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A New Fed Chair Nominee, And What On Earth Is All This Talk About Birds?

October 9th, 2013 · 20 Comments
Macroeconomics · Policy

I would like to take a break from regularly scheduled hijinks to inform everyone that, at long last, Janet Yellen has officially been nominated to succeed Ben Bernanke as the head of the U.S. Federal Reserve. This is good news, in my opinion, and I am trying my best to ignore the buzzkill comments of the “she only got nominated because Summers withdrew from consideration” sort.

In case you are unfamiliar with Yellen, here is a NYTimes article that tells you probably more than you ever wanted to know. Some highlights:

  • Yellen believes in the theory of efficiency wages, at least as far as babysitters are concerned.
  • Yellen had a rock collection in high school. (She later upgraded to a $15,000 stamp collection, but that is unfortunately absent from the article.)
  • Apparently compatible views on macroeconomic policy is the key to a successful marriage, at least if you marry a Nobel-prize-winning economist.
  • The Fed cafeteria is pretty much hell on earth.

Okay, fine, those were the trivial parts, but I feel like the rest has been talked about so many times already. I mean, we had the whole uproar over Yellen having ovaries already, as well as quite a bit of discussion regarding hawks and doves. In case you were worried that macroeconomics secretly became a branch of ornithology while you weren’t looking, allow me to give you a bit of a primer.

One of the main jobs of the Federal Reserve is to control the supply of money in the economy. This is an important job from an economic perspective, since many economists believe that increasing the supply of money can stimulate the economy (and vice versa). I’ve talked about this concept at length with a variety of people, and the consensus is that this sounds absurd if you’re not an economist (as do many other things), so allow me to go through the steps:

  • (Nominal) interest rates in an economy are determined by the supply and demand of money.
  • Therefore, when the supply of money increases, interest rates decrease, and vice versa.
  • Lower interest rates lower the cost of borrowing for investment, leading to more investment in the economy. (Lower interest rates can also encourage consumption.) This increases output and, as a side effect, tends to put unemployed people to work.

Expansionary monetary policy (i.e. increasing the money supply) isn’t a magic cost-free solution to recessions, however, since, among other issues, increasing the money supply tends to lead to increased inflation in the long run (though it’s unclear whether this principle applies as strongly when increasing the money supply in a recession as opposed to in normal times). Therefore, economists are characterized as different types of birds as a proxy for their priority on using monetary policy to stimulate employment versus keeping inflation in check. (Personally, I would have gone for llamas versus cheetahs, but no one asked me.) Within this framework, doves are the ones who prioritize trying to fix unemployment and hawks are the ones who prioritize price stability.

In a policy sense as opposed to a societal norm freakout sense, the big news isn’t that Janet Yellen will likely be the first female Fed chair but rather than she will likely be the first Fed chair who is clearly outspoken as a monetary dove. Consider the following from Yellen’s acceptance statement:

The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively. We can help ensure that everyone has the opportunity to work hard and build a better life.

I hope she’s right, since she’s certainly now in a position to help far more people than just the babysitter. Also, she’s pretty much the absolute cutest:

(Fun fact: she’s smiling because this time Obama managed to not refer to her as “Mr. Yellen.”) That picture is pretty great, but this one has got to be today’s winner:

OK RT @EmilyDreyfuss: a platinum $1 trillion coin with Yellen... on Twitpic

Or this:

I can’t decide whether this is a meme that I would like to see revisited.

Tags: Macroeconomics · Policy

20 responses so far ↓

  • 1 Wilson Dizard // Oct 9, 2013 at 7:57 pm

    Not to overstress this signal day for good sense in public policy (the benefits of a competent Fed chair can create likely will be more important, in the short term, than breaking another unfair barrier), but, it’s interesting to me that very few observers commented on the precedent that both the IMF and the Fed soon will be led by people who could do a camp/vamp reprise of this duet by Carol Burnett & Cher singing “It’s lonely at the top.” Also, on a more serious note, how can Professor Yellen cope with the problem that so many money center banks seem to be earning most of their profits not by actual banking, but by money laundering, providing services to tax evaders through their private banking arms and gouging consumers via exorbitant fees as well as backdoor loans to the “fringe banks,” namely, the payday loan shops & check cashing stores? The bank regulation structure built by the Dodd/Frank law seems to comprise a structure whose complexity is rivaled only by its aversion to punishing people who brazenly steal from the shareholders and the taxpayers. The electorate would be surprised and thrilled to learn that a bank regulator with real power has the moxie to refer some cases to the Justice Department’s Criminal Division. Justice’s hypnotically repetitive denials that it would be possible to prosecute any of the criminal fraudsters who engineered the 2008 mortgage lending debacle (in dramatic contrast to its successful convictions of savings & loan bubble fraudsters) probably didn’t deceive Yellen. Considering that so many of the investment banking insiders who backed Summers were in on those crimes, and remain unpunished, should those people now invest in passports from countries that lack extradition treaties with the US? And also, can you see the now-motionless construction cranes at Harvard’s unfinished science complex in Allston, Mass., that Larry Summer’s incompetence stopped in mid-construction because of his knuckleheaded investment of the university’s cash reserves in risky endowment fund vehicles (including exotic interest-rate swaps that cost Harvard $1 billion to $8 billion to unwind, but who’s counting?) , from your office window?

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    Extradition To and From the United States: Overview of the Law a

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