The new chair of the Federal Reserve is rumoured to be an advocate of the easy money policies which many believe helped spark the recent financial crisisby James Kwak / February 2, 2014 / Leave a comment
Once upon a time, there was a man named Greenspan. In 1987, when the stock market wobbled, he promised Wall Street all the liquidity it needed and followed that up with an interest rate cut. In the 1990s, he kept interest rates low during a long economic boom, which allowed the technology bubble to inflate to dizzying heights. As a direct response to the September 11 terrorist attacks in 2001, he again lowered rates and kept them low as house prices surged.
There’s a term for this: easy money. But few people dared to utter it while the Maestro (as Greenspan was known) ruled the Federal Reserve. As not only a Republican but also a one-time defender of the gold standard, Greenspan could hardly be accused of debasing the currency. Instead, he was hailed as the greatest central banker in history and reappointed by four different presidents. The five times Greenspan was confirmed as Federal Reserve chair, he pulled in at least 89 votes—twice receiving unanimous support.
Earlier this month, Janet Yellen was confirmed to take Greenspan’s old job with only 56 votes—the slimmest margin in the 100 year history of the Fed—despite having served as vice chair of the Federal Reserve Board, president of the San Francisco Fed, and chair of the Council of Economic Advisers. This week, she will formally take up her position, becoming the first woman to occupy the top slot. But, why was her victory so slim? Because, according to her opponents, Yellen believes in easy money, which will lead to inflation, national decline and the end of Western civilisation.
What’s going on here? Yellen isn’t some kind of radical: like everyone else, she agrees that the Federal Reserve should try to keep inflation under control. Yes, the short-term interest rate is zero, but inflation is historically low—the Core PCE price index is up only 1.0 per cent over the past year—while unemployment is persistently high.
Instead, it’s all about politics. Alan Greenspan could pump up two booms with easy money because the conservatives who might complain were seduced by his libertarian ideology. With the economy stagnant and inflation nonexistent, Janet Yellen is under fire for supporting easy money because interest rates and the Fed balance sheet have become an ideological battleground, elevated to a moral issue by resurgent conservatives clamouring for a…