Next Fed chair determined to continue U.S. stimulus plan
It’s hardly worth noting that with Janet Yellen, 67, set to be the head of the U.S. Federal Reserve Board if the Senate confirms her in a vote expected next week, and Christine Lagarde, the former French finance minister, heading the International Monetary Fund, the world’s two most influential financial institutions will soon be in the hands of women for the first time.
What matters is that Yellen and Lagarde view the harsh austerity measures embraced by the likes of Republicans in the U.S. Congress and David Cameron’s government in Britain as ill-considered — which, on the facts, is true. And they each are “monetary doves,” favouring continued low interest rates and resulting liquidity in global capital markets until the curse of high unemployment is vanquished.
Yellen appears determined, despite objections from conservative economists and politicians, to continue pumping an average $85 billion (U.S.) into the world’s largest economy each month with the Fed’s purchase of Treasury bills and mortgagebacked bonds as a form of “backdoor stimulus.” At least one GOP congressman at Yellen’s confirmation hearings described this practice of providing stimulus to an underperforming economy where Congress refuses to do so as a “morphine drip.”
Alas, the paucity of economic smarts in Congress is staggering. But for current Fed chairman Ben Bernanke’s injection to trillions of dollars of backdoor stimulus, the U.S. would still be mired in recession.
Also like Bernanke, Yellen ties continued cheap money for borrowers to reductions in unemployment. Which means U.S. borrowing rates will continue at near zero levels until joblessness falls to 6.5 per cent — or perhaps a new goal of 6.0 per cent, if rumours among Fed watchers are to be believed.
“There’s a sense she’s putting even more focus on labour markets,” Tobias Lekovich, chief U.S. equities strategist at Citigroup Inc., told the New York Times. “All that’s good for a near-term stimulus.” On the regulatory front, Yellen says she won’t hesitate to prick an asset bubble — in real estate, equities or any other major asset class — before a bubble’s bursting would wreck the economy. The former head of the San Francisco Federal Reserve Bank and former vice-chair of the Fed itself will also push commercial banks to bulk up their reserves against losses — a crippling deficiency that required the massive bailout of Wall Street beginning five years ago.
Yellen is not to be mistaken as anti-bank. She doesn’t lose sleep about banks that have grown “too big to fail.” The key is to more vigorously supervise the behaviour of those megabanks to ensure adequate risk management and sufficient capital reserves.
After all, the U.S. was not spared a banking-system collapse despite its 7,000-plus independently owned banks, nor was Germany’s banking system spared the need of a government bailout for all that country’s multitude of local “Landesbaken.”
That puts Yellen in company with Canadian practice, which, to paraphrase Mark Twain, would have us place all our eggs in only six big baskets — Canada’s Big Six banks — and then watch those baskets.