“And part of the (economic stimulus from FED monetary policy) comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”, Janet Yellen
Excerpts from Rana Forooohar’s January 20, 2014 Time interview with new Fed Chair Janet Yellen (and Mike Perry’s comments):
As the New Fed Chief, she now has the world’s largest economy in her hands.
“I’d like to see real wages going up,” Yellen says, adding that the average American male worker’s inflation adjusted wages have been flat or down for the past 20 years.
Those words may not sound uncommon, but in an institution where people often speak in algorithms rather than English and live in a statistical bubble, Yellen’s focus on the human impact of economics is a true shift. Central bankers have, as she puts it, “an important role in public policy and a moral responsibility to take part in it.” The job, as she sees it, “isn’t just about fighting inflation or monitoring the financial system. It’s about trying to help ordinary households get back on their feet and about creating a labor market where people can feel secure and work and get ahead.”
Comment from Mike Perry: “Yellen’s sentiments above are highly admirable, but step back for a minute and think about the FED’s role in relation to them. The FED only controls monetary policy. They have a major impact on nominal prices, which can affect the real economy in the short run. However, in the long run, FED monetary distortions will have to end and the free marketplace and our laws, regulations, and fiscal policy will determine economic activity, the labor market and real wages. To me, it’s naïve and a little scary for a FED Chairperson to express the view that the FED can affect real wages or labor market issues like job security and advancement opportunities. It can’t.”
“You know, a lot of people say this (asset buying) is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending,” she says. “And part of the (economic stimulus) comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Translation: a rising tide can lift all boats. That’s a phrase that’s been associated with conservatives in recent years, but it’s worth remembering that Kennedy said it first….and Yellen still believes it.
Comment from Mike Perry: “Yellen admits here (as Bernanke and Greenspan have) that the FED’s monetary policies are distorting (temporarily) the nominal price of assets like homes and stocks, causing people to make economic decisions (like spending, asset purchases/sales, and/or borrowing) that they would otherwise not make. In my and many others view, the FED hasn’t learned the most important lessons from the most recent financial/economic crisis about their monetary policy distortions, because their hubris (and desire to protect the FED as an institution) has prevented them from admitting their major role in causing it. Almost unbelievably, they are once again determined to use their monetary powers to create unsustainable nominal asset bubbles, which spur temporary economic activity (and do benefit the rich and powerful more than the poor), but whose distorting effects cause mal-investment and significant economic volatility and ultimately harm real, long-term economic growth.”