Guest Post by Michael Lord
On October 9, 2013, Janet Louise Yellen was nominated by President Barrack Obama to succeed Ben Bernanke as the next chairman of the Federal Reserve Board. Although no longer the chairman after February 1st, Bernanke will continue to remain on the board until 2020, stating that he no longer wants the burden of the position and would like to return to private life.
In a speech regarding the nomination, President Obama called Yellen “one of the foremost policy makers and economists in the nation.” He continued by heralding Yellen as being “renowned for her judgment.” Her term as chairman of the Fed will officially begin on February 1, 2014, and it will last for four years, after which, it can be extended by the next president in office.
As Bernanke’s successor, Yellen shares many of his views regarding the U.S. economy, and the majority of economists expect a rather seamless transition from a Bernanke-led Fed to a Fed headed by Yellen, who shares the same Keynesian economic beliefs. As such, Yellen’s first major decisions while as chairman will deal with the nation’s unemployment rate and the Fed’s current stimulus policies.
Background and History
Janet Yellen was born in Brooklyn, New York on August 13, 1946. The daughter of middle-class Jewish parents, she enjoyed a comfortable upbringing and excelled scholastically. Yellen was the editor of the Fort Hamilton High School newspaper before graduating as valedictorian of her class. She then went on to study at Brown University, graduating summa cum laude with a degree in economics in 1967. Afterwards, Yellen continued her education at Yale University, where she received her Ph.D. in 1971.
With an impressive scholastic resume, Yellen went on to become a professor at a number of prestigious universities, including The London School of Economics, Harvard, and the University of California at Berkeley. In preparation for her future role as Fed chairman, she transitioned her professional efforts to the Federal Reserve Bank of San Francisco, where she became the president and CEO in 2004.
Yellen has also been a member of a myriad of economic councils and committees, such as the U.S. Council of Economic Advisors, the Organization for Economic Cooperation and Development, and the American Economic Association. Prior to heading the Federal Reserve Bank of San Francisco, she served as governor of the Federal Reserve Board for four years from 1994 to 1997. Her resume also includes a position as an advisor to the U.S. Congressional Budget Office, a member of the Pacific Council on International Policy board of directors, and a research associate at the National Institute of Economic Research. In the process, Yellen also held fellowships for the Guggenheim, MIT, and the National Association of Business Economics.
In recent years, Yellen has been preparing for her new position as chairman of the Fed by becoming the vice chairman on October 4, 2010. To date, Yellen has used her position to convince Bernanke to use a two-percent inflationary growth target. Due to her “impeccable resume, solid record with the Federal Reserve Bank of San Francisco, and focus on unemployment,” Obama was urged by the Democrats to appoint Yellen as the next chairman over Larry Summers, the former U.S. Treasury secretary.
Economic and Monetary Philosophy
As the next chairman of the Federal Reserve, Yellen will have a direct impact on influencing the U.S. economy over the next four years. Therefore, it is important to become familiar with her philosophy and monetary views.
Obama supporters and proponents of “big government” could not be more pleased with Yellen’s nomination as the next Fed chairman. In many ways, Yellen is a much more active supporter of government intervention than Bernanke, and she believes that government policies can help smooth over poorly performing market economies.
According to Allen Sinai, president of Decision Economics Inc., ”Janet Yellen’s philosophy is using active government policy to achieve economic objectives.”
During a White House ceremony announcing her new appointment, Yellen emphasized the Fed’s obligation to help deal with the human impact of the recession. She stated, “The Federal Reserve’s mandate is to serve every American. Too many Americans are still unable to find a job and do not know how they will be able to provide for their families and pay their bills. If the Federal Reserve does its job effectively, it can help ensure that every American has the opportunity to work and build a better life for themselves and their loved ones.”
This belief stems from her studies at Yale under Professor James Tobin, an active proponent of Keynesian economics. “The perspective of the students who studied with Tobin was that the government has a responsibility to counterbalance the volatilities of the private economy,” stated James Galbraith, a Yale Ph.D. student who also helped work on the Humphrey Hawkins Act of 1978, which asserted the obligation of the Fed to stabilize prices and create maximum employment.
This belief is evident in the many research papers Yellen wrote with her husband, George Akerloff, while the two taught at the University of California Berkeley. According to the Research Papers in Economics website, the pair’s most cited work demonstrated that whether or not workers believe they are being fairly paid influences their job performance and may also help explain the nation’s unemployment rate.
Years later, Yellen remains a left-leaning economist reflecting the economic ideologies of the 1960s and 70s, an era when interventionist Keynesian economic policies were widely revered.
Similar to her predecessor, Yellen has always been an avid dove, although a number of her supporters maintain this position has only been due to recent unstable economic conditions, and that appropriate circumstances could result in her becoming a hawk.
Yellen has supported Bernanke’s bond buyback program, and many expect her to even expand the Fed’s economic stimulus policy in a continued effort to boost the economy. In many ways, she has strived to emulate the teachings of James Tobin, her Yale professor, who believed that government intervention can rescue an economy from recession.
In fact, Yellen and her husband are both Keynsian economists who openly believe that economic markets need government regulation to function properly. Both she and her husband created economic models showing that in order to maximize profits, firms should pay above minimum wages. It is these economic models that served as the basis for the New Keynesian economic philosophy.
Yellen’s numerous speeches and writings display her confidence in the ability of the government to play an active role in offsetting calamities, especially when it comes to the labor markets. As president of the San Francisco Fed in 2004, she wrote a paper with her husband that argued that central bankers could not ignore long-term joblessness. They wrote, “Given the damaging costs of long-term unemployment, policy makers should feel compelled to take action.”
It is clear that Yellen is also not opposed to using inflation to reduce unemployment and spur economic growth, which is a clear sign that she may leave interest rates where they are or even reduce them to zero in the foreseeable future. In more than one speech, Yellen has indicated that she believes interest rates should actually be held at zero at the present time, even though inflation is rising at a rate greater than two percent. She also plans to impose tighter banking and financial regulations to prevent a future bubble.
While teaching at Berkeley’s Haas School of Business, Yellen published several articles that never questioned Keynesian doctrines, such as the belief that a free economy is predisposed to “imbalances” or “failures” when demand cannot keep up with supply as well as the belief that inflation is caused by excessive economic growth, not excessive money printing. Yellen also taught that money printing can help lower the unemployment rate and that the central bank should exercise its power to keep interest rates as low as possible in an attempt to foster a profligate, debt-accumulating, and deficit-spending government.
Ben Bernanke also shared in his belief of these myths, which ultimately led to a policy of wildly fluctuating interest rates that produced a boom or bust U.S. economic pattern akin to the turbulent economies of the 1960s and 70s, when Keynesian theory was widely accepted. This essentially terminated the stable and sober economic years of the mid-1980s to the mid-2000s, coined by economists as “the Great Moderation.” Fully endorsed by Yellen, Bernanke’s policies helped trigger the Great Recession and the debilitating 2008 financial crisis.
Since 1994, Yellen has played an active role in contributing to the shift away from supply-side economic policies to Keynesian, demand-side policies, first as a member of the Federal Reserve Board from 1994 to 1997, then as an economic advisor to President Clinton from 1997 to 1999 in which she called for an increase in sub-prime mortgages, and most recently as vice chairman of the Fed from 2010 to 2013.
Yellen has always maintained her position as a Keynesian economist who believes in the Phillips Curve, which was a popular economic theory in the U.S. until it was discredited during the stagflation period of the 1970s. During her nomination hearing for vice chairman of the Federal Reserve Board, she stated that the Phillips Curve “provides a useful framework for discourse about monetary policy’s influence on inflation.”
While serving on the Federal Reserve Board of Governors, Yellen commented in a Federal Open Market Committee meeting that higher inflation could be “wise and humane” if it were able to increase supply. During the same meeting, she claimed that a one percentage point decrease in inflation results in a GDP loss of 4.4 percent.
Every step of the way, Yellen has actively helped Bernanke carry out a policy of money-printing, purchase vast amounts of U.S. federal debt, and impose rock-bottom interest rates. In all likelihood, these policies will continue under her leadership. Consequently, we may experience an indefinite period of massive national debt purchases, artificially low rates, and lack of economic progress.
About the Author
Michael Lord is a content writer at Penny Stocks Lab, a website focused on educating investors about penny stocks as well as other investing topics.
