Speaking on Friday March 4, Janet Yellen of the Federal Reserve Open Market Committee offered words on the state of global monetary policy which, as of yet, I have been unable to decipher for any trace of discernable thought.
Throughout the decent length speech, she touched on many subjects, including the abolishment of the Bretton Woods system, the trade imbalance with China, and Keynesian rationale for deficit spending. However, reading through it, one would be forgiven if they didn’t pick up on any of this.
The one thing this Federal Reserve member seems most keen on is keeping things the same.
On the nature of deficit spending and gross liabilities in the U.S. leading into the housing crisis, Mrs. Yellen seems to feel that the fault rests with the trade imbalances between foreign partners.
“Strong capital outflows from countries with chronic current account surpluses–in part reflecting heavily managed exchange rates, reserve accumulation, and other shortcomings in the operation of the international monetary system–put downward pressure on real interest rates, in turn boosting asset prices (particularly for housing) and enhancing the availability of credit.”
Such an argument is new to my ears. While certainly it is true that large differentials in trade, coupled with reinvestment on the part of the surplus running country into that of the deficit running country, could create and foster a cheap money environment which could lead to wild asset bubbles – well, couldn’t the same thing be said about all forms of debt?
Lenders by their nature cause real interest rates to be lowered. To suggest that such a cause is merely on the hands of trade imbalances, while certainly nestled around a grain of truth, seems to miss the larger issue.
Janet Yellen continues, despite overlooking this obvious fact, by – almost psychologically – going on the defensive of debt and deficits as a whole.
“These developments contributed significantly to the buildup of financial imbalances, but they were not, on their own, sufficient to have engendered the massive financial crisis we experienced.
Had the additional domestic credit associated with these capital inflows been used effectively, the imbalances need not have led to financial ruin.”
Well yes, that would be the ideal setting, wouldn’t it? Where all faith and trust are met to the fullest of expectations and more; however, it is worth noting that to count on fulfillment of promises as a matter of policy is somewhat naïve.
What should be apparent to everyone, after almost a century of continuous disappointment by Keynesian economists, is that the fractional reserve banking system is not a blessing or a boon to those who reside beneath it.
This implies one party with ownership to one asset and well defined obligations of any counterparties. Not a continuation of the same system over a larger and more continuous jurisdiction (same problems, but now they affect more people).
The only aspect of Mrs. Yeller’s speech that she seemed to nail was the general suggestion that things have to change. However, in referring to China in hushed tones as “countries with chronic current account surpluses,” ambiguous terminology like “flexible exchange rates” (a buzzword never explained in terms of real transactions), and half-hearted calls that we somehow make everyone to be sensible and follow the rules, you may be left wondering just when all this change will be occurring.
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