Janet Yellen's Return & The Financial Storm Ahead...

Janet Yellen

Janet Yellen is back.

Naturally, the follies of Keynesian central banking come to mind.

In many ways, Yellen’s tenure as Fed chairman was far worse than Ben Bernanke’s. At least Bernanke’s money-printing madness was undergirded by his credentials as a misguided scholar of the Great Depression and the mistaken conclusion that the Wall Street meltdown of September 2008 was the prelude to another such occurrence.

The Great Depression of the 1930s was caused by way too much Fed-fostered foreign borrowing on Wall Street during the roaring twenties. It stimulated an unsustainable boom in US exports—soaring domestic CapEx in order to expand production capacity and a stock bubble–fueled consumer-spending boom in cars, radios and appliances. Therefore, when the Wall Street bubble burst in October 1929, foreign borrowing dried up, US exports and CapEx crashed and spending on consumer durables plummeted.

This was the cause of the massive contraction in 1930–1933, which took the GDP down from $95 billion to $58 billion in dollars of the day. By contrast, it had nothing to do with Milton Friedman’s crashing M-1 (money supply), which was a consequence of unavoidable and necessary bad debt liquidation by the banking system. Nor did it stem from any lack of credit availability to solvent borrowers, as demonstrated by market interest rates that remained ultralow (under 2%) throughout the downturn.

The depression of 1930–1933 wasn’t owing to the stinginess of the Fed, which actually expanded its balance sheet by 72% between August 1929 and early 1933.

Consequently, Bernanke’s maneuver of flooding the zone with fiat credit during 2009–2013 was a mistaken page from Milton Friedman’s counterfactual playbook, which was wrong the day it was written in the early 1960s and even more wrong when Bernanke cut and pasted it into his PhD thesis at MIT in 1979.

By the time Yellen became Fed Chairman in February 2014, however, there was no plausible excuse for keeping Bernanke’s bloated Fed balance sheet in place or continuing to keep interest rates at the zero bound. If there was ever a chance to normalize Bernanke’s misbegotten Depression-fighting policy, it was during the 48 months of Yellen’s term.

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