The Utter Bankruptcy of Keynesianism: Summers’ Opponents

Keynesian Lawrence Summers has submitted his resignation from contention as the next head of the Board of Governors of the Federal Reserve. This leaves Janet Yellen in top contention.

Janet Yellen has been Bernanke’s chief supporter on the Board. She is Vice-Chairman. She is seen as “Bernanke lite.”

This is a mistake. She is not Bernanke lite. Bernanke is Yellen lite. Ezra Klein reminds his readers of this in the Washington Post. Yellen saw the credit crunch coming, and she said so in 2007.

You’ll also find Yellen voicing a prescient note of pessimism. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned. In ensuing years, Yellen pushed for the Federal Reserve to do more to combat an employment problem that she didn’t see abating — advice that Bernanke and the rest of the FOMC eventually followed, when their optimistic forecasts proved terribly wrong.

He says she is “insanely qualified and widely respected.” I would reverse the adjectives.

Here is an assessment of the reasons for Summers’ departure.

In a USA TODAY survey, 56% of the 42 economists said they preferred Fed Vice Chair Janet Yellen for the top job. Conservatives who favor a good sound business administration wanted the quiet, liberal academic Yellen because she’s closely identified with easy-money policies that have served Wall Street well.

Either camp of opponents may not have been able to kill Summers’ candidacy. The combination of the two made it untenable, as Summers withdrew his name Sunday.

In his letter to the president, Summers wrote of wanting to avoid a contentious confirmation fight. Such a fight became all the more certain when three Senate Democrats (Jeff Merkley of Oregon, Ohio’s Sherrod Brown and Montana’s Jon Tester) signaled they would vote against him.

Generally, it has been thought Summers favored less monetary accommodation than Yellen has — which cost him support that might have offset liberal opposition. With Wall Street still nervous about the upcoming process of weaning the economy off reliance on the Fed’s easy-money policies, they liked Yellen because they knew Yellen.

So, if we are to believe this, Yellen is a “dove.” Summers is a “hawk.” But there is no evidence that Summers is now, or ever has been, a hawk. He is a standard Keynesian. They both want more fiat money.

So do over half of the economists surveyed. So does Wall Street.

The economists are Keynesians. Wall Street is Keynesian. When I say “Keynesian,” I mean defenders of the Federal Reserve’s quadrupling of the monetary base since late 2008, a policy that would have been dismissed as utterly crazy five years ago. Now, any hint of reducing the FED’s creation of $1 trillion a year in counterfeit money is regarded as hawkish, and therefore a threat to the recovery.

There is no serious opposition in the academic world or the financial world to the idea that it is sound economic policy for the FED to create $1 trillion a year in counterfeit money in order to buy about 75% of the federal government’s deficit, plus support the government-owned mortgage market. Anyone who would say that there should be no new money created by the FED and that the mortgage market should be privatized is regarded as a kook, meaning an Austrian School economist.

This is how far acceptable economic opinion has moved toward statism since September 2008. This is economic fascism, and it would have been recognized as such in August 2008. Now it is mainstream opinion.

We cannot expect deliverance to come from academia, Wall Street, or Washington. Then where will it come from?

When?

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