On October 9, 2013, President Obama announced his nomination of Janet Yellen, current vice-chair of the Federal Reserve, as the new Fed chair, to replace Ben Bernanke expected to retire at year’s end.
Obama’s appointment, subject to Senate confirmation that is likely, comes after a general consensus in recent weeks that Yellen would be the President’s choice. That followed weeks of heated public debate and maneuvering, identifying Yellen as the favorite of liberals in and out of Congress, and Larry Summers the prefered choice of Obama administration staffers and insiders. Summers withdrew his candidacy several weeks ago, however, under pressure from conservative elements, who viewed his role as former Obama adviser, as too liberal on fiscal spending in Obama’s administration, and liberal elements, who viewed his role as former Clinton administration Secretary of the Treasury as too accommodating to bankers and financial deregulation.
It has been interesting to watch how liberals, within and without the Obama administration in recent weeks organized aggressively on behalf of Yellen. Yellen was the ‘Fed Dove’, willing to continue Ben Bernanke’s generous free money policies of QE (quantitative easing) and near zero interest rates. In contrast, Summers was the monetary ‘hawk’ that would likely accelerate a withdrawal from QE faster. Of course, both profiles were mostly spin.
Noted liberal economists, like Paul Krugman of the New York Times, fell completely into the Yellen camp, praising her policies and more liberal credentials. Even progressives of the moderate persuasion fell for the ‘Yellen as Fed Dove’ fiction. But a closer inspection would have revealed that neither Summers nor Yellen would have departed much, if at all, from current chair Bernanke’s policies.
Those policies, in the form of QE and ‘zero bound interest rates’, since 2009 have had little if any impact or effect on the real economy—and therefore on housing recovery, jobs, or middle class incomes.
In the course of four years of both QE and zero rates, the Federal Reserve has pumped more than $13 trillion in liquidity (money) into the US and global banking system (and shadow banking system) to bailout the banks. In terms of QE alone, this occurred in at least three versions—QE1, QE2, and now currently QE3—which together will have provided by year end 2013 (along with QE 2.5—called ‘operation twist’), nearly $4 trillion of liquidity injections to bankers as well as individual wealthy investors seeking to dump their collapse subprime mortgage bonds on the Federal Reserve.
QE and the $13 trillion resulted in record booms in the stock and bond markets in the US and globally. Much of that likely flowed out of the US into the global economy, serving to stimulate real growth in emerging markets and generating financial asset speculative bubbles around the world. There is in fact a very high correlation between the announcement, introduction, and conclusion of QE programs and stock-bond, derivative, and other financial asset booms and declines since 2009. Conversely, there is virtually no such connection between housing, jobs, and other real sectors of the US economy.
Bernanke Fed monetary policies have thus boosted financial capital gains and in turn the incomes of the wealthiest in the US and globally, as real disposable income for US households has consistently declined for four consecutive years.
As recent data on income distribution from studies of economists at the University of California have shown this past summer: The wealthiest US 1% households have accrued for themselves no less than 95% of all the income gains in the US since 2009.
Yellen has been perhaps the strongest supporter of out-going Fed Chair, Ben Bernanke’s policies of QE and zero bound rates, which have directly resulted in this lopsided income inequality. So why were liberals so impressed with her as the preferred choice for next Fed chair? It certainly wasn’t for her policies. Or was it?
Perhaps some still labor under the false notion that, in the world of 21st century global finance capitalism, low interest rates create jobs. But that academic economics fiction no longer has evidence in reality. It belongs in the same trash bin with other fictions, like business tax cuts create jobs. Or that more free trade agreements , like the pending Trans-Pacific Partnership, pushed by the Obama administration and liberals, will create jobs. Here again, the empirical track record shows that neither have, or will, create jobs. Liberals nonetheless adhere to these false notions, in essence believing in the various forms of ‘trickle down’ economics. Regardless, Yellen was given the ‘dove’ tag, and therefore the liberal endorsement.
Yellen as Fed Chair will continue policies no different in content than has Ben Bernanke. Yellen will continue to pump QE into bankers and investors, stocks and bond markets, global speculators and offshore investors, as had Bernanke. If she really were liberal, she’d take the $1 trillion given them in just the past year of QE3 liquidity injections and use it to fund a government direct job creation program. That would create 20 million $50k a year jobs, and jump start the economic recovery overnight.
But the Bernanke-Yellen policy of giving that $1 trillion (and $12 trillion more) to bankers and investors will instead continue to prop up the stock, bond and other speculative financial markets. Just as Bernanke ‘chickened out’ this past summer when he rapidly backed off suggesting the $85 billion a month QE3 injections might be reduced by modest $5 billion, so too will Yellen.
There will be no fundamental change, in other words, from a Bernanke Fed to a Yellen Fed. The US Federal Reserve under its current structure and leadership is an institution serving bankers and wealthy investors. Before the Fed can ever begin serving the rest of the economy, the country and its citizens, it will have to be radically restructured.
The Federal Reserve will have to be democratized and become an institution that functions as a ‘public banking entity’, not a private banking conduit. It will then provide low money cost loans to households, small businesses, students, and workers—instead of wealthy investors, bankers, and speculators.
Instead of issuing QE for the 1%, the Fed could issue QE designed to create jobs, raise incomes, and generate a sustained economic recovery for all. But that won’t happen under a Yellen Fed. The false ‘hawk/dove’ options for leadership in the Fed Reserve reflects the U.S. political system – a dual one-party system with corporate interest at its heart. It will take a new, grassroots movement calling for real choice, and real democracy to fix our government, and institutions like the Federal Reserve.
~ Jack Rasmus serves as the Chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
The Flow of Funds report from the Fed, July 2013, reports the household net worth has increased since 2008 from $57 trillion to $74 trillion, up $17.6 trillion, which is on average $146,000 per household. But, unfortunately, probably most households have less savings, maybe 95% of households. Was the QE3 and 2 and 1, instrumental in this 30% increase in household net worth? Apparently from your article it was. Greenspan counseled the Fed after the Recession to keep asset prices high, maybe so retirement funds would not stop providing for the retirees. I wonder how a GDP of around $15 trillion a year over a five year period, about $75 trillion in all, can create $17 trillion in additional savings? Is the nation saving about 20% of GDP each year? Help me with this math. And I looked just now at Christian Weller’s Economic Snapshot, he says “Household debt equaled 108.5 percent of after-tax income in June 2012, down from a peak of 129.3 percent in September 2007.” This is aggregate debt compared to aggregate income, I think. It shows that the increase in household assets, the $17.6 trillion increase, did not do much to relieve the excessive debt burden of most households. Why not? Your radio show is catching my interest, by the way.
The net worth increase reflects mostly asset price increases, and is no doubt concentrated among the 10% or fewer households (mostly 1%) that own most of the assets in the US and globally. The ‘average’ figures are deceiving, given that the net worth gains are highly skewed to and concentrated among the top households. Median family households’ assets are mostly all home ownership and some 401k. Home prices have gained only about a fourth or third of their $4t lost values. 401ks no more than that, and likely less. So net worth for median and below have no doubt declined, making the gains by the top1% and 10% even more than the ‘average’. Unfortunately, the Fed Funds data does not break out the segments by percent of households. Meanwhile, median households have been adding even more debt–especially student, mortgage, and even credit card debt–while dragging savings from 401ks to cover monthly bills now.
Weller’s data is also an aggregate average, which hides the fact that most households’ debt as a percent of after tax income is likely rising. His numbers are underestimating also because the gains in household income are also skewed highly to the top (so the debt variable is too low and the income variable too high, if we were segmenting looking at median family incomes and below. In a Minskyan sense, household fragility is falling for the wealthiest (due to debt decline and income gains) while fragility is rising for much of the rest. And the former is rising more than the latter is declining, so the average appears as if it is improving. In a Keynesian terms, given that the wealthiest have a low marginal propensity to consume and the median and below a much higher MPC, the net result is a decline in MPC, a lower multiplier effect, and thus a ‘stop-go’ unsustainable consumption contribution to GDP. Consumption stop-go translates into GDP ‘stop-go’. (Add to this that median households don’t get as a good a terms on their debt as wealthier ones do, which is another ‘fragility factor’.)
Hybrid Keynesians like Krugman and others (‘Hybrid’ because they aren’t true Keynesians but their training is a contradictory combination of classical and some Keynesian views), simply don’t understand the relationships between debt, fragility, consumption, and therefore GDP. They can’t see that elasticities and multipliers have structurally changed in the world of 21st century global finance capital.
The $17.6 trillion has not relieved the excess debt burden because the income gains, skewed at the top, have been either: hoarded (in tax shelters), shuffled offshore to emerging market funds and investments, squirreled away into financial asset speculation of various kinds in the US and globally, etc. Meanwhile, real incomes decline and debt rises, and terms of debt finance grow more difficult, for median and below households. Since they’re more critical in terms of consumption, we get the problem of on-off consumer spending.
Jack
I really appreciate you writing this article. I received it in the Green Shadow Cabinet newsletter. You explained things clearly in lay terms. Thanks.
I do not agree that we should re-inflate the housing bubble. Though I agree 100% with your assessment that artificially inflated asset prices are the result of QE and that QE has no effect in so far as improving the economy for the 99%. The FED in it’s present form should and ultimately must be completely under the control of government; as should the creation of money be only a function of the Treasury Dept. Fractional reserve lending must be abolished. Finally, campaign finance reform and the destruction of rulings such as ‘citizens united”, laws validating corporate person hood and those which give multi-national corporations rights beyond which are granted by governments. Laws that allow them to hold governments responsible for profits lost as the result of their being made to comply with legally established regulations. Until these issues are dealt with, until the necessary reforms are forced upon the slave masters by the intended slaves and their representatives we are merely urinating into the wind.
I agree with some of your points below, but believe you are confused on a couple of other important matters.
First, stimulating real production in housing need not necessarily reflate real estate asset price bubbles. I’m also against the latter. But the two are not synonymous. It is possible to resurrect the housing sector without creating another real estate bubble. That will take a public banking sector replacing the current for-profit banking and shadow banking sector. You are incorrect to argue that any stimulus of housing automatically results in a housing price bubble.
Second, I don’t agree that it is a simple question of the Fed ‘being under the control of government’. A capitalist ‘Treasury Dept.’ would prove no different in service to bankers than does today’s Fed. In 1907 the Treasury bailed out JP Morgan and the bankers after their 1907 crash. The ‘government’ then created the Fed in 1913 in order to be able to bail out banks in future crashes without having to tap the more politically sensitive Treasury as a source. The Fed became the convenient shield for politicians not to have to directly bail out the banks by raising taxes. (Paulson and Congress remade that mistake initially in 2008 but quickly learned again that it was better to have the central bank, the Fed, undertake that role and shield them from the political heat. Bernanke then bailed out the banks in 2009-13 and is still ‘bailing’ them with QE and zero bound rates).
Your point that ‘fractional reserve banking should be abolished’ is unfortunately an anachronism that is no longer feasible. Fractional reserve banking is ultimately a major cause of the crisis, but you simply can’t go back to the 1600s. Abolishing fractional reserve banking would lead to a collapse of world production of 10-30%, as world trade collapsed from inadequate financing. Abolishing fractional banking means an immediate and chronic depression of dimensions at least as severe as the 1930s, and probably more so today.
Too many radicals, on both the right and left, see the abolition of central banking and fractional banking per se as the cause of the crisis, and therefore its simple removal or abolition as the solution. What matters is which class controls these institutions, and for what economic purpose. It is not an economic question, but a political, class question. A democratized central bank, providing no profit, cost of money only loans to the real sectors of the economy is the solution–even if fractional lending still exists. The problem is fractional banking is used to feed free money to speculators, bankers, shadow bankers, (‘shadow-shadow’) multinational corporations, and very high net worth individuals–or what I call the ‘global money parade’ in my Epic Recession book.
I fully agree with your point about Citizens United and the deepening corporate control of the political system made possible, in large part, by the unlimited flow of money by the institutions of capitalists (their corporations) into the political system and its institutions. I have written elsewhere about this, and other elements, of the increasing corporatization of democracy and government in the US. We are experiencing a kind of ‘rolling coup d’etat’ of the system by corporate America today.
I disagree that nothing else can or should be done until money is totally taken out of politics. The resistance should occur along many fronts simultaneously. The pursuit of reforms are necessary as intermediary steps in mobilizing popular opposition. The key problems today with political opposition in America is twofold: the left is mired in the losing game of ‘single issue politics’ plus there is no unifying form of ‘political organization’ (i.e. a party that would unify the single interests with the clear objective of assuming government power). I could add that progressive intellectuals are preoccupied with just describing the problem instead of proposing solutions to the problem, and that the trade union movement leadership has been totally integrated into that wing of the capitalist party called the Democratic Party and therefore will never break from it to lead a grass roots opposition.
There are no short cuts.
Jack Rasmus