Her real long term challenge will likely be how to “mop up” all the
liquidity that has been added to our (and by extension, world) economy since
2008. The problems of slow growth and even a recession will be a piker next to
the business/investment destroying effects of inflation, and given China’s
apparent eagerness to see the dollar lose its lofty place as the world’s
reserve currency, the impacts this time around could make the late 70’s
early 80’s look like the golden days.But she is arguably one
of the smartest economists in the world today and eminently qualified –
and doesn’t have the problems Larry Summers would have brought to the
job… namely, his personality.
In the information pamphlet produced by the Chicago Fed reserve titled,
"Modern Money Mechanics," it clearly explains how the Federal Reserve
influences monetary policy. The problem is the Federal Reserve can not do
anything for this lingering economy anymore. The process for the Fed
to stimulate economic activity is primarily two fold. The Fed would buy bonds
and securities by creating a liability against it self(creating money out of
thin air) and therefore increase the reserves of the banking institution of the
investor who previously held the security. The bank then could lend the excess
reserves through fractional reserve lending. The second part of the
fed stimulus is setting interest rates. Which are at record lows. In past
economic recovery's the two above stimulus's generally would kick
start the economy again and employment would rise. The problem in
today's economy there is a total disdain for borrowing now. Most people are
focused on paying down debt and living debt free. Our current monetary system
only works if people will borrow money and continue to borrow money.
Worrying that Yellen might be like Arthur Burns seems a bit over the top. He
was a political campaign aid. She has a very different background. I
understand that there is always a worry about the Fed being politically
independent but I see no special issues with Ms. Yellen.Calm down.
Breath deeply . . .
"The Fed seems to be evolving into a central economic planner with a roving
commission to right social wrongs such as unemployment." Is this
surprising? Central banking has always done this when it is doing its job. But
we face two big problems. The smaller of the two is the absence of adequate
employment stimulus, like that which would be provided by a modern PWA. The
political gridlock in DC would never allow for this. The second and much bigger
problem is the circuity with which we must work to get things done. For
example, rather than putting people to work directly by force of will
(socialism) building infrastructure for example, we have to try to do it through
messing with the money supply. The capitalism of the present concentrates
wealth at the top through the Fed and "banks too big to fail." We have
a kind of socialism already, but it is a socialism which benefits the few and
the expense of the many. We need a socialism which benefits most everyone. The
question is, who benefits?
Nice to see that George Will gets it. How long will it take for the rest of
America to catch up?