Janet Yellen, new chair at the FED, was on some cable channel a moment ago, prompting Mrs. Rozeff to ask me “What is she saying?” “She’s an idiot,” I answered. “There’s no point in trying to figure it out, because it makes no sense.” She had just got done saying that the FED had pushed down mortgage rates to be more accommodative, and that the idea was to stimulate spending so as to increase economic growth. She pointed to rises in house prices as a sign that the FED’s moves had worked.
Upon reflection, I will stand by my instantaneous emotional-rational reaction to what I had heard. She is indeed a “useful idiot”, and an outright economics illiterate besides. The economy had all the base money it could possibly use way, way before the FED started buying mortgages. That is shown by the excess reserves. Hence, the FED’s policy had nothing whatever to do with accommodation, which for monetary policy means increasing the amount of base money available to banks. Buying mortgages and accommodation are not connected in this instance.
There is no way that the FED can stimulate real or sustainable or private sector or welfare-increasing economic growth by creating base money. If growth means growth in productive capacity for goods that are in demand by individuals in the private sector, the FED is in no position to cause this to increase. What it can perhaps do is target some particular sector, like housing, and perhaps cause a diversion of resources to that sector. It can perhaps distort economic activity for a time. But if it, as Yellen argues, does cause greater activity in the housing sector, then what happens when it stops financing the purchase of homes? Won’t that entail lower activity and indicate a prior over-investment in that sector? How does such a cycle create a sustainable growth in productive capacity for goods that people demand and will continue to demand? It doesn’t, because the FED is not a final demander of these goods. Yellen is blithely unaware of this line of thought. As a dyed-in-the-wool Keynesian, she thinks that the FED’s demand for mortgages stimulates spending which multiplies and is good for the economy. What actually would be good is for entrepreneurial activity to invest in capacity to produce those goods and services that will be wanted by potential customers after they are produced. Economic growth is not attained by monkeying around with the prices of assets and interest rates. This only distorts markets and interferes with entrepreneurial decisions.
I’d like to know why Yellen would crow about rising house prices? Why is it conducive to economic welfare for houses to become less affordable?
Yellen insists on linking monetary policy to the labor markets, when the connections are very remote. I’d like to know what connection there can possibly be between a sustainable and well-functioning labor market and a FED policy of buying mortgages? Obamacare alone is causing millions of people to withdraw their labor and live off welfare, simply because of the high implicit tax rates in this legislation.
The obvious fact, obvious to anyone but an idiot like Yellen whose mind is totally wrapped around fallacious concepts, is that the banks have all the accommodation (reserves) they need. They’ve had all they needed for at least 5 years. All the QE programs have been unnecessary. The amount of reserves in the system, if exploited by banks, is enough to last for generations of growth.10:21 am on February 11, 2014 Email Michael S. Rozeff