I wonder what it is about the institution of the Federal Reserve that takes great economists and turns them into someone unrecognizable.
As a follow on to my last post about accountability, or rather the accountability that will likely be imposed on the Fed, I’d just like to point out a blog post by John Taylor that was sent to me by Marcus Nunes where he expresses dismay at Janet Yellen’s apparently turn-coat-style testimony to Congress regarding the use of monetary rules, specifically the Taylor Rule. His exhibit “A” is a transcript from a speech given by Yellen that he characterizes thusly:
Janet Yellen’s speech is one of the clearest, most sensible, and most supportive analyses ever written about the Taylor rule. I strongly recommend reading it, especially pages 4 to 11, in light of the recent congressional interest in policy rules. She describes the rule, and then she carefully discusses “several desirable features” it has “as a general strategy for conducting monetary policy.”
She says that “the framework of a Taylor-type rule could help the Federal Reserve communicate to the public the rationale behind policy moves, and how those moves are consistent with its objectives.” She mentions that she is “certainly not proposing the mechanical use of the Taylor rule.” And she adds correctly that “Nor would Taylor himself.” She indicates that more work should be done to improve on such rules, and that in certain circumstances, which she describes, there could be deviations from the rule.
So one cannot help but be amazed by the exchange of views on the Taylor rule or rules in general between Janet Yellen and Richard Shelby, Chair of the Senate Banking Committee on Tuesday, and between her and Jeb Hensarling, Chair of the House Financial Services Committee on Wednesday. In many respects, her speech makes the case for using monetary policy rules in the way that is called for by the policy rules bill that Shelby and Hensarling were asking her about and she seemed to be objecting to. Some observers indicated that they seemed to be talking past each other. But at the least there should be some common grounds for agreement that could form the basis for progress going forward.
I haven’t read the speech and I probably won’t. The Taylor Rule is not useful in a world of ultra-low inflation and near zero interest rates. Perhaps in another lifetime. Yellen has probably changed her mind about it since she gave the speech; we’ve all learned a great deal since the crisis of 2008 going forward and have changed our minds about many things. She is right to rebuff its imposition.
But she was in the wrong, in my view, by not discussing the benefit of monetary rules in a general sense. Though, it’s understandable. She’s a bureaucrat. I could go on to accuse of her all sorts of unscrupulous motivations. But I won’t. She probably doesn’t believe it’s a good idea to politicize the Fed. And in a general sense I would agree with that.
On the other hand, however, after everything that was allowed to occur in the monetary sense before, during and after the crisis that impacted this country and its individual citizens in no small way, there needs to be accountability aside from the renomination process. We are not white lab mice to experiment on. We need to have our laws and personal dignity respected and persevered as a first and foremost concern, not put second, third, or last on the list even after the bureaucrats have long run out of paper. The crisis of 2008 can never be allowed to happen again.
Given the nature of the reverse repo, which I think is a horrible idea on top of skirting the legal authority delegated to the Fed, it appears to me that the Fed Borg just doesn’t comprehend anything outside of the marble halls of the institution, nor does it care to. It’s out of control in nearly every way imaginable, and it won’t end well unless somebody does something about it.
It matters not to me who it is to put a stop to the madness. If Yellen doesn’t think the politicians should be up close and personal in the Fed’s business then she should:
- Figure out how to fix the ultra-low inflation mess and DO IT! There’s the target – HIT IT!
- Lead – don’t follow.
- Stop pandering to the “raise interest rates” crowd
- Clean house. Marginalize the people who don’t cooperate.
- Don’t tolerate BS (see number 4 above)
Cooperate with the politicians so we can all live with the outcome.
Those are her choices.