Ben Bernanke has said many times that the solution to the country’s financial troubles is fiscal policy, not monetary policy. Would that the legislature would listen. If Janet L. Yellen is confirmed as his successor when Bernanke’s term ends next Jan. 31, she’ll have a full menu of longstanding issues to deal with, many of which came from the other restaurant.
Much has already been said of her long-term expertise as a monetary-policy insider, and depending upon the liberal or conservative stance of the media outlet, that’s either a good thing or a bad thing. Her position as vice chair of the Fed and her experience of working closely with Bernanke gives her the advantage of knowing the fine points of implementation, although detractors see that as a negative.
Yellen would be the first Democrat to serve in the post in almost 30 years. The day her nomination was announced, Republicans already had battle lines drawn. Sort of. U.S. Sen. Bob Corker of Tennessee told The New York Times that her financial policy views were ‘dovish,’ meaning too easy on Wall Street, that he had no reason to believe they had changed since then, and that he looked forward to hearing her current views. Rather perplexing, seeing as Yellen has stated that her focus has been on reducing unemployment because of the structural damage it does to households’ long term stability, and that doesn’t sound too Wall Street-friendly to us based on the positive treatment the Street often gives the stock of big companies that suddenly cut lots of jobs.
At the time of this writing, the threat of a government default had caused some of the nation’s biggest financial firms to shed holdings of Treasury bonds with maturity dates ranging from Oct. 17 to some time in December, when the government impasse was expected to be resolved. That short-term maneuver may be history by the time this prints, but it indicates that the private markets are not inclined to absorb the consequences of governmental dysfunction. Too bad voters can’t respond but once every two years.
This is the world that Yellen, if confirmed as Fed chair, would be entering. The distinction between monetary policy and fiscal policy has never been clearer. On the monetary side, the years-long Fed policy of low interest rates may make the debt less expensive on paper, but it has also devalued the holdings of savers. And the Fed’s efforts to increase employment face headwinds from cheaper job markets overseas.
On the fiscal side, basing an economic recovery on rebounding housing prices is a big lie in some of the most heated markets where prices are being driven up by investors (some of which are alleged to be hedge funds), while traditional first-time homebuyers who would actually live in the properties are being shut out because their job prospects are less than healthy.
As this is being written, the pitch of fear of a government shutdown – the last one was 17 years and two-wars-on-the-nation’s-credit-card ago – is increasingly shrill. It represents an abject failure of fiscal policy. The constant near-term postponements of reckoning day, which has attracted global attention, is something the Fed will have to deal with while having little control over the process. Let’s hope that if she’s confirmed, Yellen’s reputation as a consensus-builder can help overcome this mess.
