FederalReserve.gov | Flickr
- .@TPCarney: President Obama's nomination of Yellen as chairman of the Fed represents a victory for the Left.
- It’s no longer clear what a “conservative” policy would entail at the Fed.
- The question remains: Where has all that $2.7 trillion in Bernanke Bucks gone? @TPCarney
Money was falling from the sky in a Senate office building on Thursday. It was just a protest against the lobbying by agribusiness giant Monsanto, but the sight elicited a Twitter joke from Washington Examiner economics reporter Joe Lawler: "The Yellen Era begins."
President Obama's nomination of Janet Yellen as chairman of the Federal Reserve board represents a victory for the Left. And her confirmation hearing may bring to light the Right's shifting views in the arcane but crucial area of monetary policy.
Obama’s preference for Fed chairman was Larry Summers. When liberals on the inside leaked this, progressives on the outside went bananas.
The resistance to Summers built steadily for months, coming from Summers’ former Harvard colleagues to Wall Streeters to liberal monetary policy wonks. The thrust was this: Obama can’t afford to pass over a more qualified woman for a less-experienced man who happens to be in the old boys’ club.
And in late September, Summers withdrew his name from consideration, ensuring Yellen's nomination. It was arguably the first time Left had fought with Obama and won.
This doesn't make Yellen a “liberal” at the Fed, or imply the Right will uniformly oppose her. One reason: Many on the Right had bigger problems with Summers, and quietly took part in the campaign against him. Another reason: It’s no longer clear what a “conservative” policy would entail at the Fed.
Ron Paul in recent years brought Fed policy to the attention of many conservatives. Paul comes from the “Austrian School” of economics inspired by Ludwig von Mises and Friederich Hayek.
“Austrians” like Paul criticize our current system in which the Fed creates money out of thin air. For the past four years, for instance, Ben Bernanke's Fed has engaged in quantitative easing -- or buying trillions of dollars of Treasury bonds and mortgage-backed securities.
The money the Fed spends to buy these assets doesn’t come out of any finite account — it’s money that previously didn’t exist. So, QE increases the supply of money. There are many ways to put a dollar figure on the money supply, and the broadest measure, the “monetary base,” has increased from $800 billion in 2008 to nearly $3.5 trillion today.
Bernanke and Yellen argue that this virtual money-printing is necessary to keep the economy moving and keep interest rates low. Austrians reply that this amounts to a “sugar high” -- artificially goosing the economy in the short term, and setting things up for a crash later on.
Specifically, Austrians warned QE would cause price inflation. If the economy has vastly more dollars, but not vastly more goods or services to buy with those dollars, then prices should rise, right? But the U.S. hasn’t seen serious price inflation, at least not by traditional measures — the Consumer Price Index has risen only about 6.5 percent in four years, or less than 1.5 percent annually.
This would seem to put a dent in Austrians' dire warnings of inflation, and it has won some wary conservatives over to the Bernanke-Yellen view.
But the question remains: Where has all that $2.7 trillion in Bernanke Bucks gone?
Here’s one clue: Banks are holding $2.3 trillion in reserves — compared to less than a trillion in 2008. Also, corporations, feeling cautious these days, are sitting on record piles of cash, according to the Bureau of Economic Analysis.
This makes sense, considering the mechanism of QE: The Fed buys Treasuries from banks. But gun-shy banks don't lend it so it sits on their books instead of entering the real economy, where it could cause job growth, inflation or both.
It's easy to see how Yellen, despite calling for more financial regulation, was Wall Street's favorite. “Wall Street loves quantitative easing much more than it dislikes regulation,” wrote Yellen critic John Berlau of the free-market Competitive Enterprise Institute.
Republican investor Stanley Druckenmiller sounded a similar note: "This is fantastic for every rich person," he said of quantitative easing. The Fed's buying binge drives up demand for stocks and bonds, thus boosting the price of these financial assets. "Who owns assets?" Druckenmiller continued. "The rich, the billionaires."
Bernanke explicitly extols this "wealth effect." When the stock market is up, people feel confident and are more inclined to buy goods and services. This is in turn stimulates the economy and keeps unemployment in check, helping the middle class.
All signs indicate that Yellen will continue Bernanke's approach, making her an interesting character: the trickle-down favorite of the Left and Wall Street, who is embraced by many on the Right.
Timothy P. Carney, the Washington Examiner's senior political columnist, can be contacted at [email protected] His column appears Sunday and Wednesday on washingtonexaminer.com.