A Central Banker After Midnight

Sep 16, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Reader,

The US stock market rose yesterday - "ahead of Fed," said several headlines - with the Dow up 228 points.

And so, we return to poor Janet Yellen. Tomorrow, much of the world turns its lonely eyes to the Fed and its chieftain. The Fed has as much as promised to make the blind see and the lame walk. It claims that it, and it alone, is capable of improving the US economy, and by extension, the whole world economy. People will earn more money, thanks to the Fed, and they will have less to fear from financial calamities, such as those that happened before the Fed was set up in 1913.

In the popular mind - if there is such a thing - it is further believed that the Fed "won't allow" a major bear market, because "it would be bad for the economy."

The Fed is master of the entire world of commerce, finance, and investment.

Janet Yellen is master of the Fed.

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But who is master of Janet Yellen?

Yes, the weight of these extravagant claims and promises now falls on one woman - Janet Louise Yellen of Brooklyn, NY. And during rosh Hashanah, no less.

During working hours, Ms Yellen holds her head up and talks the mumbo jumbo of a normal, confused economist. But late at night, after tossing and turning in bed, her thoughts must focus more clearly. In moments of pure, enlightened terror she must see the impossible position she has been put in.

"How am I supposed to know at what price credit should change hands? Of course, it is impossible. Prices are set by markets, not by bureaucrats. Try to do it any other way and you always end up with a mess.

"And yet, here I am. I have a responsibility. I am head of the world's largest banking cartel. I am charged - by law - to do four things (I know this because I looked it up on the Fed's website today):

    Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

    Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

    Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

    Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

"I shouldn't ask questions. I should just do the job. Full employment? Yes...I think we're on the right track. Stable prices? Where did that come from? I didn't know that was in there. No question, we nailed that one. Prices are more stable than we wanted. But we were aiming for 2% inflation. Well, how do you like that?

"But look, if the economy is as healthy as I say it is, it isn't going to be bothered by a quarter point hike. And if it isn't as healthy...and the rate hike throws it into a tizzy...well then all those 7 long years of ZIRP did ZIP for the economy and they as well be raised, no? (Janet smiles; she is pleased with her turn of phrase.)

"Wait...maybe the employment picture isn't as good as I've been told. There's that former assistant of mine, Andy Levin, shooting his mouth off at Bloomberg:

    The U.S. is probably about two years away from achieving full employment, no matter what the jobless rate suggests and Federal Reserve officials think.

    That's the view of Andrew Levin, who served as a special adviser to former Fed Chairman Ben S. Bernanke and then-Vice Chair Janet Yellen from 2010 to 2012. "We're not even close to full employment," he said in an interview.

    Millions of Americans working part time would take full-time employment if they could get it. And many others out of the labor market might be induced back in if they felt they had a chance at a job.

    Putting it all together, Levin calculates the amount of slack at 2.2 percent of the potential labor force, equivalent to around 3.5 million full-time jobs. While that's down from 7.8 percent at the end of 2009, it's still higher than the 2 percent average since 1994. And it's well above the 1.1 percent rate that prevailed in June 2004, when the Fed last started raising rates.

"And there are all these clowns on TV explaining why I should or why I shouldn't...or why I will or why I won't. One tells me the unemployment rate is not as good as it sounds. Another says China is headed for a serious depression. Another worries that world trade is slowing.

"One says speed up. Another says slow down. They think I've got some kind of machine here where all I have to do is to stomp on the accelerator and the economy will race ahead. But if I had that, I would've pushed the pedal to the metal along time ago. It doesn't work that way....

"And...oh no...maybe the whole idea is wrong. Maybe I didn't read the job description closely enough. I mean, maybe you don't get stability, full employment, safety and so forth by pulling on these levers and turning these knobs. Maybe being a central banker is not like being a car mechanic at all. Maybe it's more like being a judge.

"Judges don't have to come up with new tools, like Quantitative Easing. They not supposed to use unconventional methods. They're not expected to improve the world, for pete's sake. Judges are just supposed to apply the law and come to the same judgement tomorrow that they made yesterday. The key feature of a judge's role is a lack of innovation. You murder someone, the judge throws the book at you. Easy, peasy.

"Judge's don't have the whole world watching...anticipating their next move; their next move is supposed to be just like their last move. And they don't have to care what happens after they render judgment. Their job is simply to render the correct judgment...every time...just like the last time.

"Maybe that's the way central banking is supposed to work, too. It's not for me to worry about the jokers who have gambled on low rates. What do I care if their stocks go down? But wait...if they go down too much...too fast...we could have....hmmm....a situation on our hands. And it could develop into a very big mess...the biggest mess in world history.

"Oh my...is it morning yet?"

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Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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