Economics, Monetary Policy, Pethokoukis

Barack Obama, America’s Austrian president

Just what is the Obama White House’s problem with Janet Yellen? She is an experienced central banker who agrees with the president that the Fed must avoid becoming obsessed with the inflation part of its mandate at the expense of the employment bit. Turns out, though, Yellen is perceived as being less bubble-phobic than rival Larry Summers:

 … the president very clearly frets about the risk of financial bubbles and wants a Fed chief who will be attuned to staving them off. As David J. Lynch of Bloomberg points out, four times in five days Obama recently referred to the importance of returning to “artificial bubbles” as a means of supporting growth. When New York Times reporters asked the president about his thinking on the Fed choice, he said: “I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation. And if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

Yellen has been at the forefront of the Fed’s thinking on how to use unconventional monetary policy to try to fight unemployment and was an architect of its strategy of using more open communications combined with bond purchases to try to spur growth. She says all the right things about potential bubble risks from the Fed’s easy money policies (“a significant concern that I and my colleagues take very seriously,” as she put in a March speech). But she is not particularly vocal on what those risks are and where they might be bubbling up.

That Obama, always worried about “malinvestment” from low interest rates — just like the supposedly market-loving Austrian economists who see Tesla’s stock price as a bubblicious sign (hatip to Joe Weisenthal). Always looking for the boom to go bust. Not surprising, really. See, both Keynesian and prewar-style Austrians in their own way view markets as fragile things. As Richmond Fed economist Robert Hetzel describes the “market disorder” view of macroeconomics:

Do fluctuations in the business cycle originate in instability in financial markets due to excessive risk taking? Alternatively, do they originate in instability in money creation due to the failure of central banks to allow the price system to work? … The monetary disorder view is that the price system works well to equilibriate the economy provided that money creation and destruction do not prevent interest rates from adjusting. There is no inevitable movement from boom to bust.

Good heavens, if we should find out that Yellen owns Tesla stock — or drives one of those bad boys — the Fed job is Summers’s for sure!

6 thoughts on “Barack Obama, America’s Austrian president

  1. Yes, Mommy Fed should determine and prevent in advance those bubbles and protect private-sector investors. ..from themselves?

  2. Fake Economist Pethokoukis only knows other fake economist like the Journ-o-listic Economist Weisenthal. This pair are everywhere prodly displacing their absolute ignorance of basic business cycles or even just simple supply/demand principles.

  3. Austrian economists do not, in fact, view markets as fragile things in the absence of disruptive monetary or other public policy. On the contrary, both Austrians and Monetarists are in what Hetzel calls the “monetary disorder” camp (holding that business cycles are due to bad monetary policy), as opposed to the Keynesian “market disorder” camp (holding that cycles arise from free markets themselves). Austrians agree with Hetzel that business cycles “originate in instability in money creation due to the failure of central banks to allow the price system to work.” Yellin is a Keynesian. I infer from the column that you are too.

  4. Sorry, delete my last sentence in the above comment. I gather from your other writings that you are a Sumner-Beckworth type of market monetarist, but one who for some reason (and unlike Beckworth) wants to pour scorn on Austrian cycle theory, to the point of absurdly likening it to Keynesian theory.

    • In light of Professor White’s expertise in the matter, I cannot hope to add much of value to the conversation. However, I will “second” his objections in their entirety.

      Professor White, do you suspect that Pethokoukis is responding to the reputation of Austrians generally, due to the existence of other Austrians, namely, those-who-shall-not-be-named?

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