Does anyone remember when Alan Greenspan was the “Maestro”? Do they remember when he was venerated by left and right as the man with the plan, the man whose presumed understanding of a price literally influenced by every single human being on earth enabled his near flawless oversight of the Federal Reserve?
If yes to any of the above, what happened? From 1987 to 2001 Greenspan could apparently do no wrong. Mere mortals hung on his every word. CNBC's confused journalists tracked the size of Greenspan's briefcase to allegedly divine which way he would move on the Fed's short-term rate target. During this time the economy boomed. So did the stock market. Until it didn’t.
There was a big economic and market correction in 2001, followed by a much-less-vibrant economy up until Greenspan’s 2006 departure from the Fed. Again, what happened? Did Greenspan lose his touch? Did the man who allegedly saved the world (Time Magazine) forget how to centrally-plan access to credit?
More realistically, George W. Bush happened to the once-revered Fed Chairman. Before Bush, from ’87 to ’01 Greenspan got to run the Fed at the end of Ronald Reagan’s presidency, through the one-term (mercifully) presidency of W’s father, and then through two terms of Bill Clinton.
Reagan’s policies were growth focused: tax cuts, a continuation of the de-regulation that had begun under Jimmy Carter, a fairly open stance on trade, plus Reagan for the most part retreated from the growth-sapping weak dollar policies that wrecked the 1970s economy.
Notable here is that per lefty historian Richard Reeves, Clinton’s presidency was Reagan’s proverbial third term. Though Reeves wasn’t happy about it, a continuation of growth policies meant ongoing electoral happiness. Clinton signed a tax increase; albeit a small one. At the same time, the tax that is government spending came down in a relative sense. The deregulation so crucial to growth continued. He signed NAFTA into law, thus increasing cooperation among producers. The cooperation enhanced the specialization that drives productivity. Maybe most important of all, after 1995 Clinton’s Treasury never veered from its strong-dollar stance, and a good dollar was a magnet for the investment that powers economic growth.
Important here is that Bush reversed course on everything but tax rates. He never vetoed a spending bill, signed corporation-suffocating legislation like Sarbanes-Oxley into law, slapped tariffs on steel, lumber, and shrimp, and most problematic of all, Bush adopted the weak-dollar policies of Nixon and Carter on the way to a slow-growth presidency.
The broad point here is that Greenspan was a sideshow. When policy was generally good, he looked like a genius. When it was bad, so went his reputation. The notion that the Greenspan Fed could somehow centrally plan credit to the economy’s betterment was always absurd, but then the economics profession is absurd. Greenspan’s ephemeral “Maestro” reputation was as much of an accident of history as is his much reduced, post-Maestro, 21stcentury reputation.
Which brings us to Janet Yellen, the retired Federal Reserve Chair. Right-leaning Investor’s Business Daily published an admiring editorial about her tenure, yet so did the left-leaning Washington Post. As for those who practice the non-science that is economics, the consensus view was that Yellen rated another term. With the economy in good shape, Yellen allegedly deserved praise given the common view (Robert Samuelson) that the Fed can make or break the economy through its presumed control of the “flow of money and credit.” Wait, what? The Fed plans money and credit?
Oh yes, that’s why the U.S. is the richest country in the world. It has better central planners than did the old Soviet Union, and in Yellen, the U.S. had a particularly skillful central planner?
Back to reality, the accession of what we call “money” is an expressed desire for goods, services and human labor. The notion that the Fed, or any central bank, regulates the flow of resources is too silly for words. If it did, the U.S. economy would be incredibly collapsed in much the same way that centrally-planned economies had a 100% failure rate in the 20th century.
After that, do any non-economists seriously think Yellen knew how to expertly plan the proper interest rate, or so-called supply of money? With the former the presumption is that the Fed can plan a price that's driven by infinite inputs from around the world, while planning of the latter presumes an ability to plan production itself.
Yet with the departed Fed Chair we’re talking about someone who explained QE to Time in 2014 as a policy “aimed at holding down long-term interest rates, which supports the economy by encouraging spending.” Except that it’s investment that powers economic growth simply because investment is what enables greater production without which there is no spending. Assuming what’s silly, that the Fed’s rate machinations could engineer consumption, such a scenario would actually be anti-growth for it shrinking the capital base necessary for economic growth.
Interesting about the prosperity that Yellen is laughably said to have engineered, she feels it’s inflationary. That it must be managed. She expressed this throughout her tenure at the Fed. Yellen was always on the ready to hike the Fed’s rate target assuming a serious increase in economic output. Forget that the Fed’s fiddling with a target can’t alter reality, or that we in the private sector always and everywhere create the resources that cause producers to seek dollar credit to begin with. To Yellen, booming economic growth would call for "gradual increases in the federal funds rate.” To be clear, Yellen felt and feels that prosperity has a downside because it leads to labor and product shortages.
Missed by the former Fed Chair is that rising demand for goods and services is the certain sign of a commensurate increase in the production of goods and services. These things balance. Economic growth is an effect of investment that enables the production of more with less in the way of human input. Growth, by its very name signals the happy automation of work once done by humans, thus mitigating any presumed labor shortages. Of course, it can’t be stressed enough that U.S. companies avail themselves of the world’s capacity in creating the goods and services they sell, which raises the question why the Fed would obsess over U.S. “capacity utilization” in the first place. All that, plus as history constantly reminds us, economic growth is the greatest enemy rising prices have ever known. When the economy's growing, prices are falling thanks to entrepreneurs accessing investment on the way to them turning former luxuries into common goods.
Venezuelans would in particular be interested in the bouquets thrown Yellen’s way, along with her odd definition of inflation. You see, Venezuela is a tragic, and modern example of the lie that is central planning. Also, its wrecked currency is a reminder of the truth that governments, not prosperity, are the source of inflation. Whatever Yellen’s confused definition of inflation as an unfortunate tradeoff for prosperity, impoverished Venezuelans know the real story. It’s about currency devaluation. Always.
Which brings us to the latest from the retired Fed Chair. On her way out of the central bank, Yellen’s Fed laid down the hammer on Wells Fargo whereby it decreed regulatory limits on the bank’s ability to earn profits. Yellen’s explanation for what was inexcusable was that “[W]e cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain the abuses do not occur again.” Oh sure, the Fed that logically only discovers bank problems after those institutions need bailouts can institute reforms meant to please customers? What a laugh; one that presumes market forces are unequal to regulating out bad behavior. Seemingly forgotten by Yellen is that the errors that placed Wells on the wrong side of regulators resulted in Wells being embezzled by its own employees. Yet its reward has been fines and penalties on top of embezzlement that no well-run company would every knowingly countenance? None of this is serious, nor was the Fed run by Yellen serious.
If there’s a silver lining to all of this, it’s a reminder of how little the Fed matters. Indeed, if the Fed had a powerful influence over the U.S. economy, then the previous truth would have ensured economic contraction on Yellen’s watch. Readers need only read her utterances to see why the previous statement is true. Yet the economy and stock market did well despite her embrace of seemingly every economic fallacy under the sun.
What does all the above tell us? It’s a reminder that much as Greenspan’s “Maestro” qualities were an accident of largely good policy from ’87 to ’01, so did Yellen benefit from mostly good economic policy from 2014 to 2018. Her Fed tenure couldn’t have been a function of her central planning skills or pro-growth views simply because she has none of the latter, and then the former always correlates with slow growth.
Thank goodness Yellen “succeeded” while at the Fed. It’s a reminder of how inconsequential the central bank actually is when someone as wrongheaded as she is can run it without crashing the economy.