Nobody was surprised that President Obama nominated Janet Yellen to replace Ben Bernanke to head the Federal Reserve. There seems to be a consensus that Fed policies won’t change much under Yellen, that she’ll keep the QE spigot flowing until, well, who knows. But there are philosophical differences between Yellen and Bernanke, which The Wall Street Journal noted are cause for concern.
Mr. Bernanke is more of an improvisational policy maker who came to his post-crisis actions by what he considers to be the necessities of the moment. His academic roots are as a monetarist, and he justifies his policy mainly in those terms. He considers his various quantitative easings to be entirely consistent with Milton Friedman’s monetary history of the Great Depression, however much other monetarists might disagree.
Ms. Yellen is a distinguished academic economist but she is also an unreconstructed Keynesian. She studied under James Tobin, the late Yale economist whose ideas dominated American economic policy from the 1950s through the 1970s. Friedman monetarism was in part a revolt against the Tobin school, which to oversimplify made unemployment a central focus of monetary policy. In the Tobin-Yellen view, the first task of a central banker is to promote full employment rather than to maintain price stability.
This is the intellectual underpinning to keep in mind when you read that Ms. Yellen favors “easy money” or is a monetary “dove.” And it has consequences that are likely to appear over time if she is confirmed by the Senate as expected.
One is that she believes wholeheartedly in the wisdom of government to steer the private economy and business cycle. When she testifies before Congress as chairman, you can expect her to support spending “stimulus” for growth in the short-term but tax increases to reduce deficits in the longer term. President Obama will not be disappointed. (Read More)
Sorry, but anyone who “believes wholeheartedly in the wisdom of government” to direct the economy raises alarm bells with me. Sure, she sounded the alarm on the mortgage bubble in 2006, but by then she was a few years too late.
Plus, she’s an academic with little or no private sector business experience. How scary is that?