Yellen Tips Her Hand—Just a Little

10/31/2013 12:00 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

With the current mess the Fed's mixed-up in, coupled with the eminent "Changing of the Guard" that's right around the corner, MoneyShow's Howard R. Gold feels that some solutions—or at least hints—can be found in an upcoming documentary film.

In two weeks, Janet Yellen will face confirmation hearings before the Senate Banking Committee on her appointment as the new chair of the Federal Reserve. Sen. Rand Paul of Kentucky has vowed to hold up her nomination, but she will almost certainly be confirmed.

When she is, she will take office at a critical time. For the past quarter-century, the Fed has accumulated more and more power; it has lowered interest rates to rescue plunging stock markets, and is now engaged in a vast experiment that's adding $1 trillion to its balance sheet every year—with little to show for it.

Meanwhile, stock indexes keep hitting new highs on traders' expectations that the Fed will keep doling out $85 billion a month in quantitative easing, which the Federal Open Market Committee voted to continue Wednesday.

How did the Fed get into this mess? And can Janet Yellen fix it?

There are some hints in a new documentary film, currently touring the country. Called Money for Nothing: Inside the Federal Reserve, it was made by Jim Bruce, a Hollywood veteran (he was an editor on The Incredible Hulk and X-Men: The Last Stand) with an interest in finance that dates back to the waning days of the boom.

You can watch a trailer here and get information on screenings and DVDs here.

Yellen herself appears in the movie, along with a stellar group of current and former Fed officials including Charles Plosser, Jeffrey Lacker, Alan Blinder, Peter Fisher, Alice Rivlin, and the great Paul Volcker. (Prescient contrarians Jeremy Grantham, John Mauldin, Barry Ritholtz, and Gary Shilling also have their say.) Fed chairman Ben Bernanke and his predecessor Alan Greenspan both declined to be interviewed, Bruce told me.

(A picture of a Janet Yellen
From "Money for Nothing." Reproduced with permission of Liberty Street Films

Yellen's comments were particularly notable. In the film, she made a bold statement: "It's our job to guarantee that whatever happens to the federal deficit and debt…does not translate into inflation.”

Sounds good, although it appears to contradict what she said after President Obama announced her appointment. “I pledge to do my upmost…to promote maximum employment, stable prices, and a strong and stable financial system…The Federal Reserve can help…ensure that everyone has the opportunity to work hard and build a better life,” she declared. Spoken like a true Keynesian monetary dove.

But Bruce told me that while shooting the movie, Yellen was intent on establishing her inflation-fighting bona fides. “What's interesting to me was she wanted to make that statement that she made. She wanted to go on the record saying 'we don't have to debase the currency to pay off the debt,'” he said in an interview.

Perhaps, but it's likely to take years for the Fed to get back to normal monetary policy, and Yellen may be in no hurry.

“Janet Yellen doesn't want asset bubbles. I don't think she recognizes [one] already exists,” Bruce said.

His movie, which makes this complex subject matter understandable and even entertaining to intelligent viewers, shows how we've gotten there.

NEXT: What Greenspan and Bernanke have wrought


Breezing through the Fed's first century (it celebrates its 100th birthday this December), Money for Nothing tells of its founding by top New York bankers at a hush-hush meeting on Jekyll Island, Georgia; traces its huge mistakes in the years before, and after, the Great Depression, for which Bernanke famously apologized to Milton Friedman, and then covers the Fed's second big error—the Great Inflation of the 1970s—for which Volcker came to the rescue.

But most of the movie—which Bruce financed mostly through shorting banks and housing-related stocks in the mid-2000s—zeros in on the Greenspan and Bernanke years.

Bruce highlights the stock market crash of 1987, when the Greenspan Fed flooded the banks with reserves; Greenspan's irrational exuberance speech in December 1996, which failed to douse the fires of stock market speculation, and the Fed-sponsored rescue of leveraged hedge fund Long-Term Capital Management by Wall Street firms in 1998.

“From now on, the Fed would be expected to lower rates, based not just on problems in the real economy but in the stock market as well,” the film says. “The Fed was offering the market an amazing deal: no regulation to prevent you from taking risk, but if your bets went wrong, lower interest rates to rescue you.”

The policy reached its zenith—or nadir—in the 2000s. After the bust and September 11 attacks, Greenspan's Fed lowered short-term rates dramatically until they hit 1% in June 2003, the lowest in nearly half a century. He kept them there for a year and they remained depressed for three years—during the housing bubble's blow-off phase.

The film shows that Greenspan pushed consumers to spend, by encouraging cash-out refinancings as home values soared. US households extracted $2.3 trillion from their homes from 2003 through 2008. “Were it not for this phenomenon, economic activity would have been notably weaker,” Greenspan acknowledged.

“Greenspan had kept rates so low for so long that he turned an overheated housing market into the greatest credit bubble in history,” the film states. “His plan was to swap one boom for another and juice the economy with low interest rates. But far from solving the problems, he would trap the Fed in a vicious cycle from which it has still not escaped.”

(A picture of a Ben Bernanke
From "Money for Nothing." Reproduced with permission of Liberty Street Films

The film views QE as just an outgrowth of a generation of Fed policies aimed at easing or preventing recessions, stock market crashes, or other Bad Things through micromanagement of the economy and feeding Americans' addiction to cheap credit.

After cutting interest rates to near zero and several rounds of unconventional monetary policy that have added nearly $3 trillion to the Fed's balance sheet, Ben Bernanke may have prevented a second Great Depression. But he leaves his successor with some tough choices despite his hilarious claim to CBS News' Scott Pelley that he's “100%” confident the Fed can exit successfully.

For a generation, the trail the Fed has blazed has been paved with good intentions. Right now that road doesn't lead to Heaven. And Janet Yellen will find it very difficult to keep us from moving in the other direction.

Howard R. Gold is editor at large for and a columnist at MarketWatch. Follow him on Twitter @howardrgold. The World MoneyShow London is next week! For more information, and to register for FREE click here...

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