Guest Post: Yellenomics – Or The Coming Tragedy of Errors
Submitted by Pater Tenebrarum of Acting-Man blog,
Keynesian Paradigm to Be Revived
We have come across a recent article at Bloomberg that discusses the philosophical roots of Janet Yellen's economics voodoo. This seems in many ways even more appalling than the Bernanke paradigm (which in turn is based on Bernanke's erroneous interpretation of what caused the Great Depression, which he obtained in essence from Milton Friedman).
Janet Yellen, so Bloomberg informs us, was a student of the Keynesian James Tobin at Yale, the economist whose main claim to fame these days is that a tax is named after him. Tobin, like other Keynesians, was an apologist for central economic planning, which made him eligible for the central bank-sponsored Nobel Prize in Economics. He was undoubtedly a man after the heart of the ruling class. It is therefore not a big surprise that one of his students gets to run the Federal Reserve, which is one of the main agencies, if not the main agency, by which the rule of money power and central economic planning are perpetuated. It should be noted that the inflationist who runs the central bank of Argentina, Mercedes Marco del Pont, was also trained in Yale. Marcos del Pont once asserted sotto voce in a speech that the enormous ongoing plunge in the purchasing power of the Argentine peso was not a result of her incessant massive money printing. Since she didn't deign to explain what actually causes it then (foreign speculators perhaps? Just guessing here…), it presumably is just a case of 'sh*t happens'. This just as a hint as to what can be expected from economists trained at Yale.
From the Bloomberg article:
“When James Tobin joined President John F. Kennedy’s administration in 1961, the U.S. economy was struggling to recover from its third recession in seven years. As a member of Kennedy’s Council of Economic Advisers, the Yale University professor put his theoretical research on asset markets to work in fashioning a novel strategy — nicknamed Operation Twist — to reduce long-term interest rates.
Now, more than half a century later, two of Tobin’s Ph.D. students — Janet Yellen, nominated to be the next chairman of the Federal Reserve, and Koichi Hamada, a special adviser to Japanese Prime Minister Shinzo Abe — are applying some of those same concepts in their efforts to boost their respective countries’ economies.
Tobin’s work on asset markets with fellow Yale professor William Brainard “is essentially the backbone of quantitative easing,” said Edwin Truman, a former Fed official who taught at the school in New Haven, Connecticut, from 1967 to 1972.
The portfolio-balance theory found that policy makers had the ability to affect the prices of individual assets by altering their supply and demand in the financial markets. And that in turn would have an impact on the economy.
The research won Tobin the Nobel Prize in economics and formed the justification for the late economist’s strategy to twist the bond market’s yield curve in 1961 by selling shorter-dated securities and buying longer-term ones.”
Naturally, the Bloomberg article neglects to mention that Tobin's toxic advice to Kennedy laid the foundation for the later Nixon gold default and the roaring 'stagflation' of the 1970s.
What is not surprising though is that one of the witch doctors advising Shinzo Abe on his hoary inflationist policies also turns out to be a Yalie indoctrinated by Tobin. The only good thing we have to say about this particular circumstance is that it will accelerate the inevitable collapse in Japan, and thus perhaps bring forward the moment in time when unsound debt and malinvestments in Japan are finally liquidated.
Unfortunately it is to be expected that this will involve massive theft from Japan's savers and bring misery and misfortune to millions, as the statists will no doubt try everything to save the present system. The eventual confiscation of the citizenry's wealth is undoubtedly high on their agenda for dealing with 'fiscal emergencies' (for proof, see the recent proposals by the IMF, which are more than just idle thought experiments. They are the blueprint for what we must expect to happen down the road).
Keynesian economist James Tobin – he looks harmless enough, but was a wolf in sheep's clothing. There is no government intervention in the economy he didn't like or recommend. His work was directly responsible for the catastrophic 'stagflation' of the 1970s.
(Photo via AFP / Author unknown)
The Economic Illiteracy of the Planners
Bloomberg also brings us a brief excerpt from a speech Ms. Yellen delivered on occasion of a reunion of the Yale economics department. The excerpt perfectly encapsulates her and the department's philosophy (which is thoroughly Keynesian and downright scary):
“Fed Vice Chairman Yellen laid out what she called the “Yale macroeconomics paradigm” in a speech to a reunion of the economics department in April 1999.
“Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not,” said Yellen, then chairman of President Bill Clinton’s Council of Economic Advisers. “Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes,” although there is “uncertainty with which to contend.”
She couldn't be more wrong if she tried. We cannot even call someone like that an 'economist', because the above is in our opinion an example of utter economic illiteracy.
First of all, the premise she proposes is completely mistaken. The unhampered market economy is the only economic system that can guarantee maximum employment. Only in an economy where there is no intervention in prices and wages at all will all those who want to work actually find work. It is precisely because the state intervenes in the economy and fixes wages and prices that perpetual institutional unemployment exists. In other words, she has things exactly the wrong way around. Of course, we may concede that in a complete command economy, unemployment can be made to disappear as well – along with all traces of freedom, human dignity and wealth. There was no unemployment under Stalin, but we doubt that his army of slave laborers such as that he forced into digging the Baltic-White Sea canal was particularly happy.
Of course Ms. Yellen's contention that the class of philosopher kings to which she belongs “has the knowledge and ability to improve macroeconomic outcomes rather than make matters worse”, must be answered with a resounding 'No'!
The historical record of interventionism speaks for itself: it is a history of constant, recurring failure, that quite possibly has thrown back economic and technological progress by decades, perhaps even centuries.
It can not be otherwise; if it were otherwise, then socialism would work, but socialism demonstrably cannot work. The same problem that makes socialism a literal impossibility – the calculation problem identified by Mises in 1920 – applies in variations to all attempts at economic planning. Central banks are a special case of the socialist calculation problem as it pertains to the modern financial and monetary system (see also J.H. De Soto's work on this point). Similar to the planners of a putative socialist economy in which the means of production have been nationalized and where therefore prices for the means of production no longer exist, the interventionists populating central banks cannot 'calculate'.
They cannot gauge the opportunity costs involved in their actions and compare them to the outcomes, as they are not subject to the market test - the categories of profit and loss have no meaning for them. There is in fact nothing on which such a calculation could be based. It is an absolute certainty that their interventions will result in precisely what Yellen asserts will not happen: they will “make matters worse”. It is simply not possible for a central economic planning agency to 'improve' on a market-derived outcome. The Federal Reserve's handful of board members cannot 'know' what the ideal level of interest rates for the entire market economy is. Only the market itself can determine the state of society-wide time preference, and thereby establish the natural interest rate. The interventions of the central bank are intended to impose an interest rate that deviates from the natural rate, on the absurd theory that a gaggle of bureaucrats 'knows more' than the entire market!
The reality of what they know and don't know is amply demonstrated by the outcomes of their policies: the recurring booms and busts that have consistently damaged the economy structurally, and which have finally led to a situation where the economy found itself actually worse off when the last boom ended than it was on the eve of the boom. This demonstrates a rare gift for destruction, as normally credit booms cannot crimp the progress of capitalist economies completely. With the Fed at the helm, it has however apparently become possible now to actually enter a cycle of economic regression. Not only are we worse off than we would have been otherwise, we are now worse off in absolute terms as well. These people know less than nothing, which is to say, they do possess knowledge, but it is in a sense negative knowledge, due to the destruction it brings.
“Ms. Yellen told the Financial Crisis Inquiry Commission in 2010 that she and other San Francisco Fed officials pressed Washington for new guidance, sharing the problems they were seeing. But Ms. Yellen did not raise those concerns publicly, and she said that she had not explored the San Francisco Fed’s ability to act unilaterally, taking the view that it had to do what Washington said. “For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of an almost universal failure.”
Robert Wenzel among others already reported on Ms. Yellen's absolutely dismal forecasting record. The reason why we are bringing this point up is that it has to be contrasted with the picture painted of her in the mainstream press, where she is regularly portrayed as a veritable Cassandra who foresaw the crash taking before anyone else did – but curiously did absolutely nothing about it, in spite of her position as a Fed governor. For another excellent and very detailed deconstruction of the myth that Ms. Yellen ever knew what she was doing, here is a video by Peter Schiff, who has dug into all the evidence (these days it is luckily very easy to fact-check and expose the lies the media want us to believe). Note that although Schiff is obviously philosophically opposed to Ms. Yellen and everything she stands for, his assessment is very fair. Even so, it is utterly damning:
Peter Schiff on the myth that Ms. Yellen has 'forecast the crisis'. She forecast absolutely nada.
What To Expect
It will probably be best to prepare the funeral rites for the US economy. The seemingly inexorable lurch toward socialism is going to be taken up another notch with Ms. Yellen's nomination to Fed chair. From the Bloomberg article we learn that Anglo-Saxon central banking socialism is indeed going global these days – and that Ms. Yellen is one of its foremost proponents:
“Janet was a force — perhaps ‘the’ force — behind the FOMC’s decision to move to an even more accommodative policy last December,” said Laurence Meyer, a former Fed governor who is now a senior managing director at St. Louis-based Macroeconomic Advisers LLC.
Hamada, who retired from Yale this year after a 27-year tenure, also has been aggressive in pushing for more monetary stimulus in Japan, going so far as to publicly criticize his former star pupil Masaaki Shirakawa for not doing enough to lift growth when Shirakawa headed the central bank from 2008 to March of this year.
That was “a little bit of stepping out of the Japanese character,” said Richard Cooper, who taught Hamada at Yale and is now professor of international economics at Harvard University in Cambridge, Massachusetts. “It shows the American influence.”
The 77-year-old Hamada is one of the architects of the reflationary policies known as Abenomics and played a role in choosing Haruhiko Kuroda to replace Shirakawa as governor of the Bank of Japan. Under Kuroda, the BOJ is buying more than 7 trillion yen ($71.3 billion) in bonds a month in a bid to spur growth in the world’s third largest economy. The central bank today maintained its unprecedented easing and forecast that inflation will reach its target, even as some board members cautioned the price outlook was too optimistic.
The BOJ program “is an extension of the Yale Tobin-Brainard approach,” Hamada said in an interview. The Japanese central bank is “enhancing activity in asset markets” to “activate the real, stagnated economy.”
That 'American influence' is certainly pernicious and we should perhaps add here that the whole idea that central economic planning and money printing are panaceas for economic ills is at its root actually deeply un-American. The leftist ivory tower economists who propagate it are certainly not representative of the American spirit, which was always oriented toward liberty, including of course economic liberty. These people are the anti-thesis of this spirit, but we can offer some consolation: before all of this is over, central banks will be utterly discredited and be among the most reviled institutions ever.
Bloomberg offers the views of a sole critic (in the interest of 'fairness')– a proponent of the Friedmanite Chicago School. In other words, a school of thought that as recently as in the 1940s was regarded as part of the 'leftist fringe' as Hans-Hermann Hoppe once pointed out, is brought up as the lone spokesman against central planning a la Keynes and Tobin. These views are then curtly brushed off as irrelevant:
“The lessons Yellen and Hamada learned from Tobin back then aren’t producing the intended results today, said Brendan Brown, who attended the University of Chicago in the 1970s and is now executive director of Mitsubishi UFJ Securities in London.
Echoing some of Friedman’s skepticism, Brown argues the Fed’s effort to boost bond and stock prices artificially won’t help the economy because investors and companies realize the run-up won’t last and so will hold back on spending.
Rather than stepping up capital investment, companies are responding to the rise in stock prices by buying back shares or increasing dividends, he said. Orders for U.S. equipment such as computers and machinery fell 1.1 percent in September, according to the Commerce Department in Washington.
“QE is not working,” said Brown, author of “The Global Curse of the Federal Reserve.”
Former central bank official Joseph Gagnon takes issue with that assessment. He supports the Fed’s actions and said the economy has been restrained by households paying off debts, the on-again off-again crisis in the euro region and a “massive” fiscal squeeze.”
It is not surprising that a 'former central bank official' takes issue with Mr. Brown's entirely correct assertion that 'QE is not working'. We also take issue with it – not only is it 'not working', it is positively destructive. It will leave the economy's capital structure extremely distorted and misaligned with consumer preferences. The bust that will follow in the wake of this huge policy error is going to be one for the history books.
Bloomberg then quotes Gagnon further:
“This is just Operation Twist redone,” said Gagnon, who taught at the University of California’s Haas School of Business in Berkeley in 1990 and 1991 when Yellen was a professor there. “And what we now know is that Operation Twist did work. They just needed to do more.”
Really? Is that what we 'know' today? That 'Operation Twist' somehow worked in spite of not working, and that it actually would have worked if only they 'had done more'? It is emblematic dear readers that the article closes out with the standard Keynesian excuse fore why Keynesian policies never seem to work:
“They haven't done enough of it”
The logic behind this excuse is quite baffling, to say the least. Something that doesn't work will work if only more of it is done? Has not Japan demonstrated conclusively by now that 'doing more' of the same only ends with government finances in tatters and on the brink of crisis?
Anyway, after reading this paean to Yellen and her teacher Tobin (we haven't quoted from the article's extensive praise of Tobin, but it is as uncritical, unreflected and flattering as such portrayals ever get), we conclude that one must fear the worst. If you thought that after Greenspan and Bernanke things couldn't possibly get worse, you are probably in for a surprise.
Keynesian central planner Janet Yellen: believes the free market doesn't work and needs utterly clueless people like her to function 'better'.
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