By Andrew Sheng
In Chinese history, a woman’s ascension to power is either a sign of profound change or dramatic crisis. Janet Yellen’s nomination to assume chairmanship of the U.S. Fed is a sign of changing times. Note that both the Fed and the SEC will be headed by women. After all, Christine Lagarde, Head of the IMF, has said that if Lehman Brothers had been a bit more Lehman Sisters, we would not have had the same degree of tragedy! In essence, we need women to clean up man-made messes. The difference here is not that Ms Yellen is taking over in crisis, but is faced with withdrawing the medicine for the crisis. She inherits an intoxicated punch bowl, with a central bank that needs to unwind massive quantitative easing (QE), at the same time as the U.S. faces its own debt debacle. According to the Congressional Budget Office, the U.S. will run out of borrowing authority on Oct. 17 and will have about US$30 billion in cash after that. The country would be unable to pay all of its bills, including benefits, salaries and interest, sometime between Oct. 22 and Oct. 31. The rest of the world sits aghast with disbelief that the most powerful economy in the world can have a debate whether the government would stop paying its bills, because some Tea Party members can play “who blinks first” with the President on changing the Medicare legislation.
This is stark reminder that crisis is not about rationality and that politics is the real dismal science, not economics. I have no doubt that in terms of IQ, EQ and experience, Janet Yellen is imminently qualified to be the captain of the world’s leading central bank. As former President of the San Francisco Fed, she understands not only the issues of an open, innovative West Coast economy, but also the dynamic Pacific Rim countries that account for 55 percent of world GDP and 44 percent of world trade. The APEC economies, being large users of the dollar for trade and largest dollar holders in their foreign exchange reserves, have high hopes that the new Fed Chairman will protect the value of their dollar holdings. What is the scorecard that Ms. Yellen has inherited? QE3 is committed to buying US$85 billion worth of long-term Treasury paper, including US$40 billion of mortgage-backed paper, per month as long as is necessary. Furthermore, since December 2012, the Fed has said it intends to hold the federal funds rate near zero at least until unemployment has declined below 6.5 percent. As far as I know, there is no theoretically proven causal effect on low interest rates reversing the level of unemployment. Even current Chairman Ben Bernanke has admitted that “We don’t have tools that are strong enough to solve the unemployment problem.”
Despite this, the purpose of QE is to tell Congress that the Fed stands fully behind the economy, buying time for the real structural reforms to be undertaken by the politicians.