Stockman vs. Yellen points out great divide in Washington
WASHINGTON, D.C. — The Federal Reserve’s unprecedented actions to drive down interest rates and stimulate recovery have sparked a political backlash, adding a new dimension to the polarization in the nation’s capital.
The latest political celebrity or political scourge, depending on your point of view, is former Reagan Administration budget director David Stockman, who argues in a new book that the Fed’s response to the 2008 financial crisis was an overblown power grab which has put the nation on a course to fiscal disaster.
But the Fed has not, as in the past, been content to hide behind the technical jargon and ambiguously worded press releases of many predecessors, including the notoriously opaque Alan Greenspan. Under Chairman Ben Bernanke and Vice Chair Janet Yellen, increasingly mentioned as Bernanke’s likely successor, the Fed has embarked on a campaign to bring plain English and frequent public statements to the business of guiding monetary policy.
It has, as a byproduct of this new transparency, mounted a vigorous and public defense of its actions, pointing to improvements in the housing market and the stock market as signs it is on the right path.
In separate appearances on April 4 at the 50th annual conference of the Society of American Business Editors & Writers, Yellen and Stockman presented diametrically opposed world views. This fierce policy clash erupted anew on April 5 when a weak jobs report for March suggested that either the Fed’s policies were becoming increasingly ineffective or that the Fed’s bond-buying and hyper-low interest rates were becoming increasingly necessary.
In her remarks, Yellen said that the Fed has deliberately added a new dimension of communication to policy-making, underscoring new research that effective monetary policy is “dependent on getting the message out months and years in advance” of the actual policy implementation.
Comparing Fed announcements to press releases about a new road project, she said that whereas the new road’s usefulness is really years in the future, the statements by the Fed about policy intentions have an immediate and enduring affect on corporate decision-making.
One problem with Fed policy in the early 1970s is that “public expectations of inflation were unanchored,” and rising inflation forced then Fed Chair Paul Volcker to raise interest rates to unprecedented levels to get the message across. Volker’s great “success was to anchor inflation expectations at low levels,” she said, adding that the lack of concurrent communication about policy changes had one big shortcoming in that it “gave advantages to sophisticated investors.”
Today, with the Federal Reserve’s balance sheet expanded to $2.5 trillion and growing, she said the need for communication is more urgent, particularly with regard to the Fed balance sheet, the timing of a wind-down and “the long-term future path of Fed funds,” the overnight rate for lending to banks that is the benchmark for setting other short-term interest rates.
Since January 2012 the Fed has been offering very specific guidance about the size and scope of bond buying and the future of short-term interest rates. It has said that it expects to keep fed funds at zero as long as inflation is running at or below 2.0 percent and unemployment remains above 6.5 percent.
Turning on its head the dictum of longtime Bank of England’s legendary central banker Norman Montagu, she said, “the days of never explain, never excuse are gone for good.”
Stockman, a man not afraid of controversy, laid into the Fed saying that is has become a “manipulative budget machine” that has “gone off the deep end on monetary policy.” The result according to Stockman: a toxic environment where the recent stock market gains look increasingly illusory. “Asset prices don’t mean anything,” he said.
What the Fed is doing is putting huge profits into the hands of hedge funds and others, he said, adding that the canyons of Wall Street have become “a casino of players who are front-running the Fed,” an organization that he described as “desperately trying to keep the bubble alive.”
Stockman squarely lays the blame for the 2008 financial crisis on the Fed for inflating the housing bubble and stock market in a series of moves going back to 2000. Stockman defended a highly controversial position that the government was wrong to intervene in the financial crisis because allowing large investment banks such as Goldman Sachs to fail was the only way to truly get speculation out of the system. Moreover, he said, fallout from large bank failures on Wall Street would not have resulted in a second Great Depression. “Bernanke panicked because he feared Depression 2.0,” Stockman said. “It was a bailout against a phantom problem.”