Why You Should Not Be Enthusiastic About Janet Yellen as Fed Chairman

While it’s a relief to have Larry Summers out of the running for the Fed chairmanship, it’s also important not to labor under any delusions about Janet Yellen, the nominee presumptive. Larry Summers set a very low bar to beat.

The modern Fed has become a citadel for orthodox-thinking, meaning entirely mainstream economists. And even though the global financial crisis revealed mainstream economics to be intellectually bankrupt and worse, affirmatively destructive, it has lost no hold over policy. It’s hard to imagine that a keen empiricist and original thinker like Marriner Eccles, the Fed chairman from 1934 to 1948, would have a snowball’s chance in hell of being appointed to any important position at the present-day Fed.

Obama embraces and will continue to perpetuate the conservatism of our central bank. He reappointed Bernanke, who has continued the policies of the Greenspan Fed: aggressive market intervention with a permissive posture on regulation (Dan Tarullo is the moving force behind the push at the Fed for tougher oversight). The Bernanke put has proven to be the Greenspan put on steroids. And recall that the Bernanke reappointment was not a shoe-in. Bernanke got an unheard-of five holds in the Senate and was confirmed with the largest number of no votes in the history of the Fed. And even that result came only after Obama whipped for him personally.

Zach Carter at Huffington Post gives a bill of particulars on Yellen’s policy positions. The fact that she has been touted as being more dovish on interest rates right now and a better forecaster than Summers has directed attention away from the fact that her economic views are firmly neoliberal, meaning antagonistic to the interests of ordinary citizens. In addition, she has a history of being a “don’t rock the boat” type, which is safe from a career advancement standpoint and looked sound during the 1990s, when the great experiment in creating an appearance of prosperity via rising consumer leverage still has a way to run before it hit its inevitable limits.

Carter recaps some of Yellen’s positions:

Yellen supported a host of economic policies during the Clinton era that have since become broadly unpopular. She backed the repeal of the landmark Glass-Steagall bank reform and she supported the 1993 North American Free Trade Agreement. She also pressured the government to develop a new statistical metric intended to lower payments to senior citizens on Social Security….

A full transcript of Yellen’s Feb. 5, 1997 confirmation hearing is available here. At the same event, Yellen endorsed establishing a new statistical metric that would allow the federal government to reduce Social Security payments over time, by revising the consumer price index, or CPI, the government’s standard measurement for inflation…Once in office, Yellen put that belief into action, writing a letter to the Bureau of Labor Statistics encouraging it to devise a cheaper inflation metric…

At the time, this new metric, known as chained CPI, was being aggressively pursued by House Speaker Newt Gingrich (R-Ga.), following then-Fed Chair Alan Greenspan’s criticism of the existing cost-of-living calculations…Some economists argue that a more appropriate inflation measure for Social Security would look at price changes for elderly people, and the BLS does track an experimental metric addressing inflation for older Americans. Such a metric is not useful for politicians looking to cut Social Security spending, however, as it shows that living expenses tend to go up more for older people, driven in part by health care spending.

Chained CPI has been a major point of contention in budget negotiations between Obama and congressional Republicans, with both camps alternating between supporting the measure and decrying it. Adopting Chained CPI to cut Social Security is extremely unpopular with both the general public and senior citizens.

Oh, and Carter also points out that Yellen also pumped for NAFTA in 1993.

Yellen advocated cap and trade in 1998. She argued for only narrow application of anti-trust the same year:

Screen shot 2013-09-18 at 2.02.51 AM

In addition, the claims about Yellen’s accomplishments are exaggerated. For instance, the mainstream media is touting the idea that she was one of the economists who recognized that there was a housing bubble forming. Huh? A read of FOMC minutes shows no such thing. The most she did was consider the idea that housing prices might be too high. She missed the bubble, just like everyone else in the cloistered Fed. As John Hussman wrote (hat tip Scott):

We now face the prospect of Janet Yellen, who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions:

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”

If you read the entire speech, Yellen points out that housing prices have risen considerably, putting them way over their long-established relationship to rentals. But she also says:

Higher than normal ratios do not necessarily prove that there’s a house-price bubble. House prices could be high for some good, fundamental reasons. For example, there have been changes in the tax laws that reduce the potential tax bite from selling one home and buying another. Another development, which may be making housing more like an investment vehicle in the U.S., is that it’s now easier and cheaper to get at the equity—either through refinancing, which has become a less costly process, or through an equity line of credit. These innovations in mortgage markets make the funds invested in houses more liquid. There are also constraints on the supply of housing in a number of markets, including the Bay Area. Probably the most obvious candidate for a fundamental factor is low mortgage interest rates. Even so, the consensus seems to be that the high price-to-rent ratio for housing cannot be fully accounted for by these factors. So, while I’m certainly not predicting anything about future house price movements, I think it’s obvious that the housing sector represents a serious issue for monetary policymakers to consider.

In other words, this is the steotypical two-handed economist analysis.*

The image that emerges from Yellen’s record is that of a mainstream Clintonista, someone who does not rock the Beltway consensus, reflexively pro-market, hesitant to regulate or intervene. It’s possible her views have shifted somewhat in the wake of the crisis, particularly since the research out of the San Francisco Fed isn’t rigidly orthodox. But the IMF famously publishes research that is well to the left of its policies, so it’s not clear that the San Francisco Fed’s research is a valid indicator. The best guide will be Yellen’s stance in her confirmation hearing, assuming she is nominated. Hopefully the same Senators that opposed the Summers nomination will ask tough questions.

Mind you, I don’t oppose Yellen, but caution readers to be realistic about her. She is the best candidate Obama would nominate. Just don’t confuse that with all that good.

*In fairness, she was right in saying that monetary policy is not a great way to address a bubble in a specific type of asset. This is an issue we discussed prior to the crisis, for instance, citing the governor of Australia’s Reserve Bank Ian MacFarlane, who was concerned about a much more obvious housing bubble in Australia (one which curiously has only managed to inflate even further).

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    1. Yves Smith Post author

      TS Eliot: Human kind/Cannot bear very much reality.

      If you want to keep taking the blue pills, you should not be reading this blog.

      And we have pointed out there has been a surprising run of good news lately: Summers withdrawing his name from the Fed chair contention, which signals the official end of the Rubin era in DC (oh, he’ll still have influence, but it’s now on the wane) and putting the attacks on Syria on hold.

      1. Ben Johannson

        By nature I’m a strong pessimist, although I’ve found daily mindfulnessw meditation helps me not get down emotionally because of it.

        1. elkojohn

          Optimist: 51-100% hopeful in the future

          Pessimist: 01-49% hopeful in the future
          Nihilist: 0% hopeful in the future

    2. F. Beard


      Can there even be, by definition, a good Fed Chairman? Can the head of a government-backed counterfeiting cartel be good?

      Is there such a thing as a good mafia boss?

      1. Bapoy

        Yet you think a government counterfeiting cartel is good. Sorry Beard, you need to start becoming a bit more objective.

        It was not gold the man upstairs went after, it was what we have now, the manipulation of the currency (via devaluation) for the benefit of the few. Tell me beard, how can anyone counterfeit or manipulate gold? From a poor standpoint (please don’t use the – but the rich people that have gold will benefit [hint: They already do]) – If your labor is worth 1 ounce a month, how can I devalue that ounce next week, month, year?

        1. F. Beard

          I’ve already explained. If you’re too dense to understand, I’m sorry.

          Pray to God for wisdom; the Bible says He’s willing to give it to those who ask.

        2. skippy

          Gold equals Tulips on a longer time line and if you have not noticed… all market functions have gone virtual ie. less friction.

          When they are ready, they probably will send its price to zero like a sub prime expectation.

          skippy… once the carcass is striped they abandon it, leaving only bone and gristle and move on… see history.

  1. profoundlogic

    As I said a few days ago, the early “retirement” of Summers was not huge news, nor was it a signal of a changing of the guard. Regardless of which double-speaking hypocrite economist is chosen, it won’t change the fact that the institution itself, just like the Congress, has morphed into a black whole of egomaniacs whose primary purpose is self-preservation and enrichment.

    Call it “confirmation bias” if you want, but my instincts tell me that we’re going to need a more significant crisis before the masses wake up and realize that this central planning experiment has been an orchestrated plan of wealth extraction from the beginning. The status quo will simply continue what they’ve been doing (grabbing a larger piece of a shrinking pie) until they are bound and gagged, their incessant greed finally checked.

    1. profoundlogic

      From a sociological perspective, it will be interesting to see what the tipping point is. Right now we currently have close to 48 million on food stamps and another roughly 11 million collecting disability, a large percentage likely doing so with fraudulent claims. The question will be just how long the bread and circuses economy can continue before the bread runs out? If labor participation rates keep dropping, the writing is on the wall.

      1. sharonsj

        Just because the Republicans claim most people are fraudulently on disability doesn’t make it so. The claim stems from episodes on NPR, which explained how states, to save money, were helping QUALIFIED people apply for disability. The key word “qualified” never makes it into the Republican lexicon.

        1. profoundlogic

          This is neither a D or R issue. It’s a matter of record that it’s in states’ own interest to put more people onto the Federal disability rolls, and if people can’t find a full-time job, “disability” becomes a pretty compelling alternative. You honestly think the disability system isn’t being gamed by thousands of Americans?

          1. Alexa

            No, I don’t.

            There’s an entire industry that’s been built up to assist “truly” deserving individuals receive their Social Security benefits.

            This would not have become necessary, had the process of “qualifying” not been ridiculously or overly stringent, in the first place.

            I’ve read (although not recently) that on average the process takes almost two years.

            How can a process that is that slow and methodical be subject to the degree of fraud, that you seem to believe is commonplace?

            The claims of this system “being riddled with fraud” is just a right-wing talking point, and an excuse to gut the system.

            And unfortunately, some Dems appear to increasingly be on board with this endeavor.

            1. Alexa

              Thanks for the links, if you’re addressing me.

              Sorry, but you’ll need to be more specific.

              IOW, I’m not going to read the entire website, to try to figure out your point. ;-)

              “profoundlogic” states that:

              Right now we currently have close to 48 million on food stamps and another roughly 11 million collecting disability, a large percentage likely doing so with fraudulent claims.

              The question will be just how long the bread and circuses economy can continue before the bread runs out?

              If labor participation rates keep dropping, the writing is on the wall.

              What specific “material” in your posted links dispute this commenter’s assertion that “a large percentage likely doing so with fraudulent claims.”

              BTW, if you notice, I was asking for substantiation of the commenter’s claim regarding “fraud.”

              I said “nothing” about there being an increase in the number of Social Security Disability claims.

              Of course there is an increase in the number of claims filed in recent years.

              Have you ever heard of the “Baby Boomer” generation, for cryin’ out loud?

              Since all of them are “middle-aged” now, and their numbers are quite large, naturally their bodies have begun to break down.

              But what has this got to do with rampant “fraud?”

          2. Lambert Strether

            This line of thought reminds of Lady Bracknell’s words in The Importance of Being Earnest:

            Really, if the lower orders don’t set us a good example, what on earth is the use of them? They seem, as a class, to have absolutely no sense of moral responsibility.

            I’m not going to clutch my pearls and head for the fainting couch when Joe Sixpack games the system, given that the people who own the system are gaming it, and Joe, personally, about as hard as a system can be gamed.

          1. Alexa

            Look, don’t mean to be “harsh,” but there seems to be a awful lot of opinion “thrown around” about fraud in the Social Security Disability program–with little fact that I can see, to back it up.

            Hey, I’m far from an expert on the topic of Social Security Disability Insurance.

            So if you have valid data to back up charges of rampant fraud, I’m open to considering it.

            And I’ll gladly “eat crow” if I’m mistaken in my belief “that the program is NOT riddled with fraud.”

            But, you say:

            Citizens claim disability benefits in order to access Medicare and “sidestep Affordable Care Act.”

            How on earth can you state this, when “The Marketplace” or Health Exchange (or whatever it’s called these days) won’t even be open officially for business until October 1st?


            Look, some people just object to “disability insurance”–i.e., they equate it with “welfare.”

            Fine if you don’t approve on ideological grounds–but why not just say so? ;-)

  2. Beerdignado

    How come Elizabeth Warren is enthusiastic about Yellen, then?
    I definitely didn’t have Warren pegged as a neoliberal or a status quo figure.

    1. Yves Smith Post author

      Warren is not a progressive. She is a 1990s Republican who is pro-consumer on banking issues and has come selectively to more liberal positions by dint of her considerable research on bankruptcy (the Harvard Bankruptcy Project, which provided the foundation for her book The Two Income Trap). She is actually pretty conservative otherwise economically. For instance, she falls in line with the Obama on the belief that the deficit needs to be cut:



      And she didn’t even openly oppose Summers. She’s been credited for action she didn’t take. She almost certainly would have roughed him up in hearings and probably would have voted against him, but she was not part of the campaign against him.

      1. middle seaman

        Labeling everyone as neoliberal or Republican leaves us, at best, with Bernie Sanders. The only meaningful test to apply to a politician is her usefulness in working for the poor, the unemployed and the middle class. Also important is her opposition to the mindlessness of the current economic policy.

        Elizabeth Warren and Alan Grayson seem to be almost the only champions of the 99%. Why dig and find skeletons in their closet?

          1. Alexa

            That’s right, TK421.

            Consider this:

            Nate Carter’s point that Yellen might be “bad news” is reinforced by the fact that she appears to have helped steer a previous CPI cut [and a new BLS formula for the CPI] through the Clinton Administration.

            Here’s a short blurb (and link) about the CPI cut enacted in 1999:

            In January 1999, the BLS adopted a “geometric mean formula” in the calculation of most CPI basic indices.

            The purpose was to reflect the demonstrated ability of consumers to shift away from products whose prices had increased relative to other products in the same basic CPI component–for example, away from apples whose prices had increased more than, or decreased less than, other apples in Chicago. (2) . . .

            Recent Controversies Over CPI Method

            1. neo-realist

              Merkley—The lonely voice for intelligence apparatus transparency. I wish there were many more like him.

          1. 2laneIA

            Harkin has a long record of standing up for the vulnerable. His efforts to get the chocolate industry to reject child labor have been mostly under the radar, but it is the kind of thing he does because it’s right and he cares. If you can access a wheelchair ramp in a building open to the public, it’s thanks to him. He gave a really great floor speech last January, to the effect of “never, in my lifetime, did I expect to see a Democratic President, and a Democratic Vice-President, cut Social Security.” It was a shot at his old friend Biden, as well as Obama, and Biden called him a conscience of the Senate in a speech last Sunday at the Harkin Steak Fry. I am going to miss Tom.

          2. Alexa

            I’ve always liked and respected Senator Harkin, but lately his stances (on a couple of issues) seem to be veering a bit to the right, IMHO.

            I’ll be posting on his newly proposed “USA Retirement Funds” before the midterms.

            Also, not pleased with the direction of his push for so-called “Social Security Disability Reform.” (Before I comment further, will need to watch a couple more of the hearings he’s held on this issue.)

            From what I’ve read thus far, I fear that his proposal is going into the direction of “welfare reform”–a version of “disability work fare.”

            Many Republicans are very pleased with his reform proposals.

            Among the proposals are (1))more stringent work requirements, and (2) fashioning the Soc Sec Disability system after the VA Disability System.

            BTW, I have no problem with individuals who are “able” to work, performing appropriate work.

            My concern is, since Senator Harkin has made it plain that his “reform” efforts are partly a “budget cutting exercise,” is that the reform will serve to harm some of the Soc Sec Disability beneficiaries, by forcing them to do work that is not appropriate for their medical condition.

            IMO, we need to be watchful.

            Let’s face it: There are NO LIBERALS IN THE SENATE, anymore, LOL!

            1. neo-realist

              Re: Reform of Social Security disability

              H’mm, as someone who knows an ex that is on supposedly permanent SSD–bipolar, what would they consider appropriate work that they could deal with? Would they be sent out into the cold cruel cutthroat job market like everybody else? Would people hire them considering their conditions?

              1. Alexa

                Good question, neo-realist–dunno the answer.

                But I do know that the feds (military) has more or less reclassified PTSD–claiming that it is “curable.”

                At one time, full-blown PTSD was considered to be a “manageable disorder,” at most, for some sufferers, but certainly not for all.

                But due to the huge increase of VA Disability filings–based upon the diagnosis of PTSD–instead of ending our military adventurism, the PtB have miraculously declared that there is now “a cure.”

                I was stunned, when I first learned of this.

                Guess we’ll have to see what Senator Harkin’s reform yields.

        1. Jane Doe

          She didn’t label alone . She described and defined.

          Label implies she’s not conveying through description and definition what Warren believes.

          Decoupling label from meaning is how we find ourselves in this mess. To respond to what’s happening in our society requires both organization and with it rigorous thinking.

          Asking does Warren fit the label you want her under when looking at her beliefs is healthy.

        2. Yves Smith Post author

          I am not “labeling” her as a Republican. She had been a life-long Republican prior to her doing the Harvard Bankruptcy Project, which she apparently initiated around 2000 at the behest of a senator who was distressed about the level of bankruptcies in his constituency. She apparently went into the study with the usual “oh they are a bunch of deadbeats” assumption and was stunned by what she found when she did the work.

          So to her considerable credit, she’s empirical and willing to reverse her views based on facts and analysis. But the flip side is that in areas where she has not done her homework (and as a Senator, she now has a huge range of issues on which she has to take a position), she tends to default to orthodox/technocratic thinking, which in the US is neoliberal.

          The labels fit, whether your like them or not. And what would you suggest as an alternative? Picking political leaders based on looks? That already happens to a large degree, but it’s hardly something to be encouraged. Similarly, trusting a likable persona is what got us Bush and Obama.

      2. beerdignado

        Thanks for your & other peoples responses. I was unaware of Elizabeth Warren’s background. Goes to show one should always, always be critical and not defer to authority.

        A lesson learned.

      3. Bapoy

        Elizabeth Warren a Republican?

        I’m not surprised, I have trouble differentiating which one is more socialist, the Democrats or the GOP.

        Heck, America has turned into Cuba. How in the world the influence of the socialists we hated so much have taken over is beyond comprehension. But they have. We almost went to war with Russia over it, all of a sudden we want free housing, education, food, medicine, coke, cars, and hookers. And than we ask why the country has been deteriorating year after year after year. Hello people, wake up… that’s what socialism does.

        I’m also confused as to how the things these folks will consume will get produced, nobody wants to do it.

        1. Yves Smith Post author

          See comment above. She was a life-long Republican till about 12-15 years ago.

          Not that being Republican is bad. There was a liberal wing of Republicans like Jacob Javits who I’d take all day over our current Democrats. And you still have some tough-minded regulators that come out of that tradition, most notably Sheila Bair.

          And the modern Republicans are at least honest about what they are up too.

          1. F. Beard

            The Republicans, like Nixon to China, might do the right thing and bailout the entire population. The Democrats, wanting to be appear “economically serious”, will never do so.

            That said, I’ll never vote for another Republican. Nor a Democrat. I wash my hands.

  3. s spade

    Good, courageous criticism. The only thing I don’t understand is why you don’t oppose her.

    Apart from the fact that she isn’t a fat creepy blustering misogynist who blew up the Harvard endowment, what is there about Yellen making her worthy of support?

    1. Yves Smith Post author

      She’s as good as we are going to get from Obama. I’d much rather have Stiglitz or Jamie Galbraith or Sheila Bair, but we’d need to be in an alternative reality for that to happen.

      1. Dan Kervick

        Right, both would probably be better. With Stiglitz, however, I think it would be a waste of good economic talent. I would rather have him free to continue to write and speak his mind about inequality and systemic global problems. The Fed Chair has to speak in a stilted, straight-jacketed language because the neurotic and jittery Mr. Market is taking every word as some signal about where he should put his money.

      2. craazyboy

        I think Neil Barofsky would be fun, but I’m sure I’ll just have to be satisfied with books and movies for entertainment.

        1. ChrisPacific

          Gary Gensler would be fun as well, although if I’m going to live in Fantasyland there are other roles I’d rather place him in. (SEC Chair, for example).

          1. Punk Toad

            As long as we’re talking “fun at the Fed,” how about Bill Greider as Chairman? As far as Yellen goes, she is a humanist and her research supports the belief that Fed policy can make people’s lives better. The fact that her husband, George Akerlof, is considered a communist by many is interesting.

      3. PaulW

        Do we really want the best of the worst? If we got the worst then might we not hasten the collapse of the entire corrupt system? The best of bad choices just keeps the racket rolling along.

        It’s a shame we didn’t get 8 more years of Bush. The way his gang were burning bridges diplomatically the quislings running the countries of US allies couldn’t find cover. Instead we get Obama – the best of two bad choices – Bush with a smiley face, which gives cover for our quislings to stay in power and ruin our countries as fast as America goes down the rotten drain.

        Perhaps I’m just too nihlistic for this site.

        1. Cujo359

          I think I speak for most American readers here when I say that if we knew how to make that happen, we’d be doing it. Unfortunately, whoever Obama nominates will be someone with whom he agrees on economic policy, which is to say he or she will almost certainly be someone in the Yellen mold.

  4. Dan Kervick

    Personally, I think the Fed should be a stern and effective regulator of the banking system and utterly boring and predictable when it comes to monetary policy.

    The best thing to be said on behalf of Yellen is that she has been working inside the US’s centralized banking system for a long time now, and so actually knows how it works. Her understanding isn’t based on abstract models of curves moving around in pure macroeconomic space. That beats all of the ivory tower economists whose names are often bandied about for the job.

    I look forward to the days when most Americans have no idea who the Fed Chair is because it doesn’t really matter anymore, and nobody looks to the Fed as a driver of macroeconomic policy. The Fed is a bank – the central bank – and the Fed Chair should have the outlook of a bank manager who happens to work for the public. If Yellen is nominated, then 90% of what I want to hear her talk about is how she will stabilize the banking system, and I’m happy to leave aside all of the QE-infinity and other experiments in policy. I don’t want another enabler of the monetary policy fanboys who have a long-term strategy of shifting the responsibility for macroeconomic policy formation from the elected branches of government to the unelected central banker. And I don’t want another “maestro.”

    The US needs a substantially expanded state role in the economy; full employment based on direct government hiring; an industrial policy to overhaul our energy and other major infrastructure systems with plenty of “picking winners”; an incomes policy that aggressively levels income disparities; a radically overhauled financial system. The US, Europe – and now the Brics too- need a kind of economic war effort, a “great leap forward”. The Fed can’t and shouldn’t do any of these things. It’s role should be to provide for financial and monetary stability while accommodating government policy.

    Some of the changes I mentioned might require an overhaul of central bank responsibilities, perhaps including direct credit lines or monetary funding for new government-run entities. If so, we will need to pass new laws to create those functions and responsibilities. At that point the role of the central bankers will just be to do what they are told.

    1. profoundlogic

      “I think the Fed should be a stern and effective regulator of the banking system”.

      The odds that you would first be struck by lightning are dramatically better.

    2. Banger

      For various reasons a strong faction of the power-elite have chosen to wreck and corrupt the normal political system to such a degree that institutions like the mainstream media and the fed have a dominant political position by default. The Fed is the administrator, today, of economic policy because the USG has almost ground to a halt.

      Leaving economic policy to the Fed makes a lot of sense. It is a private organization created for bankers to rule monetary policy for the benefit of bankers–this is kind of a round about way of “privatizing” the government. Soon the major institutions of governance will all be private entities as we move inexorably towards and interesting form of neo-feudalism. I don’t think there is any way around this other than make grass-root political action more important so that some areas of the country see a revival of community and community solutions as well as real democracy. People sense that the federal gov’t is so over.

      1. Dan Kervick

        The Fed is not a private organization: all seven members of the Board of Governors are appointed by the President. Also, the Fed returns vastly more earnings to the US Treasury than it does to its so-called “stockholders”

        1. Dr, Noschidt

          DK, that’s 7 red herrings (maybe code for the 7 demons that became the “seven dwarfs” of Snow White and the Seven Dwarfs” in folktale become fairy tale).

          The OWNERSHIP of the banks in the “Fed System” is PRIVATE. The GAIN is PRIVATE PAY DIRT. Please don’t be a window dresser for the Powr Play Producers. Don’t put your academic institution to shame. This is the Naked Capitalism site, remember?

        2. psychohistorian

          Setting policy is worth XXX times the earnings.

          And besides the plutocrats take their earnings out of the big non Fed banks they own.

        3. Yves Smith Post author

          Dan is correct. The banks own non-voting preferred shares. They don’t have any control from a corporate governance perspective. The regional Fed boards don’t supervise the Fed (for instance, the New York Fed board could not fire William Dudley). Their purpose is to advise the Fed staff on conditions in the local economy. Sort of like inviting in Rotary Club members and a few random members of the community to find out what they see. This was a more important source of information to the Fed in the old days when there was less economic data available.

          That does not mean that the Fed does not cater to banks. It clearly does and perhaps even worse, sees the world through a bank/financial markets centric lens (as it’s very badly cognitively captured yet does not recognize it). So you get much the same results as if the Fed were formally controlled by big financial services firms.

    3. Bapoy

      The Fed does almost NOTHING. I’m not sure why they need any analysts studying models, probably to make it look like there is a point.

      Tell me, aside from manipulating interest rates, the value of the dollar and the stock market, what else does the Fed do?

      Do you think that a few “smart” fools can manage the market better than the market can manage itself? The answer is no…

      Keep it going fools, we are headed for the edge. Nobody cares anyway, drink it up people.

  5. Teejay

    This sounds like yet another example of the Overton Window.
    Two choices one horrendous the other only half bad. The Dems
    put on a kabuki dance “fight” for us, “protect” us from SS or Medicare cuts, a Supreme Court or Fed nominee only to end
    up with a policy or person who’s only half as bad as it could have been. And we feel victorious. Please pass the Pepto-Bismol.

  6. Conscience of a Consrvative

    We need a Fed chief that will decrease, not increase the foot-print of the Fed in the financial markets, while ensuring that institutions that receive subsidisies(like the big banks) are properly regulated. It will never happen but the two names that should most seriously be considerd for Fed chief are Thomas Hoenig & Sheila Bair.

    1. Banger

      We are moving into a neofeudal era. The USG has been gamed and, increasingly, taken out of the game except in matters of war. Economic policy will be left to the banks through the Federal Reserve Bank which is not part of the USG. Other private entities will take over the political management of the country either through direct or indirect rule. Perhaps local governments will rediscover democracy but as far as the USG is concerned I think its no longer very functional other than serving big private interests.

      1. s spade

        The economy is really all about keeping the rich rich and the essential work somehow getting done. All our major institutions are operated with a view to looting and collecting rent and enabling asset grabs by a networked elite. The system functions beautifully from the point of view of those in control of its critical levers. Everybody else must just do the best he can in the circumstances.

        I am not certain things have ever been much different. Perhaps the propaganda and public relations worked better in the days before there was an internet to connect people directly to one another.

      2. Alejandro

        “Other private entities will take over the political management of the country either through direct or indirect rule.”

        Although insidious,Detroit is a current day “Developmental” laboratory. An example of “Democracy” that never was.

    2. Conscience of a Conservative

      Realize that the Fed is basically ultimate lender and counter-party is just about every market.

  7. Fern Henley

    We will have a woman to blame when Title II of Dodd-Frank is implemented? If she has a grain of sense she’ll do what she can to push Glass-Steagall standards of banking to head off that problem. Her goose would be cooked if it became known she supported G-S but being in office when deposit confiscations/bail-ins started would be very pretty gruesome.

  8. Jim Haygood

    ‘The modern Fed has become a citadel for orthodox-thinking, meaning entirely mainstream economists.’

    Orthodoxy these days means the delusion of central planning: that a committee of PhD morons can day-trade the economy to prosperity via macroeconomic manipulation of the money supply and interest rates, when in fact they are engaged in value subtraction on a scale not witnessed since the latter days of the Soviet Union.

    As Dan Kerwick pointed out above, the Federal Reserve’s appropriate role is to regulate the banking system. If it were merely doing that, it wouldn’t be doing too much damage (other than that unavoidably caused by its built-in conflict of interest as a government-sanctioned industry cartel).

    But the Fedsters now view themselves as omniscient economic messiahs. Accordingly, when they f*** up, they do so on a pharaonic scale.

    For the 100th anniversary of the banksters’ bureaucratic atrocity on 23 Dec 2013, we should conduct a double funeral: one for the dollar; one for U.S. economic hegemony. After a hundred years of permanent war finance, they’ve both turned irrevocably to sh*t.

    1. Banger

      But the federal government is becoming increasingly dysfunctional and, frankly, increasingly corrupt. I believe the “wrecking” of the USG was deliberate and planned. The Fed has to manage economic policy by default–it has no choice.

  9. craazyman

    why do they even need a chairman? How much is that costing and can’t they outsource it to China or India?

    What do you really have to know? Probbly not very much

    What about a rotating chairmanship. They’ve already got 12 branches. Can’t they take turns?

    It sounds lazy to me. Get somebody in there who knows how to work, like the shift manager at some Dunkin Donuts near police precinct. If it doesn’t work out, then maybe Yellin as plan B.

    Do you want somebody with a name like “Yellen”. It doesn’t sound (no pun intended) very auspicious to me, unless she’s really ready to kick ass and raise her voice. Maybe somebody named “Winters” would set the right tone. Or better yeet somebody named ‘Gold”. Irving Gold, PhD, that’s the kind of chairman I want.

    Do you feel lucky? I don’t.

    1. craazyboy

      I think training a groundhog may work. Just have to get it to believe Ground Hog Day comes every 6 weeks when they have the Fed meeting.

      Then instead of looking for a shadow (how silly), train it to look at the latest phony employment number and phony inflation number, then crap out little poo balls equal to what the Fed funds target is.

      Nothing else to do. The Discount Window is on the honor system already, and they have a drop box there where you just dump in your collateral!

          1. craazyman

            “The Governors have determined that the price of gold shall be set and maintained at $5,000 per ounce until every leveraged speculator is a piece of black toast. The Federal Reserve will be conducting periodic open market operations, buying gold upon price weakness and selling only when the price exceeds $7,000 per ounce, until the year 2025. Fianancial institutions who are short gold will need a credit line, but they won’t get it from me. No more Mr. Nice Guy.”

            Chairman Irving Gold, PhD
            U.S. Federal Reserve
            Board of Governors
            Washington, DC


            1. craazyboy

              ‘Cept unfortunately I’ve been waiting in cash for QE 1 to end, then QE 2 to end, then QE 3 to end, then QE 4 to end and then maybe 2 poo balls from the ground hog.

              shit, now it looks like I may be waiting for QE 5 to end.

              having a low risk retirement portfolio really sucks.

  10. Dr. Noschidt

    she has a history of being a “don’t rock the boat” type,

    Indeed, why else would she be in The Club?

  11. MikeNY


    And if I’ve been negative on Yellen (and I have), it’s because I care about economic justice, and I think the Fed’s asset-based model of how to steer the economy is broken, and their policies nothing but “Trickle Down”. (Jeremy Grantham has argued the first point eloquently in GMO’s quarterly letters.) I have read nothing to persuade me that Yellen diverges from sclerotic Fed orthodoxy …

    As profound logic says, The Fed thinks they can centrally plan the economy. And it’s working for the masses about as well as it worked in the old Soviet Bloc: a torpid descent into poverty. The plutocracy, of course, is prospering. So the plutocracy is who the Fed really works for, but they can’t see past their ideological blinders to this fact. And as I’ve said before, the Fed’s misplaced Messiah Complex is giving Congress — which actually COULD address the problem — and excuse to do nothing.

    I would love for Yellen to prove me wrong.

  12. Jesse

    Yellen is no reformer.

    She is no raging neo-liberal either.

    She is an establishment central banking figure in the mold of Bernanke, not Greenspan.

    That Elizabeth Warren ‘did nothing’ about Summers is a bit disingenuous, or uninformed about how Washington and politics work. She pretty clearly signaled ‘do not support’ and went into the headcount calculation that caused Summers to be deferred.

    I think Yellen will go with the flow, and adhere to the Bernanke policies. She will try to build a consensus amongst an increasingly diverging set of views. She will please neither the austerians nor the platinum coin crowd.

    The real solution needs to come now from the policy, fiscal side of the house and the politics make that problematic to say the least.

    1. Yves Smith Post author

      My sources on what Warren did re Summers are Congressional staffers who were working against the Summers nomination. A reader made this comment yesterday:

      Scarborough on MSNBC this morning says that Liz Warren (a) organized the lobbying in the Senate against the nomination, while (b) publicly denying or playing down her involvement.

      I ran it by one of my sources on the Hill, who replied:

      It’s completely untrue

      And her staff has not been trying to get credit for her either. She’s most assuredly not behind this effort to pump up what she did after the fact. There seems to be a Warren cult developing, which is troubling.

      1. Alexa

        “There seems to be a Warren cult developing, which is troubling.”

        Isn’t that the truth?

        Sort of like the “hysteria” that broke out over Texas State Senator Wendy Davis, when she led a filibuster.

        Some diarists at DKos was actually promoting her for either US Senator, or President, or both, IIRC.


          1. Alexa

            That’s exactly why it is “concerning.”

            I’m guessing that Warren’s being “put forth as a liberal” in order to co-opt a “true liberal” (not that there is one in the Senate–or waiting in the wings, that I know of) from running against FS Clinton or VP Biden, or any of the other likely Third Way/No Labels/Neoliberal candidates!

            Our system is SO rigged. {Sigh.}

  13. TC

    #Fed must open $5tr Credit Facility for infrastructure-0% interest, 100 year maturities to rebuild US, 30 million jobs #Tarpley4FedHead

    Only a Hamiltonian will do at this point, because the Fed, like Zed, is dead baby.

    1. Bapoy

      I don’t know you, but I am willing to bet you have some gold stashed away.

      Open 5 trillion facility – destroy purchasing power up the wazoo. The gold bugs would love this.

  14. Yancey Ward

    Obama embraces and will continue to perpetuate the conservatism of our central bank. He reappointed Bernanke, who has continued the policies of the Greenspan Fed: aggressive market intervention with a permissive posture on regulation

    Jeez, hard to write a more nonsensical pair of sentences. The only way to make sense of this is to redefine conservative as radical, but then, why not write radical in the first place- then you don’t have to force your readers to reinterpret perfectly good English words.

    1. Yves Smith Post author

      Please study up on the Greenspan and Bernanke puts.

      Greenspan was far more aggressive than past Fed chairmen in using interest rate policy to help the banks than past Fed chairmen. Greenspan engineered a very steep yield curve in the wake of the S&L crisis so banks could rebuild their balance sheets (banks then were more conventional and most of their money came from borrowing short term and lending long-term). Greenspan similarly in the dot-bomb era drove short-term rates to negative real yields and held them there for an unprecedented 9 quarters. In the past, when the Fed would drop rates in a downturn, it would keep them super low for a only a quarter.

      Greenspan was ALSO obsessed with the stock market. He put tons of Fed talent on trying to understand what drove stock prices. Past Fed chairmen would never never never have seen the stock market as part of the Fed’s job. Finally, I was hearing from people at UBS (leading equity derivatives trader) that their floor traders would see huge orders in the S&P pit that they were sure was from the Fed (the called it “the Turk”). I was hearing these stories back in 2000. I thought they were nuts at the time but the sources were completely credible and not at all tinfoil hat types, and their views were clearly shared by UBS management.

      1. Bapoy

        The Fed has publicly stated that they are buying assets… What do you think those assets are? Stocks for the most part..

        1. Yves Smith Post author

          The Fed could buy stocks only under its “unusual and exigent circumstances” authority, under which it could even buy, as former central banker William Buiter put it, a dead dog.

          But it’s most assuredly not permitted to do that on a routine basis, nor did they buys stocks during the crisis.

          But if they are buying futures (big if, I am just going on that insider belief) they may have a convoluted legal justification.

          1. craazyboy

            I’ve heard folklore of the “plunge protection team” buying stock for a long time too, but it never seems to show up as an item on the Fed balance sheet.

            One likely explanation is they trade in and out within a particular reporting period. Or the more tin foil hat slant is we have a accounting fraud problem at the Fed. Course that has happened in less stellar and exceptional places than the USofA.

            1. Dr. Noschidt

              What might Bill Black have to say about control fraud in the Fed system. But actual access to such inside information is forbidden. “It’s a secret.” So I guess that puts them above the law, or “the law unto itself” like the BIS Imperium.

              Without an audit of the Fed system of banks unto Basel III, who can know what they have done/are doing/will do? We’re told to take their word for it: “Trust me.”

    2. Doug Terpstra

      How’s this? “Obama embraces and will continue to perpetuate the [bat_hit radical] conservatism of … the Greenspan Fed: aggressive market intervention with [effectively NO] regulation.”

  15. susan the other

    If she is orthodox she won’t like Jack Lew’s alternative remedies (which are?) to regulate the TBTFs. Wondering what the banksters will come up with next. Obama becomes the first Black Pres just when the ship of state is going down; Janet Yellen becomes the first woman Fed Head just when nationalization is the only way to shore up government finance. Which is what we are living on. In her little press conference last Spring to discuss the Fed’s decision to curtail the Forclosure Review Process because it was so corrupted, she was clearly nervous. She read, very carefully, from a script she held in her lap. She did not address the damage caused to homeowners; she did not address securitization fraud; she simply described how the Fed had shut down the process and would pay everyone harmed some pittance. She didn’t say one word about how inaccurate her information was; how useless. She answered only a few questions, one about the TBTFs, and she told the audience that the banks do not like what the Fed has done. Forcing them to have higher levels of capital. With the economy permanently in the toilet, Ben Bernanke refusing to make that foreclosure-debacle appearance; and the injustice of banking deregulation known to everyone, Yellen was as brief and noncommittal as she could possibly be. She might be a very imperious Fed Chairman.

    1. Aint No

      True and that’s probably why Obama wanted Summers. When/As it all comes down, he wanted somebody, even a totally compromised somebody, who can think on their feet. But who knows how Yellen will react? Even she doesn’t.

      1. rich

        This might help…

        What Is a ‘Credibility Trap’

        Groupthink rationalizes it, and the fear of ostracism and missing the big payday keeps everyone in line. And once you are part of this system, it owns you, whether you are a politician, a journalist, an economist, or a parasitic enabler. If you are in business, not to join in is a competitive disadvantage. Bad behaviour drives out the good.

        A credibility trap is when both parties pledges themselves to the monied interests, thereby putting the business of business ahead of the business of the people. The society becomes out of balance, and cannot bring itself to right.


  16. Tyler

    Yves, I’ve been hoping and waiting for you to smash on Elizabeth Warren… and it was as glorios as I envisioned! Yes! Yehehehesss!

    Seriously, though, Warren voted to repeal the estate tax. That’s a Tea Party vote.


  17. profoundlogic

    What, No Taper? I thought the economy was all roses and recovery from here on out.

    Institutional failure from top to bottom. Summers was just cashing in his options for more lucrative endeavors.

  18. jfleni

    Yellen, like most current economists, is an economic QUACK, anxious to appear “MAIN STREAM”!

    Face facts! That’s where the money and prestige is. Although much better than an irresponsible yahoo like Summers, she almost certainly has feet firmly made of economic and academic clay.

  19. Fiver

    Any chance Bernanke did “un-taper” to buy another stint as God?

    As for Yellen or whomever next sits on the Throne, she/he had better pay a great deal more attention to the effects of Fed policy outside the US than the Bernank did (though I rather think he reversed course temporarily due to the severe damage caused emerging markets, particularly India, via enormous capital flight, as well as the disruption in the scheduled War on Syria). The list of countries that would prefer an end to US unilateral monetary policy is at least as long as that desirous of an end to unilateral military actions.

    In addition, with Yellen, my long-standing assessment that the real trouble comes in late 2014/early 2015 is looking good, as she will keep plowing easy money into speculators pockets until the wrong outfit chokes on it, all the while seeing “nothing particularly scary in markets that might lead one to ease at this time” right before it blows. It takes more to be “good” at that job than being able to chair a meeting – it takes a keen sense of the abnormal – one she’s never once displayed.

  20. allcoppedout

    If I had a vote for Fed Chair, Yves would get mine. Yet I think even this would change nothing. I rather like what I’ve seen of Warren (our UK news pays little attention to colonial affairs unless a royal is abroad), but she looks like anyone on one of our select committees giving banking and other bureaucratic crooks a hard time, playing to the electorate and changing nothing.

    To get decent technical people in place who could change things, we have to hang the establishment first. One of the real questions is ‘banking or democracy’? Is there anyone in banking circles who has made any sensible, non-insider investments left?

  21. Dr Duh

    It occurs to me that the gridlock that prevents the use of fiscal stimulus thus ‘forcing’ the use of monetary stimulus is a feature not a bug.

    Under the guise of preventing deadbeats and leeches from buying ‘steak and lobster’ with their EBT cards, the Republicans have ruled out further fiscal stimulus, ‘forcing’ the Democrats to push on the string and the increased liquidity naturally drives up asset prices. While the middle and upper middle classes benefit, the richest rewards go to the 0.1%. Lower interest rates facilitate the bleeding of the working poor and middle class through consumer debt. And in the end, everyone feels grateful that they weren’t sucked into the vortex of huge depression.

    Deception *is* the most powerful political force on the planet.

    1. Bapoy

      I think i’m confused.

      Fiscal stimulus allows the middle class from buying lobsters, yet the pushing on the string makes asset prices go up?

      If pushing on a string forces prices up, what do you think “stimulus” would do. Hint: If you think of all the things on this world (housing, clothing, food, cars, etc) it’s all relative. the food can only serve so many people, the clothing, food, cars, etc too. “Stimulus” is not what will allow the people to eat lobster, it’s the fishermen that will.

      1. craazyboy

        It is a little bit confusing, but Dr. Duh basically describes the game correctly. Except that I don’t think the opposing teams split up nicely as Rs vs Ds.

        Fiscal stimulus, as a core Keynesian concept, means the USG steps in with countercyclical spending to counteract the biz cycle. The nature of this spending can be in various forms – direct job creation as done by FDR style work programs, or safety net type spending like extended unemployment, food stamps, etc…In the case of the safety net programs (besides keeping people from starving) this spending is thought to be good from a macro econ standpoint because all this money gets spent into the economy rather than “saved” and this is good for aggregate demand.

        Sometime in the 90s we started being sold on the concept monetary stimulus is better because cheap money will promote corporations to invest and low borrowing cost for consumers will allow them to buy what they think is cool, rather than what some guv bonehead thinks they should buy. (could be a war)

        The term “pushing on a string” means we are in a “liquidity trap” which means no one is borrowing the cheap money. Business does not want to invest and consumers are tapped out at their credit limit. Everyone has re-financed down already to lower interest rates.

        So all that liquidity is in the bankers hands and basically they cause trouble with it. Investors are trying to get return somehow, but with low risk interest rates virtually zero they pile into risky assets and drive prices up to bubble territory.

        Then someday it has to end, and who ever gets out of risky positions first(like someone whom knows a Fed Reserve Governor and how the next meeting will go) wins the game and everyone else loses.

      2. LifelongLib

        Your big assumption is that we live in an economy of scarcity, where economic activity is limited by the ability to make things. In fact our economy (and other modern ones that have not been devastated by war etc.) is limited by the ability of people to buy things i.e. lack of money. To use your example, food is rotting and farmers are sitting idle while people go hungry because they have no money to buy it with.

  22. steve from virginia

    Bernanke quashed taper but it’s coming like it or not, the Fed lacks collateral to ‘absorb’. At the same time, repressed rates = increasing/mispriced risk. Bond markets have been re-pricing risk since May because of bond-buying not in spite of it.

    More bond-buying = more risk = higher rates rather than lower rates).

    Fed isn’t relevant, the money-cost of money is set by millions of motorists every day buying gasoline, the dollar is a quasi-hard currency being exchangeable on demand for a valuable physical good. Policy rate is irrelevant — and even @ zero there is little effect on lending overall, money is too ‘expensive’ for the economy.

    Yellen, Summers, Bozo the Clown … doesn’t matter.

  23. S M Tenneshaw

    The choice of Yellen over Summers does give a clear sign that the oligarchs find it wise, for now, to give lip service to the rule of law instead of openly laughing at us. A minor setback for them.

  24. Hugh

    I could say I have been warning about Yellen for some time, but I will go with, we live in a kleptocracy. Yellen is a highly placed officer in an institution critical to looting us. She is a less abrasively irritating personality than an egomaniacal walking serial disaster like Summers, but she still works for and upholds a system at war with the needs, wants, and dreams of most of us.

    It is good to see some of her neoliberal positions coming out. However, I do not hold out any hope for any real substantive questioning during confirmation hearings regardless of who is nominated. Senators are each given a certain amount of time to ask questions. They spend most of that time bloviating like the blowhards they are. Because they circulate in and out of the hearing room and are there only long enough to ask their questions, the same question gets asked about 6 times. There is no follow up generally because the Senator runs out of time or doesn’t know what the logical follow up is. Whole vast areas can elicit no questions at all. Even if a Senator knows a question has already been asked they may ask it again with an eye to how it will play back home either to the rubes or the financiers banking him/her. The nominee for his/her part has devices to use, even in the case of the Senator that tries for the “Got you” type question. They can speak in vacuous generalities, go off topic, restate the question in such a way they basically end up answering an entirely different question but one more to their liking, all of this to the end of running out the clock. In confirmation hearings, any actual exchange of information is always entirely accidental and against the intentions of all concerned.

  25. Glenn Condell

    Maybe Yellen was the elite pick all along, with Summers employed to drag the nomination away from any potential candidate to the left of Yellen. A sort of human Overton window for the 1%’s interests. Somewhat human anyway. And if by chance he had scraped through, bonus!

  26. Jill

    I received this today from a Democratic Front Group. There are good causes on it, but then you’re always directed to help President Obama oppose evil Republicans!

    “Will President Obama betray young women like me by passing over a qualified woman to run the Federal Reserve Bank? Not if I can help it.
    My name is Hannah Walter and I’m a senior in high school. I know from my experience on my school’s Federal Reserve Challenge team that the Federal Reserve plays a key role in our economy by fighting inflation and keeping the banks in check. Economists, law and finance professors, and other experts agree and want a Fed Chair who is committed both to price stability and full employment.
    That’s why I strongly urge you to join me in asking President Obama to nominate Janet Yellen as the next chair of the Federal Reserve Bank. As the current Vice Chair of the Fed, Yellen has shown strength in leadership. She has been a strong voice for regulating banks, as well as protecting jobs and wages.
    Janet Yellen has the experience and qualifications to do the job, and experts as well as politicians across the political spectrum believe that she can build an economy that matures and thrives, fostering stable growth that leads to new jobs as well as price stability.
    In nominating Yellen, President Obama has the opportunity to break the glass ceiling of the Fed and show young women like me, who are interested in careers in economics, math, and science, that a woman can transform an economy that the old boys’ club brought down. What kind of message would the President be sending to young women by passing over the woman who is clearly the most qualified choice for the position?
    President Obama, please don’t let another distinguished and qualified woman be passed over. We need women in this country’s economic elite and we need a Fed Chair who has a proven record of protecting jobs and keeping a tight watch on banks.

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