And people tell me, “She keeps telling you lies.” I guess they wonder how I stand it, oh, but when I look in her eyes, I know it’s love the way I planned it. I believe in Janet. Janet, they don’t understand it, the whole thing must be wrong. I gave my heart to Janet, and she won’t lead me on. Janet, oh, Janet. So goes the song Janet written by Robert Caldwell, Paul Fox and Frannie Golde, and performed by the Motown band, the Commodores in 1985. These lyrics make me think that the Commodores must have spent a lot of time with Wall Street types, for the admiration for the Federal Reserve Chair (Janet Yellen) is so strong.
Those who are familiar with this Blog, know that I am not in awe of the Federal Reserve. I am not a conspiracy theorist, and I do believe that it is important to have a Central Bank, but in spite of claims of many financial economists, I really do not believe that the Federal Reserve Board of Governors has much at all to do with market interest rates or inflation. Rather, as I have pointed out in the past (http://guerrillaeconomics.com/2015/12/higher/) the Federal Reserve merely follows the market when it decides to raise or lower the Federal Funds Rate (which is the rate that Banks must charge each other when lending excess deposits in overnight markets).
However the Federal Reserve does have real regulatory authority, and Chairman Yellen pointed this out in an address at the Bank’s recent retreat in Jackson Hole Wyoming. While many in the media suggested that Chairman Yellen was thumbing her nose at the current Administration by promoting regulation, the actual text of the address suggests just the opposite.
While it is true that Chairman Yellen stated that financial market regulations imposed since the last recession have had positive benefits, that should be expected from the person who is nominally in charge of most financial market regulation. More importantly, what she did not do was to call for significantly more regulation, nor did she state that all of the regulations currently in place – particularly those that impact smaller banks – should remain. In fact, other than some grandstanding about the scope and scale of the last financial crisis, which while bad, was not anywhere near as devastating as many this country has suffered over the past 250 or so years, the presentation was very balanced and accurate.
Ms. Yellen effectively argued that the financial system prior to 2008 was a bit of a wild-west casino, and that regulation – particularly of insured money center banks – was needed. She was also correct in pointing out that much of the new financial regulation was geared toward strengthening bank balance sheets, and their ability to withstand financial downturns. She also admitted that some of the regulations on the banking system were overly harsh, and that the Federal Reserve was studying the effects of regulations and making adjustments.
This is precisely the type of perspective that a regulatory agency like the Federal Reserve should take. Just because a regulation might have been needed in the past does not mean that it must stand unchanged forever. A regulatory environment that is set in stone is bound to crack and agencies need to examine the changing requirements of those that they both regulate and protect. Over time it will become obvious that many of the financial regulations put into place during the heat of a recession were either too onerous, or are simply not doing what they were supposed to do. These regulations need to be eliminated or changed – something that Chairman Yellen pointed out in her presentation.
Complex economic systems and complex markets need rules in order to operate. Rules help to ensure that markets are fair and functioning, and help to grow the economy in the long term. While Chairman Yellen may have her flaws, the Jackson Hole speech was not what is being presented in some media outlets. Rather, it was a balanced presentation discussing how financial regulations need to evolve over time. I guess the Commodores were right when they sang, Janet, they don’t understand it.