Needed at The Fed: A New Age of Boring

By Dan Kervick

It is being reported that the President will nominate Janet Yellen to be the next Chair of the Federal Reserve Board of Governors. Yellen was the obvious candidate all along, and it’s a very good thing that Obama’s earlier preference for Lawrence Summers, a key architect of the deregulated neoliberal regime of the 80’s and 90’s that helped bring us the financial collapse of 2008, was vigorously shot down by critics. The most important challenges for the next Fed chief will be in the area of financial system regulation, and despite the efforts by some of Summers’s closest friends and colleagues to give him a rush makeover as a born-again regulator, Summers was clearly not the right person for the job.

From what I am able to discern, Yellen is a highly professional economist and central banker. She appears to be driven primarily by a commitment to public service and a concern for sound policy, not by greed or vainglory. There are no indications that she is an insider party crony, a money-grubbing practitioner of revolving door politics and payoffs, or a would-be Emperor of the Universe. And so I am sincerely hoping that Yellen puts her professionalism into practice by fashioning herself into the least well-known and most unexciting Fed Chair in recent memory.

We need to end the barmy “maestro” system that has transformed Fed Chairs into rock stars, and turned every inadvertent nose-scratching by the Fed chief into a Page One story feeding hyper-reflexive and erratic market responses to real or imagined Fed signals. The maestro system, with its cult of superstitious fawning and slack-jawed wonderment at the Banker-In-Chief, has veered into extreme depths of perversity lately, as too-clever-by-half market practitioners attempt to outthink themselves at every turn, neglecting fundamentals and clinging to dotty theories about quantitative easing that turn good news into bad news and bad news into good news. The markets sometimes seem to have become nothing but free-floating postmodern casinos driven by arbitrary assignments of importance to Fed policy statements – and that’s a very dangerous thing for our economy. It will be interesting to see if Yellen is able to use her nomination hearings to make some suggestions about how to turn market attention back toward fundamentals, and away from self-accelerating monetary policy fantasies, pipe dreams and delusions. It will also be interesting to see if she is able to use the hearings to call on a derelict Congress to do its economic policy job.

I sincerely hope that five years from now hardly anyone pays attention to the news from the Fed, and that we hear little from our central bank other than some occasional inside page stories along the lines of “Banks Grumble about Tightening of Lending Rules”, “Fed Agrees with FDIC and OCC on Capital Rules Adjustments”, “Fed Shutters First Bank of Springfield” or “Fed Set to Release Newly Designed Ten Dollar Bill.”

The Fed is a bank, and serves as the organizing hub of our centralized banking system. It holds the deposits of its member banks and processes each member bank’s payments to and from the other member banks, as well as setting the interest rate at which these member banks lend to one another. The Fed also has broad powers to regulate its member banks, and as the central bank in the system, the Fed’s liabilities and credit functions are vital to the smooth internal functioning of the banking machinery. The Fed also manages the supply of interest payments from the government to the member banks and from the banks to the government, either by itself making or collecting these interest payments, or by playing an intermediary role in interest payments going to and from the US Treasury.

The Fed is also charged with supplying an elastic currency to the US economy. In carrying out this function, it broadly accommodates the expansion or contraction of money and credit in our economy, an endogenous process that is driven primarily by economic factors and government policies external to the banking system, and that the Fed helps stabilize, but no means directs or controls. The Fed’s own negotiable liabilities, in the form of physical currency, are supplied directly to the public in response to bank depositor demand during the ordinary course of bank lending and deposit management. And finally, the Fed holds the deposits of the US Treasury and acts as the US Government’s fiscal agent.

Somewhere along the ways and byways of economic theory, an unromantic grasp of the sober institutional reality just described was transformed into fantastical monetarist-inflected theories portraying the central bank as the omnipotent controller of the money supply, the guarantor of full employment and the driver of aggregate demand. A credulous tilt toward these extreme theories was even written into our laws during a period when monetarism was in the first flush of enthusiastic ascendancy, and a whole generation of economists and pundits has since been raised on them, and taught to look to the central bank to steer and power our economies. There is now a rather substantial cottage industry of influential economic pundits and policy economists who are personally and intellectually invested in central bank-oriented monetarism, and who have placed career bets on its continued thriving. So it may be hard to break the hold of these outworn and frequently failed theories on the public imagination.

Direction of macroeconomic policy in a democracy belongs with the political branches of government, not the central bank. The Fed should be a pliant accommodator of government policy, applying an unobtrusive stabilizing rudder as the ship of government pushes onward in whatever direction the people choose to sail it. The persistent magnification of central bank importance has helped lead to a generation of Congressional and Presidential buck-passing, and is in part responsible for the grossly inadequate and immoral response of government policy-makers to the crisis of 2008. Both in the United States and Europe, do-nothing legislatures and benighted or corrupt policy-makers have laid waste to a generation of unemployed and increasingly hopeless young people while the policy-makers sit back and pray for central bank rain dances and other snake oil cures to be effected by mere interest rate jiggering and asset shuffling.

The neo-baroque era of the Almighty Central Bank needs to end, and like a passing Sun King, the modern central bank as we have come to know and worship it needs to yield to a new era of engaged, democratic and politically responsive governments taking full adult responsibility for economic policy and the economic development of their societies. So here’s hoping for a successful, prosperous and entirely uneventful tenure for Janet Yellen as the Fed’s new chief, and a turn toward a new generation of activist economic policy driven by democratic citizens and their elected representatives, with central banks reduced to the role of providing helpful advice and obedient support.

Cross-posted from Rugged Egalitarianism

Follow @DanMKervick

15 responses to “Needed at The Fed: A New Age of Boring

  1. ‘The Fed is also charged with supplying an elastic currency to the US economy.”

    The fed should allow people to directly deposit this currency and transact it electronically instead of only allowing people to hold it in the form of notes and coins. It should supply an efficient currency not just a limited purpose currency that only banks have the privilege to directly deposit and transact in . If the fed continues to provide a currency to the public which can only be physically carried around then we will need to depend on commercial banks to provide an efficient means of payment.

    • It should supply an efficient currency not just a limited purpose currency that only banks have the privilege to directly deposit and transact in . dannyb2b

      Yes. The lack of a convenient Postal Savings Service for the risk-free storage of and transactions with fiat is an implicit privilege for the banks.

      And shortly after a PSS is set up, government deposit insurance and the Fed should be abolished.

  2. Fed Chiefs of the past were pushed into te role of superheros by cowardly politicians. Whether Yellen’s job will be boring, as it should be, or not will depend on whether she too is pushed into a similar role. The financial markets are themselves due for a huge correction and it will happen regardless of what she does or says.

  3. Wow, some brilliant quotes from this article.

    GRP makes an interesting point, is it a chicken/egg type situation perhaps? Lesser government activity over 30 some years kind of forced the Fed to fill the void, or did Fed expand and it allows government to kick back more, pun intended, and do nothing.
    Maybe the powerful, erm “powerful” CB is a necessary part of limited gov? It all seems to be hand in hand, which is ironic eh? We need less government, but should totally trust an unchecked, unregulated, quasi private but gov bank to handle as much of the economy as they can. Leave power away from the people and with a few…

    • I think we are talking about two sides of the same coin Brian. The whole thrust of monetarism and the cohort of economists and policy-makers who promoted it aggressively as part of the general rise of neoliberalism was that the political branches of government needed to play a smaller role, and that macroeconomic policy could be handed off to central banks. I don’t think Greenspan was forced into anything. Diminishing the role of fiscal policy and elevating the role and “independence” of central banks go hand-in-hand. It’s a global phenomenon, part of a general trend away from activist government toward small government, big finance and politically unaccountable technocracy. The Rand-disciple Greenspan’s message to the world was, “Governments, butt out. We’ve got this.”

  4. Nicely written. Nicely argued.

  5. unfortunately, the Fed’s job has morphed into a mission to ‘un-f**k’ whatever the fiscal side of the house did. They can do more – Yellen wants to – and I’m fine with that. A perfect world has elected representatives doing their job, but we haven’t had that since the 1970s.

    • The Fed can’t really do anything significant to undo dereliction of Congressional duty, so it is not un-f**king anything. QE is a placebo program with rapidly diminishing placebo value.

      • Right – Congress has far more tools (and better ones!) than the Fed. but without QEx, everything would be far, far worse. QE hasn’t done as much as advertised, but it has still provided some value. You’d have higher interest rates, less home refis, etc.

  6. Dan, Thanks for another insightful contribution.

    I realize you aren’t an economist, but a philosopher who understands economics in the big picture perspective. I really appreciate this approach, as I have a long career teaching philosophy . Especially should we remember that economics as a science came out of economics as ethics – i.e. as search a for a good society, or the “public good.”

    From your previous posts, I believe your political/ social views are progressive, and I share much of what you have advocated elsewhere about full employment, infrastructure, education, health, etc. But here you didn’t push any fiscal or political agenda, but properly said that that is a matter for democratic processes and argument to decide. Economics is the mechanism, and money matters need to be guided by good economic ideas (e.g. MMT). Your explanation here of the role of the central bank as a helper, rather than a controller, of the economy is clear. Thanks for that, too.

    My only worry is that your comments about democratic control may sound too idealistic, when I think about oligarchic influence on law making, and the effects of predatory financial capitalism on the values of the popular culture. I’m also afraid that ordinary citizens don’t know how to learn either what kind of economic/ monetary policies are good, or how to see through the din and deception of popular media accounts of what is happening, and what needs to be done about it. But let’s hope, and try to influence whom we may reach.

    Yours truly,

    Justin Synnestvedt, Chicago

    PS I’d love to have some critique of my recent book length essay, “Inequity, Iniquity and Debt.” It tries to summarize many of the big topics the MMT community discusses, in a context of ethics:

  7. kevin_global

    US presently face a major crisis. The legislative branch of Govt is completely paralyzed. And it seems that Congress cannot approve the budget let alone authorizing trillions of dollars of spending for economic recovery and progress. American people may have to wait till eternity so as to see the Congress realizing and fulfilling its responsibilities. Supreme Court cannot authorize federal spending or legislation for fiscal stimulus. That leaves us with the Executive branch. Branch with elected officials who do not have constraints as in the Congress. Today’s extraordinary problems need extraordinary solutions. Solutions can start with a strong executive branch which realizes its responsibilities when Congress has forgotten theirs.

    I want a Fed chair to have two qualities.

    1) A person who understands that Central Bank is a property of Govt. Person who is ready take orders from WH or executive branch of Govt. Who can exploit dual mandate for what its meant for. Open special credit windows for Infrastructure Development. Fed (on orders from WH) should provide $5 Trillion credit facility for Infrastructure growth in America. Putting up tender offer to buy Infra Bonds from State, Port Authorities, Municipalities etc. Fed will pledge to buy Infra Bonds at 0% coupon, 50-100 year maturity.

    Its similar to what Fed does presently. Fed currently purchasing $500 Billion of MBS annually. Instead of these MBS purchases, fed should directly buy Infra Bonds. That will directly lead to job creation and fixing stagnating Infrastructure of America.

    2. A person with strong regulatory zeal. Someone who is determined to curtail the casino economy, the over financialzation of economy. Someone who can end too big to fail and help in process of prosecuting too big to jail. During the lead up to 2008 financial crisis, the regulatory role of Fed was non existent. Its time to amend mistakes. Glad to see that Summers is out of the race but i don’t see anyone with the kind of regulatory zeal i am looking for. (Bill Black will be a good choice : ) )

    So when i see Yellen. I don’t find the qualities needed. I don’t know how to measure/weigh professionalism. Dan has described Yellen as highly professional Central Banker and economist. I see Yellen as a Clone of Bernanke. Some one with rich academic background. Someone who will try to turn and push knobs and pedals of Central bank apparatus that supposedly run the monetary system and economy. Trying to manipulate and tweak the economy with interest rates and other “tools”.

  8. Pingback: Calling on Yellen: Time for a Modest, Dull Fed « naked capitalism

  9. I agree totally that the Fed is limited in what if can do, and, has done about all it can do. As you know the interest rate was set at 0-.25% since December 2008. Four years and ten months is the evidence. I further agree that Janet Yellen, after she is confirmed and not during her confirmation hearings, should tell Congress not to pass the buck to it to promote economic growth and point out the limitations of monetary policy and necessity of fiscal policy support. However, I would go further and suggest it would be much better if the entire Federal Reserve Board would carry much more weight than just Janet Yellen alone.

    • I further agree that Janet Yellen, after she is confirmed and not during her confirmation hearings …

      Agreed. Hopefully the confirmation hearings will not turn into another partisan free-for-all.

  10. I appreciate your comment. More importantly, I would be interested in your thoughts on the wisdom of her trying to get the entire Board to petition Congress to harmonize fiscal policy with monetary policy in support of economic recovery. As you know the austerity by sequestration pulls in the direction and is restraining economic growth. Some education is needed. Do you think: a) she could try to get the Board to do this; and, b) she should try to do this?