STAFF NEWS & ANALYSIS
Here Comes the New Fed Boss
By Staff News & Analysis - May 01, 2013

Possible Fed Successor Has Admirers and Foe … Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed's campaign to stimulate the economy and bring down unemployment. – NY Times

Dominant Social Theme: A brilliant woman is about to step in at the Federal Reserve.

Free-Market Analysis: It seems official now … Ben Bernanke is leaving at the end of his term. He is said to be exhausted by the past seven years of economic implosion and subsequent quarrels about monetary policy.

Of course, from our humble perspective, this is all to the good. It is our somewhat impractical hope that what we call the Internet Reformation will make being Fed chairman so miserable that no one will want the job and the Fed will simply collapse from lack of participation at the topmost levels.

We don't really believe this will happen but one can hope. Central banks are simply horrible institutions. They create great bubbles that turn into great depressions.

Ask a central banker how he knows how much money to print or where to set interest rates and if he is honest, the answer will be that it is not understood. Central banks fix prices. And price fixing is inherently distortive; it's a wealth transfer and an inefficient one. Over time great distortions and then depressions can arise.

Alan Greenspan admitted during his term that there were no forward-looking indices available to the Fed. He followed the price of gold but this was not predictive but reactive. Unfortunately, there will be no shortage of ambitious people looking to lead the Fed when Bernanke steps down. Ms. Yellen is apparently the front-runner.

Will she change the way the Fed operates … or turn it from an illogical organization into an economically logical one? From our point of view, that's impossible. An agency that forcefully sets the price cannot be reformed. It can only be done away with.

Here's more from the article:

There are other potential candidates for the job, including Roger W. Ferguson Jr. and Professor Blinder, both former Fed officials, and economic advisers to Mr. Obama including Timothy F. Geithner and Lawrence H. Summers. But Ms. Yellen appears to be the front-runner in a race that has not actually started quite yet.

None of the other obvious candidates possess the same combination of academic credentials and policy-making experience. No Fed chairman has been as deeply steeped in both the theory and practice of central banking …

Ms. Yellen, born in Brooklyn in 1946, has said that she became interested in economics as a way of thinking logically about how to help people. She studied at Yale under the Nobel laureate James Tobin, a leading proponent of the view that governments could mitigate recessions. Professor Tobin, now dead, told Business Week magazine in 1997 that Ms. Yellen had "a genius for expressing complicated arguments simply and clearly."

She built an academic career at Berkeley together with her husband, the economist George A. Akerlof, whom she met in a Fed cafeteria. Much of their work together highlighted flaws in the economic theory that markets operate efficiently, a theory that basically treats government policy as inherently costly. Their work showed that government, including central banks, could indeed adopt economic policies that improved people's lives …

Ms. Yellen began a second stint at the Fed in 2004 when she was named president of the Federal Reserve Bank of San Francisco. She has played a leading role in the Fed's movement to provide "forward guidance" about the path of policy over the next several years, persuading investors that it is safe to accept lower interest rates.

But it is easy to overstate her differences with those more focused on inflation. "I think I am as committed to price stability and the attainment of price stability as any member of the F.O.M.C.," a reference to the Federal Open Market Committee, Ms. Yellen said at a 2010 luncheon in Los Angeles. "When the time has come, am I going to support raising interest rates? You bet."

From this we learn that Ms. Yellen is practical, committed, brilliant and well-intentioned. But does she really believe that the Fed under her guidance will be more successful than under Ben Bernanke? And how after one Great Depression, numerous serious recessions and the current Great Recession does she still manage to believe that central bank price-fixing can "improve people's lives"?

We have no doubt Ms. Yellen is intelligent, gracious and competent. Will it make the slightest bit of difference to the lamentable performance of the Fed?

After Thoughts

Nope.

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