Janet Yellen and Monetary Statism

There is perhaps no entity of government that has more autonomous power to centrally plan our economy than the Federal Reserve.  The endless monetary stimulus, artificially low interest rates, and juicing up the stock market, has devalued the dollar, inflated commodities, distorted the housing market, enabled the growth of government (with cheap borrowing), and redistributed wealth from savers to borrowers.  With current Chairman Ben Bernanke stepping down, Republicans must utilize the confirmation process of Janet Yellen to focus attention on the deleterious policies of the Fed.


Today, the Senate Banking Committee will hold its first confirmation hearing on the nomination of Janet Yellen to be the next Chairman of the Board of Governors of the Federal Reserve.  As Vice Chair of the Fed, Yellen has been even more zealous in pushing monetary stimulus and interventionist policies than Bernanke.  Yet, so many Republicans, including some egg heads at the think tanks (along with K Street), have no problem with a group of unelected bureaucrats led by Yellen distorting the economy to benefit Wall Street and the expansion of government over the rest of the country.

Make no mistake about it: using the Fed as a tool to service debt on the cheap is antithetical to free market values.  No conservative can support Janet Yellen.

Let’s put aside the debate over quantitative easing and the currency/commodity issue.  What is beyond dispute is that the near-zero interest rates have allowed the Federal government to expand its role into the private economy with relatively little pain.  Take a look at this article from the Washington Examiner:

The U.S. government has saved over $1 trillion in debt since 2007 thanks to the actions taken by the Federal Reserve to stimulate the economy, a new report from the McKinsey Global Institute finds.

By keeping short-term rates near zero and engaging in large-scale asset purchases known as quantitative easing, the Fed also boosted U.S. banks’ net interest income by $150 billion, the analysis found.

The government profited by being able to issue Treasury debt that pays lower interest rates thanks to the Fed’s stimulus programs. The effective rate on outstanding U.S. debt fell from 4.8 percent in 2007 to 2.4 percent in 2012, according to the study, saving the Treasury $900 billion in interest payments over that time. The Fed also remitted an extra $145 billion in profits to the Treasury during that period.


Some might suggest that this is reason to celebrate.  And indeed, from the perspective of the “dollars and cents” budget Republicans, this is a welcome development.  Their end goal is just to trim the budget in itself.  Accordingly, if they are able to expand government (“compassionate conservatism”) with just a $240 billion annual tab for interest on the debt instead of $500-$700 billion, why not take the initiative?

As we all understand, the main problem with government is not the budgetary cost and the debt (although it will be a problem in the coming generations).  The worst aspect of the federal government is that it uses those funds to meddle in the private economy, kill jobs and raise the cost of living (Obamacare, labor and environmental regulations, etc.).

If not for the Federal Reserve acting to service the debt on the cheap, we would immediately actualize the damaging effects of increased spending under large programs like the stimulus and Obamacare.  According to Investors’ Business Daily, “If Washington had to pay the average interest now that it paid in 2000 (6.4%), it would be paying $500 billion more each year to stay afloat.”

Consequently, most people would feel the pain of “the free lunch” and realize that it is not so free.  Without the Fed’s monetary manipulation, Washington would be forced to raise taxes more outright in order to purvey Obamacare and the free lunch society.  Now they can do so simply by monetizing the debt on the cheap.


Additionally, demanding reforms of the Fed is not only good policy, it is good politics.  I’m not an advocate of populism just for its own sake.  Obviously, we all believe Wall Street and wealthy bankers are entitled to pursue their personal fortunes to their hearts’ content.  But when we have a policy issue that vividly shows how anti-free-market policies hurts retirees and savers in order to benefit the well-connected special interests on K Street and Wall Street why not rise to the occasion?

Why stand for unelected and unaccountable manipulation that is the biggest culprit for expansion of government when we can stand for starving the beast?

Why stand with Wall Street banks to pursue unprecedented purchases of long-term assets that induce negative interest rates when we can stand with the “natural order of things” and help seniors?

Why stand with $45 billion in monthly mortgage-backed security purchases, which will distort the housing sector once again, when we can stand with the free market?

Why create a permanent dynamic in which we are locked into market-distorting sugar highs for fear of reprisal from Wall Street if we revert to normalizing our monetary policy?

It is truly incredible that any conservative would oppose commonsense reforms to the Federal Reserve.

**Posted below is my outline from last year of a reform bill from Rep. Kevin Brady and Senator Mike Lee:

  • It will repeal the Fed’s current dual mandate (Humphrey-Hawkins) to achieve maximum sustainable employment and keep prices stable.  The Fed would be forced to focus solely on price stability.  This would take “the game” out of the Fed.  If they have no ability to create stimulus and provide monetary morphine, Wall Street can’t anticipate it.
  • It would require the Fed to clearly articulate its function as the lender-of-last-resort.  When the government was picking winners and losers in 2008, the Fed bailed out Bear Sterns but not Lehman Brothers.  This bill would force them to communicate a clear policy so financial entities will not erroneously rely on the Fed’s support.
  • It would make the 12 regional Federal Reserve Bank presidents permanent members of the Federal Open Market Committee, the branch of the Fed that sets interest rate policy.  At present, only the president of the New York Fed is on the committee, along with a rotating membership of just 4 of the remaining 11 branch presidents.  The regional presidents tend to be more conservative (like Fisher) than the 7 bureaucrats that are appointed to the governing board by Congress.  It would also weaken the power of the Fed chairman.
  • It would ban the Fed from buying up other securities and bonds, such as mortgage-backed securities from Freddie and Fannie.  We must stop distorting the markets by encouraging investments on the basis of how much capital is available instead of real growth in a specific industry.
  • It would require that the Consumer Financial Protection Bureau, created by the Dodd-Frank law, be subjected to congressional appropriations.  Under current law, the CFPB is housed in the Fed and shielded from congressional oversight.

Cross-posted from the Madison Project


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