Is Yellen the right choice for Fed Chair?
Speculation on the next Fed Chairman has been a two-horse race for the past few months. But with Lawrence Summers' withdrawal of candidacy last weekend many see the selection of Bernanke's successor as a foregone conclusion. It is disappointing to think that in a country of 315 million people the braintrust of the US government can only think of one person to take the job: Janet Yellen. Let's assume for a minute that there's no one else who is capable of doing the job. If so then let's use a few quotations to get to know the candidate behind the hype:
1. "It slightly worries me that when people find a problem, they rush to judgment of what to do. "
I'm starting with a softball because I think many of us would agree that thoughtful consideration of any problem is preferable to a kneejerk reaction. I award Dr. Yellen a gold star for her decisionmaking philosophy and would hope that such patience and careful consideration would not be compromised by political expediency.
2. "We need to increase the transparency of shadow banking markets so that authorities can monitor for signs of excessive leverage and unstable maturity transformation outside regulated banks."
Call me naive and idealistic but I tend to prefer my financial markets open, transparent, and above-board. And even then there's no guaranty that we won't have problems. But the size, scope, and magnitude of the problems might not grow so large as to risk taking the entire system down with them. We would all be better off if we were to take steps to formalize trading of off-balance-sheet liabilities of the kind and size that perpetuated the last real estate and credit meltdowns. Another gold star for Dr. Y, the financial medicine woman.
3. "I am anxious to fix welfare. There has to be more training and child care."
Am I to assume that the potential future Fed Chairman would moonlight as a social engineer? Or should we perceive this quotation as a mere philosophical or academic observation? This quote could provide the basis for an entirely separate discussion. For now I will confine my observation to the simple fact that it is reasonable to assume that Yellen is a Keynesian who believes firmly that government spending can solve a multitude of economic and social woes.
4. "In the long run, outsourcing is another form of trade that benefits the U.S. economy by giving us cheaper ways to do things."
Here's where I begin to really question Yellen's viability as a Fed Chair. I assume that her use of the term is rather broad and akin to 'offshoring', the exportation of productivity. And therein lies my criticism of the comment: that Yellen associates 'cheaper' with 'better', and that quality and productivity have no place in the decision equation. I think that this comment also foreshadows her view of interest rates in that a "cheaper way to do things" would be for the Fed to take measures to maintain extraordinarily low interest rates, maybe even to levels that negate any risk premium. I'm taking away a previously awarded gold star for this perceived notion that savers and investors should not be rewarded with a fair return on their capital, and for the indirect message that consumption in any and every form is preferable to investment and saving.
5. " Estimates of the extent of spending are escalating, and the recovery and bounce-back, fueled by massive fiscal stimulus, could propel the U.S. economy on an unsustainable upward trajectory."
How very ironic that a Keynesian would even hint at this very real possibility. That "massive fiscal stimulus" she refers to in this quote includes the Fed's current massive (and arguably ruinous) asset purchase plan. This last one leaves me wondering where she really stands on the issue. If this quote is taken at face value then it is reasonable to conclude that Dr. Yellen is well aware of the potentially disastrous consequences of the shell game being played between the US Treasury (issuing debt to fuel deficit spending) and the Fed (purchasing the debt at any price to keep rates down). And if she can foresee the problem then what, if any, thought has she given to avoiding such a disaster?
It is highly likely that Dr. Janet Yellen will succeed Bernanke as Chairperson of the Fed. If so then investors should prepare themselves for more soft money and dovish policies for the next several years. Is there any chance that we'll see a viable hawish candidate come forward to challenge Yellen's candidacy, someone who will advocate for tapering quantative easing and asset purchases, and who will espouse the virtue of demanding some sort of real return on the Fed's capital? The chances of that are slim, moving closer to none by the day.