Trump should replace Fed Chair Janet Yellen in February

Replace Yellen with a new Fed chair who will make economic growth the central bank's top priority so that the American economy can really start to grow again.

A protester greets Fed Chair Janet Yellen between innings at Jackson Hole. 2014. (Screen shot from Bloomberg video)

WASHINGTON, August 28, 2017 — In February 2014, President Obama nominated University of California–Berkeley Business and Economics professor Janet Yellen to chair the Federal Reserve System’s Board of Governors. Her four-year term expires February 3, 2018. Should President Trump re-nominate her?

Most liberal economists give Yellen high marks for her performance so far. She has maintained the low-interest rate, high money supply policies of prior Fed chair Ben Bernanke.

The prevailing popular belief is that Yellen has kept the economy going while holding inflation in check. But now that the economy seems poised for stronger growth, will Yellen be able to achieve the Federal Reserve’s longer-term goals?

The main goals of contemporary monetary policy are to control the money supply and influence interest rates in a way that enables the U.S. economy to achieve full employment, price stability, and economic growth.

Yellen can be given credit for helping to create full employment and price stability, according to traditional measures. But the economy has yet to experience normal growth.

In fact, the economy hasn’t enjoyed annual growth of 3 percent or more since 2005.  This lack of growth has been the cause of many of the economic and social problems we are experienced today. The subnormal, roughly 2 percent annual growth rate the U.S. economy has seen during the past 11 years is unacceptable and problematic.

This abnormally slow growth rate continues to reduce opportunity for many Americans, particularly those with lower incomes. When the Great Recession hit, millions of adults dropped out of the labor market entirely. Millions more were under-employed, forced to settle for low-paying or part-time jobs for which they were clearly over-qualified.

A general and growing sense of anger and frustration spread among Americans, particularly those in the lower to middle income strata. It was most acute among lower income earners who knew they had no opportunity whatsoever to better their lot.

For her part, Janet Yellen did keep interest rates low and she did increase the money supply, which should have stimulated growth. There is a simple reason why it did not: The people who really needed the money couldn’t get it. Based on Yellen’s recent comments, if reappointed, she will continue the policies that limited growth. That is simply unacceptable.

A monetary policy that is designed to expand the economy is only effective if banks are lending money across all income strata. When banks make loans, business can expand and grow the economy. The same holds true for responsible individuals and entrepreneurs. If severe restrictions are placed on banks that make it difficult to approve loans, however, businesses cannot expand and the economy cannot grow.

Economists like Yellen who believe that “social justice” has a higher priority than economic growth convinced Congress to pass the draconian Dodd-Frank bill in 2010. This law was designed to protect consumers from “predatory lending,” which most people believe was the direct cause leading to the financial crisis and Great Recession (2007-2009 or -10).

Predatory lending means that banks routinely granted mortgage loans to people who simply could not afford them according to normal and accepted underwriting standards. Banks did this, according to supporters of Dodd-Frank, because greedy bankers earned fees for granting such mortgages. Yet they ultimately had no liability for the end results, since these mortgages were then repackaged and sold to quasi-governmental agencies like Fannie Mae and Freddie Mac.

Among other things, this eventually led to the Federal government being forced to take control of both entities before they went under – a complicated matter that, as yet, has not been adequately resolved.

The problem was that while Dodd-Frank did eliminate predatory lending, it virtually eliminated most other lending as well. Without banks lending to small businesses and individuals, monetary policy simply doesn’t work when it comes to stimulating the general economy.

President Trump wants to repeal most of the Dodd-Frank law. The business and banking communities would enthusiastically welcome this action. By removing unnecessary regulations, banks would once again be free to lend, businesses would be free to borrow for expansion and the economy would be free to grow at normal levels or even better. But Janet Yellen does not want Dodd-Frank repealed.

Speaking to the world’s top bankers who concluded their annual meeting at Jackson Hole, Wyoming last week, Yellen said she was not in favor of completely repealing Dodd-Frank.  She does recognize that there are trade-offs between regulations and lending. But she also stated that regulations are needed to ensure stability and reduce risk, especially for  consumers.

Yellen only wants to tweak Dodd-Frank. But this would continue to limit lending and continue to be a drag on robust economic growth. The country needs a Federal Reserve chair who is willing to place economic growth as the central bank’s top priority—something Yellen clearly will not do.

In 2010, the social-justice-oriented, Democrat controlled Congress passed Dodd-Frank, which has been too heavy a weight for the economy endure ever since President Obama signed it into law. It is as if a runner has fallen; but instead of helping the runner get up and start running, new rules and regulations pile additional weight on the runner’s shoulders making it more difficult to get up and start running again.

Please, President Trump: Replace Yellen with a new Fed chair who will make economic growth the central bank’s top priority so that the American economy can really start to grow again. It’s absolutely necessary if you really want to achieve the goal of achieving sustained economic growth of 4 percent annually.

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