The Magazine

The Real Fed Sweepstakes

It’s policy that counts, not personalities.

Aug 12, 2013, Vol. 18, No. 45 • By JUDY SHELTON
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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.

Janet Yellen, Larry Summers

Janet Yellen, Larry Summers

Newscom

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.”

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