Jamesian Philosophy Refreshed

As you may recall, just a little over two years ago there was a great deal of fuss which seems likely to go down in history as the "Taper Tantrum." Fed chief Ben Bernanke committed to the idea that the Federal Reserve would taper off its bond buying (that is, its new money creation)in the fall of 2013. In the late spring of that year, some market traders, especially in the bond markets, began to get the idea that "he might really go through with it" and they weren't ready. The Federal Reserve was itself spooked by the volatility in the bonds markets, and it backed off: Bernanke started in with "I didn't really mean it" statements. And left office the following year. Now we have a new Fed chief, Janet Yellen, and she too has proposed what she is calling a "normalization" of Fed policy. This time, too, as the date approaches, some markets get volatile. This time the tantrum is in equities rather than bonds. Why? Mumble mumble ps...

As regular readers of this blog surely know, I published a book early in 2012, Gambling with Borrowed Chips. I'm thinking of that book anew because one of its key contentions received some support in recent days from an unlikely source, Janet Yellen, the new chair of the Federal Reserve. One of my book's central contentions was that overly the permissive credit policy by the Federal Reserve throughout the early years of the new century under both Greenspan and Bernanke fueled the housing and housing derivatives boom, a boom that was bound to burst. Entering the new century, the Fed Funds rate was at 6.5 percent. Greenspan pressed to lower the target in several steps starting in January, so that in early September, before the 9/11 attacks, the rate was 3.5 percent. Of course, after those attacks the Fed sought to forestall panic by lowering the rate further, to 1.25. If you only have a hammer (or only think you have a hammer) all problems look like nails. ...

Soon after Janet Yellen's confirmation hearing, Nouriel Roubini prepared a list of ten important questions nobody had asked her, and tweeted them. Of course, given the nature of twitter, he had to offer these questions one by one. Given the nature of a blog, I can put them all together for him here. 1. Do you support optimal control, the notion that inflation sometimes has to be allowed to go above target? 2. You have written that inflation may have to go above target for awhile to reduce labor slack. Do you support this optimal control? 3. Do you agree with Governor [Jeremy C.] Stein that macro-pru will not be sufficient to control bubbles? Would you raise rates sooner to prick bubbles? 4. While you say 'no bubble' today, what is the risk that slow QE exit and policy rate normalization over  4 years will cause bubbles down the line? 5. If the current approach to too-big-to-fail will not work would you down the line support breaking up big banks to deal with ...

Recently, on an assignment for AllAboutAlpha, I had the privilege of interviewing James Rickards, the author of CURRENCY WARS. Since I've been following the Yellen-versus-Summers speculation here somewhat, as to who will be the next chairman of the Federal Reserve, I will quote Rickards briefly on both of them here, then send you to the full interview. On Janet Yellen, he said that she is "a known  quantity, a monetary dove who would be very slow to taper if at all, she might even speed the money creation." On Lawrence Summers, though, the verdict was more devastating: "Summers is neither a hawk nor a dove. He's a wild card."

The speculation continues about the successor to Ben Bernanke. From a breaking-glass-ceilings point of view, Janet Yellen, now the vice chair, would become the first female chair. Crash-tingle-ouch. From an impressive resume point of view, she is a very impressive candidate, glass crashing notwithstanding. She is, after all, the vice chair at present. She was for more than six years President of the Federal Reserve Bank of San Francisco. Under Bill Clinton, she was a member of the President's Council of Economic Advisors. Going back a bit further, she did her undergrad work at Brown University and her graduate studies at Yale, receiving a Ph.D. from the latter in 1971. She is what is known in monetary policy as a "dove." The term arose because somebody somewhere internalized the metaphor of a "war" on inflation. So central bankers willing to risk recession or worse to fight inflation are "hawks" and those willing to make peace with inflation ...