Submitted by Shawn Brown of SBrown & Asscociates [12],
The Senate Banking Committee’s confirmation hearing for current Vice-Chair of the Federal Reserve began with Janet Yellen delivering prepared remarks [13]. Most observers likely tuned out well before the completion of the 2 ½ hours meeting to decide whether Yellen was worthy to succeed outgoing Chair Ben Bernanke and ascend to the top spot at the Fed. With the ongoing debacle of the Affordable Health Care website handcuffing Democrats, tough questions about QE, ZIRP, the oft talked about Taper and the possibility of reducing the Fed’s gargantuan $4 trillion balance sheet were verboten. That left Republicans to address the elephant(s) in the room. Predictably, it took nearly the entire hearing until a Senator from Nebraska offered his views about the damage being done by the various fiscal and monetary machinations undertaken to combat the Great Recession.
What happened, beginning just after the 2 hour point of the meeting, was both remarkable and revealing. Senator Mike Johanns, who won’t seek reelection, began by thanking Dr. Yellen for stopping by his office prior to the confirmation hearing. Yellen appeared startled when Johanns suggests that he “would like to continue, if I could with a few questions along the lines of what we talked about in my office.” Senator Johanns said,
“I found your testimony about asset bubbles to be interesting, just before the Chairman turned to me, I looked at where the Dow was at, it’s about 15,850. An economy that quite honestly most everybody would recognize has too much unemployment, an economy where people continue to struggle, an economy where it’s kind of hard to see where the growth is going to be. We are now starting to see real estate bidding wars just like the old days…
Dr. Yellen I kind of look at these factors and I think I could go on and on with some other items and I must admit, what am I missing here? I see asset bubbles and I think if you were to announce today that over the next 24 months you are going to bring that balance sheet down from $4 trillion to zero or $1 trillion, I think if you even said over the next 4 years we’re going to bring it down from $4trillion to zero you would see how big those asset bubbles are, wouldn’t you agree with me on that?”
For obvious reasons, Dr. Yellen doesn’t want any part of a discussion that might include the mention of slowing the $85 billion per month of asset purchases and therefore any talk of a normalization of the Fed’s balance sheet is out of the question. Logically, Yellen decides to check her notes and offer that housing is rebounding in only the hardest hit markets like Las Vegas, Phoenix and her part of the country (San Francisco Bay Area) where a substantial fraction of borrowers were/are underwater. Whether she is waiting for her confirmation to tackle questions related to exiting QE, normalizing interest rates and ultimately reducing the Fed’s balance sheet remains to be seen but Senator Johanns decided to press for more disclosure.
“Dr. Yellen, here is what I would offer and I think you would agree with me although you probably won’t want to agree with me in a public hearing setting. But if I think if I were to say to you why don’t you announce today that you are going to draw this down over the next 24 months from $4 trillion to zero, I think you would see the impact of your policies on the value of real estate all across the United States not just in the hardest hit areas. I think the real estate that I own and others own would go down in value. I also think that the stock market would have the same sort of reaction that it has had when Chairman Bernanke just suggested that there might be a phase down here.
Here’s what I’m saying, I think the economy has gotten used to the sugar that you put out there and I just worry that we are on a sugar high and that is a very dangerous thing for the little person out there who is just trying to pay the bills and maybe put a buck away for retirement. The last thing I will say, the flip side of your policies that you are advocating for are very, very hard on certain segments of our society. You know, explain to the Senior Citizen who is just hoping that CD will earn some money so they don’t have to dig into the principal what impact you’re having on a policy that says for as far as the eye can see or foreseeable future keep interest rates low, they are hurt by that policy.”
Yellen’s candid admission was alarming, “I agree and I understand that savers are hurt by this policy (ZIRP, emphasis mine)… it is important to recognize that savers wear a lot of different hats, they play many different roles in the economy.” Yellen invokes the spirit of the 35th President of the United States in her response to Senator Johanns’ accusations that Fed policies are robbing savers and Seniors, “They may be retirees who are hoping to get part-time work in order to supplement their income. They may be people who have children who are out of work and who are suffering because of that or grandchildren who are going to college and coming out of college and hope to be able to put their skills to work...When those people who worry about our policies, thinking about themselves as savers, taking into account the broader array of interests they have even though they may harm them in that respect are broadly beneficial to them as I believe they are to all Americans.”
JFK, at his inauguration in 1961 said, “Ask not what your country can do for you but what you can do for your country.” Janet Yellen is almost certainly going to be the next Chair of the Federal Reserve, her comments about self-sacrifice, especially for savers and Seniors should sound an alarm that something terrible this way comes.
forward to 2:08:30 to watch this must see segment most missed.