Deferring Yellen’s judgement for praise

Do you remember the retirement of Alan Greenspan? Probably not, everyone seems to want to forget about what happened after 2006.

The monetary maestro had presided over an extraordinary period of stability, calm and growth. They called it the Great Moderation. A president joked that if Greenspan died, they’d just prop him up in his chair at the Federal Reserve.

Unfortunately, the 2000s turned out to be the opposite of moderation. It was the build-up of the greatest bubble since the 1920s. Bigger than the tech wreck, which Greenspan also presided over…

The man asked to give Greenspan his sending off tribute at Jackson Hole in 2005 instead took to the lectern to tell the gathered central bankers the inconvenient truth. Danielle DiMartino Booth described how it went down in her book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America:

Later that year, [Raghuram] Rajan was named chief economist for the IMF, the youngest person and first non-Westerner to hold that job. It was a great honor to be asked to praise Greenspan for making the world’s financial system more stable. On August 26, one presenter after another praised Greenspan for his approach to monetary policy, which a Fed summary described as “discretionary, flexible, and based on a deep understanding of economic data and business conditions.” Guided by eleven key principles, a “hallmark of the Greenspan era was reliance on what he himself has characterized as a ‘risk management’ approach to monetary policy. Under this approach, policymakers guard against low-probability outcomes that might have outsized adverse effects on the economy.”

“The next day, Rajan stepped up to the lectern and delivered a very different paper from the one the Kansas City Fed organizers anticipated: “Has Financial Development Made the World Riskier?” His answer was an unequivocal yes. Rajan argued that technological innovation, deregulation, and institutional transformations had eroded the traditional banking virtues of stewardship and prudence. Investment banking on Greenspan’s watch had been profoundly transformed for the worse. Rajan used compensation for investment bankers and other finance executives to illustrate his point.


“The interbank market could freeze up, and one could well have a full-blown financial crisis,” Rajan concluded. Banks would no longer trust each other. The result could be a catastrophic meltdown.

“Rajan’s paper was received as a slap in the face to Greenspan, the Fed, and the economic theories championed by top American economists like [Larry] Summers, who was in the audience. It’s a good thing starchy academics would never resort to violence. But their disdain for Rajan was palpable. “I felt like an early Christian who had wandered into a convention of half-starved lions,” Rajan later wrote. Summers, then president of Harvard University, lambasted Rajan, saying he found the paper’s “basic, slightly Luddite premise” to be “largely misguided.”

And you thought these conferences are boring

After that misguided performance, Summers almost went on to be the Fed chair in 2013. Not surprising given his competitors’ equally complacent comments at the time.

But Summers had to withdraw when women’s groups drew attention to his comments about statistics on women’s aptitude at science and maths. Barack Obama appointed Janet Yellen instead. Nobody mentioned Summers’ criticisms of Rajan, which you’d think are more relevant.

Anyway, that was Greenspan’s goodbye. His successor Ben Bernanke was lauded for saving the world when he retired from the Fed. Cleaning up Greenspan’s mess is more like it.

The current chair, Yellen, has announced her own retirement. So the race is on for how she’ll be remembered. So far it resembles the cartoon Wacky Races: pretty much the same plot as every other episode, predictably messed up.

From con artist to escape artist

Unfortunately, Rajan has not been invited to opine on Yellen’s career publicly. They chose someone less critical to ponder over her years at the Fed. And I was misfortunate enough to catch part of the conversation on Bloomberg Radio over breakfast.

So you’ll forgive me for my fits of sardonic laughter this morning. If Capital & Conflict had an audio version, it would’ve been a struggle to get through.

I’m referring to the interview of Yellen by Lord Mervyn King. The outgoing chair of the Fed had to be interviewed by a fellow central banker equally responsible for the 2008 mess to ensure there would be no tough questions. The Baron of Lothbury was head of the Bank of England before and during the 2008 crisis, and now features on “In Conversation with Mervyn King” as himself.

In the interview, Yellen opined about how the minutes of the Fed’s meetings are made available eventually, so Fed leaders are ensured to be responsible. They don’t want to be ridiculed by posterity, who have the benefit of hindsight.

How true, they don’t want to be ridiculed

But she couldn’t be more wrong about their ability to judge what will be deemed responsible and what not. And she failed to mention the ridicule they’ve consistently been subjected to when the minutes have been released in the past.

Some of the Fed minutes from the financial crisis exposed extraordinary complacency. Let alone public comments at the time about how sub-prime is a small problem and the refusal to even consider a drop in house prices on a national level.

Funnily enough, Yellen in her interview with Lord King spoke about the amount of laughter in the minutes too. Analysis of the Greenspan and Bernanke years showed the amount of laughter hinted at the growing bubble and complacency surprisingly accurately. The correlation between stockmarket performance and laughing central bankers is high.

Something is missing

With commentators like Lord King jostling to give Yellen’s best man speech, something has gone missing. We know from the Greenspan debacle that it’s far too premature to judge her performance. Thanks to the nature of monetary policy, we won’t know for some years to come what her legacy should be.

Then again, some of her early performances do suggest Yellen’s place in history be hilarious. Again, Booth puts it beautifully in her book:

During her first public speech as Fair Chair, Yellen managed to botch both the substance and the “theater,” as Fisher would say. In very personal and impassioned remarks, Yellen mentioned three residents of Chicago struggling to find full-time jobs.

Yellen neglected to mention that two of the three people she held up as examples had criminal records— one for felony theft and the other for heroin possession— deterrents in gainful employment with companies that did routine background checks. What was shocking: they had told Yellen about their pasts. She chose to leave out those salient facts in her speech.

Every time Yellen has declared she is “data dependent” since, it’s made me giggle.

But when it comes to monetary policy, we just won’t know Yellen’s place in history for some time. What beggars belief, then, is the declaration of Yellen’s extraordinary success by pundits. Everyone seems to be full of praise for the money printer. She comes across as wise, accomplished and having served society. It’s as if she cut out the trillions of dollar bills herself.

Our analysis of her career is simple. Just wait and see.

But we do know some things for certain. Money printing isn’t free, ironically. The costs are just hidden.

There’s inflation that’s baked in, to emerge when you least want it to.

There’s misallocation of capital – malinvestments driven by wacky monetary policy instead of sound economics. The build-up of “zombie” companies is a good example.

And there’s the debt boom triggered by low interest rates. When those rates return to normal, that debt becomes unaffordable.

Yellen has baked a horrific mess into our global economy and she’s exiting stage left before things hit the fan. From con artist to escape artist. Good luck to her.

I just hope Robert Mugabe is around long enough to see it all fall apart.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Central Banks

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