The nomination of Janet Yellen to chair the Federal Reserve has come down to this: a referendum on quantitative easing and zero interest rates. The money-printing program that Ben Bernanke started five years ago this month remains Yellen’s answer for how the economy will get back on solid ground. Yet in her appearance at Thursday’s Senate Banking hearing, a bipartisan group of senators expressed dismay that Fed money printing has widened the wealth gap while fueling potential asset bubbles.
Whatever air was left in the tank of quantitative easing was let out early last week when former Fed official Andrew Huszar, the director of its $1.25 trillion mortgage-backed security purchase program, wrote a devastating Wall Street Journal op-ed, “Confessions of a Quantitative Easer,” in which he declared the program “the greatest backdoor Wall Street bailout of all time.” Huszar disclosed that he and other Fed managers expressed their concerns about this outcome early on, but they were ignored as the Federal Open Market Committee moved from a macroeconomic to a more special interest rationale. “Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers,” he wrote.
Huszar’s mea culpa carried weight because it came from a credentialed insider and exploded the Fed’s insistence that it is looking out for the average American. Yellen returned to that theme in her hearing, declaring that central banking seeks to help everyone. “The ripple effects [of QE] go through the economy and being benefits to, I would say all Americans, both those who are unemployed and find it easier to get jobs as the recovery is strong, and also to those who have jobs,” she said.
If there is another economic meltdown, the Senate Banking Committee can’t be accused of not fearing it. Nebraska Republican Sen. Mike Johanns characterized the market as being on a “sugar high,” a term later echoed by West Virginia Democrat Joe Manchin. Johanns quoted the current Dow Jones Industrial Average and suggested that if the Fed were to wind down its balance sheet, the market would fall by a corresponding amount. Tennessee Sen. Bob Corker called easy money an “elitist policy” that serves the fraction of Americans whose worth is mainly denominated in financial assets. Everyone in the room seemed dispirited that these were the results the Fed had to show for itself, Yellen included.
For Democrats, Thursday’s hearing was a chance to hedge their predetermined pro-Yellen votes. But for Republicans, the stakes are higher. Yellen would become the Fed chair most committed to the dual mandate of inflation and unemployment since it was adopted with the Humphrey-Hawkins Act in 1978. A yes vote would obliterate their support for a single mandate of price stability, a position staked out by Corker and fellow GOP committee member David Vitter (La.) in legislation introduced earlier this year. While Vitter has already said he is voting no, Corker has not announced his intentions. However impressed he professed to be with Yellen’s testimony and visit to his office, Corker cannot easily overlook Yellen’s public posture on the Federal Open Market Committee vociferously opposing the single mandate.
As the first Republican candidate to run statewide on what became the Reagan tax cuts, I found it amusing to hear Senate Democrats like Sherrod Brown and Heidi Heitkamp critique the Fed’s monetary policy as “trickle down.” But their point is unarguable. Her testimony makes clear that Yellen clings to the idea that enriching the financial classes will deliver benefits across the economy. Reaganomics directly cut the tax rates of working people, while Yellen’s easy money claims ephemeral “ripple effects” amid relentless middle-class decline. Trickle down economics has truly arrived in 21st-century monetary policy.