At first, it was fun—this parlor game of guessing who the Obama administration will appoint as the next chairman of the Federal Reserve. We all assumed it would be Janet Yellen, because she’s a woman. And then suddenly we had Larry Summers all over the leading financial newspapers receiving multiple endorsements from respected economists. There were sly references to his intellectual prowess and invaluable experience, not to mention (but they always did) his connections with Obama’s closest advisers on economic and financial matters.
Now this little diversion for monetary policy wonks is shaping up to be a referendum on banking deregulation efforts and “sensitive gender issues”—even as the president emphasizes wealth inequality as the defining problem for a nation unable to regain its economic footing and start growing again despite four years of unprecedented fiscal and monetary stimulus.
“When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy,” intoned President Obama in his Knox College speech on July 24. “When middle-class families have less to spend, businesses have fewer customers.”
Um, hello? Unstable bubbles are the result of excessive money creation by the Federal Reserve, which is charged with controlling the money supply. Middle-class families—and especially retirees who planned to live off the returns from their lifetime savings—have less to spend because the Fed’s near-zero interest rate policies have slashed their anticipated income streams. What the president might have mentioned, since he was expounding on growing wealth inequality, was the fact that those reduced returns on savings accounts for Main Street depositors have made it possible for Wall Street investors to reap huge capital gains from stock market increases. In the loose money/tight credit environment that has been in effect since Obama came to power, giant hedge funds and major corporations enjoy access to near-zero-cost financing, while small business borrowers are turned away or charged punitive interest rates.
But was there even one mention of the Federal Reserve in the president’s highly promoted speech on the economy, which lasted more than an hour? No, none. Among the more than 5,000 words uttered by the president to describe the impact of government policies on prosperity, does the word “monetary” show up? Nope, not once.
It’s easy to imagine the indignant ripostes to be unleashed at the merest suggestion that anyone in the White House would ever “politicize” the Fed by acknowledging that the easy-money policies engineered under Ben Bernanke, its current chairman, have been the chief factor in disbursing unequal financial rewards. Stock market values have more than doubled since March 2009, fueled by the Fed’s serial programs of quantitative easing. The wealthiest 1 percent of Americans own 52 percent of all directly owned, publicly traded stocks in the United States; the top 5 percent own 82 percent of directly held stocks.
Yet the president cannot bring himself to explain to the American people that the Fed’s cash injections to the economy through monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities dwarf by a dozen times over the amount of a year of the sequester, some $85 billion in total—which Obama described last week as a “meat cleaver.” And while the president roundly condemned our “winner-take-all economy where a few do better and better and better, while everybody else just treads water,” he neglected to point out the role of our central bank in making that happen.
It’s as if the manipulations of money and credit by the Fed, which are aimed at creating a wealth effect to stimulate demand, are acts of nature; this despite the fact that the Board of Governors of the Federal Reserve System is a federal agency whose seven members are appointed by the president and confirmed by the Senate.
Meanwhile, the White House finds itself in the uncomfortable position of having to pretend that all the buzz over who will be appointed to replace Bernanke is not cause for consternation. Don’t believe it for a second—they are worried. If Yellen is not appointed, there will be lots of explaining to do about why a highly qualified, well-practiced policymaker was deemed insufficiently worthy of taking over the monetary helm. “She’s extremely talented,” piped up House minority leader Nancy Pelosi last week, trying (but failing) to be helpful. “It’s not just that she’s a woman.”
Summers has adherents as well, particularly among economic policy veterans from the Clinton administration such as Gene Sperling and Robert Rubin. He is seen as someone who can be counted on to perform confidently in a financial crisis, taking command when others are paralyzed by fear. Given the Fed’s key role in fomenting such events, the ability to conduct lender-of-last-resort functions with verve may come in handy indeed. Too bad we can’t choose someone with the same qualities that should characterize management of the money supply: someone wonderfully boring, predictable, and reliable.
The sad fact for those of us who think the Fed’s extraordinary interventions are doing more harm than good—distorting market signals and misallocating capital to the detriment of productive economic activity—is that both Yellen and Summers would continue with the dovish policies of pumping in excess liquidity in the vain hope of reducing unemployment. They both embrace the notion that monetary illusion can induce real economic gains; they both accept the broadest mandate for the Fed to justify its dominance in determining economic outcomes.
It’s interesting that Paul Volcker, the former Fed chairman who actually demonstrated that political independence from the White House and Congress was a virtue, has recently been suggesting that the Federal Reserve is attempting to do too much, taking on “responsibilities that it cannot reasonably meet with the appropriately limited power provided.” In a speech before the Economic Club of New York in May, Volcker criticized the idea that monetary policy should be directed toward achieving both price stability and full employment:
I find that mandate both operationally confusing and ultimately illusory: operationally confusing in breeding incessant debate in the Fed and the markets about which way should policy lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic; illusory in the sense it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience.
Is it too late to consider recruiting Volcker back to the task? Would those 18 or so Senate Democrats who signed a letter urging Obama to appoint Yellen because of their concerns about Summers having favored banking deregulation be drawn to the man behind the eponymous “Volcker Rule” that would prevent banks from engaging in speculative trading for their own accounts using depositors’ money? Probably not; being a male, Volcker is at a distinct disadvantage. And not having visited the White House some 14 times in the last two years, he can’t claim the insider edge.
It’s a shame, because our economy may well be headed for another round of bubbles and bailouts. Already, housing prices reflect the excessive liquidity. Favored patrons of large financial institutions can flip real estate for profits while first-time homebuyers, shunned by snakebit community banks, are frozen out.
Instead of engaging in feverish whisper campaigns to slide favored appointees into the world’s most powerful financial position, what we should be discussing is whether the Fed’s outsized role in determining the price and availability of credit is beneficial to economic performance. Legislation to establish a bipartisan commission to examine the long-term impact of monetary policy—on output, employment, prices, and financial stability—was introduced in March by Rep. Kevin Brady, chairman of the Joint Economic Committee. It now has 23 cosponsors and seems to be gathering momentum as Congress slowly recognizes the magnitude of the Fed’s influence in allocating financial resources and the scope for economic failure in the wake of monetary miscalibration.
Maybe it’s time to acknowledge the Fed elephant in the room instead of dancing around the root causes for the global financial breakdown that launched our most recent dismal recession. When the president inveighs against the “rising cost of groceries” in his economic speeches or refers to the evils of “a housing bubble, credit cards, and a churning financial sector that kept the economy artificially juiced up” before he took office in 2009, as he did last week, let’s not allow the role of monetary policy to be dismissed in favor of invoking human greed or the shortcomings of markets.
And when Obama claims that “we’ve cleared away the rubble from the financial crisis and begun to lay a new foundation for stronger, more durable economic growth,” let’s challenge him with a fundamental question: How can you lay a foundation for stronger, more durable economic growth without first laying a foundation for sound money?
Judy Shelton, an economist, is author of Money Meltdown and codirector of the Atlas Sound Money Project.