Barron’s editorial page editor highlights the Fed chair’s power

Thomas Donlan devotes a Barron’s editorial commentary to Janet Yellen’s unrivaled role in American monetary policy.

The person who sits in the chair at the Federal Reserve holds more concentrated power over the economy than the power over laws and rules held by the chief justice, or even by the justice in the middle who swings between the court’s more rigid power blocs. …

… Janet Yellen, who is completing her second year presiding at the Fed, is on her own at least until the middle of the next administration, when she will be eligible for re-appointment if the next president likes the results of her policies.

We wouldn’t give odds on her job security, even though the blame for the next couple of years of economic results ought to be placed more heavily on Yellen’s two recent predecessors than on her.

Alan Greenspan presided from 1987 to 2006 and created what was misnamed the Great Moderation, although his policies weren’t so moderate. In fact, the monetary policies he developed in his bathtub indulged two bubbles, one in stocks and the other in real estate. After the first bubble popped, he rescued the economy with more easy money, lowering short-term rates to a then-ridiculous 1%. Bankers and speculators were grateful, of course, as were their multitudes of clients borrowing more than they could afford.

After waking up to the dangers of unlimited lending, Greenspan tried to pull money off the table without hurting the economy, using slow, regular, small increases in interest rates. Apparently, he had read too many rave reviews of his skill and power, but he was managing something that had become unmanageable. Greenspan left office just in time to leave his successor a financial crisis. …

… Ben Bernanke had just settled in to Greenspan’s chair when the bills came due. An economic and financial historian, he was determined not to make the same mistakes the Fed had made in the 1930s. He was certain that too little money was the root cause of the Great Depression, so he made the opposite mistake.

Bernanke chopped interest rates to zero and acquired trillions of dollars’ worth of bad credits from the global banking system, all in the name of saving the world from an economic catastrophe. He also supported what appears to be a bubble in cheap energy, a bubble in mergers and acquisitions, and a bubble in the value of the dollar.

Seven years of such policies magnified the recession and slowed the recovery. Can Yellen reverse them? The huge pile of assets that the Fed accumulated during the period of quantitative easing says no.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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