After several months of acrimonious debate Larry Summers removed his name as a potential replacement for Federal Reserve chairman Ben Bernanke earlier this month. With Summers stepping aside, Fed vice chair Janet Yellen regains her spot as the odds-on favorite to replace Bernanke should he step down early next year as is widely expected.
Stocks initially responded positively the news, ostensibly because it is assumed Yellen will keep in place Bernanke's market-friendly quantitative easing program. Not everyone is as enthusiastic at the prospect of another inflation dove filling Bernanke's shoes.
Peter Schiff, CEO of Euro Pacific Capital and author of The Real Crash: America's Coming Bankruptcy, thinks a Yellen appointment will spell disaster. He says Bernanke did Alan Greenspan the favor of replacing him as the worst Fed chair in history and Yellen is about to return the favor.
For savers, low interest rates mean less spending power because of inflation. Schiff worries that Yellen would push for negative interest rates; actively confiscating money out of savings accounts. Though the scenario seems farfetched the implications are mind bending.
The argument in favor of yet more stimulus is that measures thus far have been compromised solutions resulting in little real growth. By neither allowing the free market to function nor spending enough to catalyze robust growth, trillions have been thrown away in the least efficient manner possible. The strategy has been something akin to trying to generate heat but burning a tree down one leaf at a time instead of all at once.
The recent taper debate illustrates the point. Though most were surprised to see no change in QE, very few economists expected a more than $20 billion reduction in monthly purchases. Few claim a $20 billion tweak in the context of QE would have a tangible impact. The taper proponents simply wanted to send a message" that QE would someday disappear.
It's time to raise our collective ambition. Either the stimulus is working or it's time to change course entirely. If the recovery is as illusory as Schiff and others claim, it's better to find out now than it is to slowly throw away another few trillion dollars. There's a case to be made that a less centrist Fed chair would be just what the country needs to get the economy out of its stupor.
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- Janet Yellen
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