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The Real Problem Isn't Janet Yellen, It's the Conceit That Is the Fed Itself

October 17, 2013 in Economics

By James A. Dorn

James A. Dorn

When President Barack Obama nominated Federal Reserve vice chairman Janet Yellen to take over as Fed chairman after Ben Bernanke departs in January, the markets purred a sigh of relief. The Fed’s adherence to ultra-low interest rates and quantitative easing to boost risk taking and asset prices is now expected to continue for at least another year and most likely until the end of 2015. That path could prove costly.

The Fed’s balance sheet already has soared from $800 billion in 2008 to $3.7 trillion today. Continuing to accumulate $45 billion of longer-term Treasuries and $40 billion of mortgage-backed securities per month will further inflate the monetary base and risk igniting inflation.

President Obama, in his nominating speech, noted that “a lot of people aren’t necessarily sure what the Federal Reserve does.” He then went on to say that because of Bernanke’s unconventional monetary policies “more families are able to afford their own homes, [and] more small businesses are able to get loans to expand and hire workers.” Apparently the president accepts the idea that printing money, and artificially lowering interest rates, is good for America.

Without a rule to bind the Fed and without a convertible currency, the risk of monetary mischief is high and will be even higher if Yellen is appointed chairman.”

The truth is that many families are still constrained by the loss of equity suffered during the 2008 financial crisis and cannot make the high down payments now required for most home mortgages. Moreover, banks are reluctant to lend to small, higher-risk businesses, and job growth has been painfully slow.

The Fed’s dual mandate, imposed in 1977, requires maximum employment and price stability, but the reality is that there are limits to monetary policy. Printing money cannot increase the wealth of a nation. Moreover, there can be no permanent tradeoff between inflation and unemployment. Market participants learn to adjust to monetary policy. Once workers anticipate inflation, they will demand higher wages and unemployment will revert to its “natural” level consistent with market demand and supply.

Increasing real economic growth requires improved technology, capital investment, a better educated workforce, and institutions that are conducive to entrepreneurship and prudent risk taking. Those institutions include a just rule of law that protects persons and property, free trade, sound money, limited government, low marginal tax rates, and market-friendly regulation.

Although printing more money cannot increase society’s productive capacity or …read more

Source: OP-EDS

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