The Future of the Federal Reserve
At the end of 2013, current Federal Reserve Chairman Ben Bernanke will leave his post and pursue other interests. Looking back, in coordination with other global central banks, a total of roughly $9,000,000,000,000 have been created in order to change the pricing (mechanism) of capital markets in response to the financial crisis of 2008. For better or worse, the free markets are now an idea of the past. Equity prices are artificially high, interest rates artificially low and currencies artificially stable at unnatural levels due to global monetary policy. Needless to say, central banks hold the keys to present and future capital allocation and have become extremely if not all powerful. Who will be the next Fed Chairman and how will he/she continue or change current policy?
Bye, Bye Summers
Until a few weeks ago, it appeared that Larry Summers might become the next Fed chairman. As an accomplished scholar and politician, Mr. Summers seemed to be an appropriate choice for the enormous responsibility of the position at hand. However, Mr. Summers decided not to pursue this job and I applaud his decision. In the end, his track record in finance is not exactly spotless as the picture below shows:
It now seems certain that Mrs. Janet Yellen, a highly decorated economist and instrumental engineer of current QE policy will take over the Federal Reserve in January. Aside from her eerie resemblance with my daughter’s second grade school teacher, Mrs. Yellen appears to be the natural successor to Ben Bernanke. Not only does she endorse astronomical money creation, she will probably be willing to go beyond the scope of current policy in order to achieve the goals of central banks. I believe she will change the benchmark of monetary policy, namely unemployment and inflation, to nominal GDP growth. By that, I mean that the Federal Reserve will want to achieve a steady growth in nominal GDP and will create money to achieve this goal. How can that be done?
GDP= C(onsumption) + I(nvestments & Savings) + G(overnment spending) + N(et Exports – Imports). Clearly, newly printed money will not be sent out to consumers across the country and also not be given straight to savers, investors or exporters. Therefore, a continuation of printing money to buy government bonds and allow government to expand spending is very likely in the future of monetary policy. Frequent readers of this site know that in my opinion, we are in a stagflationary environment in which the economy muddles along while prices increase. The more “stag” we see, the more “(in)flation” will be created to show, say, a 2.5% GDP growth per year. Of course, this GDP number will not reflect real growth but it will serve its purpose of portraying a steady and stable economy.
In effect, Mrs. Yellen will likely be a very similar leader to Mr. Bernanke and build on the policies of the past five years. Personally, I am appalled by the fact that capital markets have been taken over by central authorities and assets are now being allocated according to central bank decree. History has not been kind to such attempted intrusions into the marketplace and only time will tell whether the largest monetary experiment in human history will be successful in the end.
I shall end today’s post with a thought for the reader to ponder. Is current monetary policy legal? After all, the Federal Reserve, by law, is not allowed to engage in fiscal policy yet by indirectly financing government spending it is arguably doing just that. While I am no legal expert, I have researched this matter and found an informative paper on the subject published by the William & Mary Business Law Review. The author, Chad Emerson, makes a compelling case as to why current monetary policy is in violation of the law and I urge you to check his work: The Illegal Actions of the Federal Reserve: An Analysis of How the Nation’s Central Bank Has Acted Outside the Law in Responding to the Current Financial Crisis Decide for yourself whether the current power of central banks has exceeded the necessary and helpful function of lender of last resort or not. Finally, I leave you with a quote by an infamous banking legend: