The Career of a Keynesian Mediocrity

The standard Keynesian policy solution to economic inefficiency is that government takes active measures via a (supposedly) wise and knowledgeable central bank, one filled with people who hold Ph.D.s in economics from top-notch universities.

Because they know stuff.

These central bankers act in tandem with fiscal policy emanating from a (supposedly) all-seeing, all-knowing government, one filled with well-intended political actors. And politicians know stuff, too. Well, that’s what they tell you, anyhow.

Under Keynesian theory, between those wise bankers and politicians at the helm, the overall economic ship will sail much better. To continue the nautical metaphor, a well-guided economic ship will hit no icebergs. Or that’s the idea.

Indeed, the Keynesian goal is “stabilize output,” especially over and around business cycles. In other words, the Keynesian approach is intended to smooth out the economic bumps. Or from a more political angle, it eliminates those pesky recessions that lead to large-scale business failures and unemployment.

No Roaring 1920s; no Great Depressions of the 1930s. That’s the lure.

Cynics might call this an “economics-lite” version of a 1920s/’30s-era Soviet Five-Year Plan, in which the central state controls money supply and directs investment to virtuous ends that the commissars discern. Because that planned Soviet model was Keynes’ intellectual competition back then — or the economic counter-model.

In the 1920s/’30s, the world was evolving out of both the Great War (aka World War I), as well

as the Bolshevik Revolution. The Anglo-Saxon model — meaning primarily what was happening in Britain and the U.S. — competed for world intellectual acceptance with the Lenin-Stalin model in the Soviet Union, based on Karl Marx and his Das Kapital, the first volume of which was published in 1867 as a critique of proto-capitalism.

So as you may have discerned from this timeline, much of what passes for modern economics — certainly Keynesianism — is rooted in century-old thinking that formed as a counterpart to even older, Marxian ideas from 150 years ago.

That is, Keynesianism involved government control but through the more benign approach of a so-called “mixed economy.” The private sector must jump through myriad policy hoops created by government and its legions of Very Smart People, the ones with those Ph.D.s in economics. And again, the desired end-state in all of this is to avoid recessions.

I won’t belabor the preceding points; people write long books about Keynesianism, versus, say, Soviet central planning, let alone the far more free market-focused “Austrian” school of economics.

Of course, smart people also argue over the merits of recessions. Because one way or another, recessions happen. Economies undergo periodic and sometimes major contractions that tend to clean out the accumulated muck of malinvestment and poor spending decisions. And of course, people argue over whether or not it’s truly possible to control business cycles.

There’s all of this, and much more to discuss about Keynesianism; and really, at the end of the day how much government control do people really want in life, right?

But for now, let’s return to Harvard and Janet Yellen. Because by 1976, and despite her Stakhanovite focus on instructing Keynes to eager, impressionable students, young Yellen was denied tenure by the cognizant faculty committee. She received her walking papers.

Ms. Yellen packed her bags and went on to another series of jobs over subsequent years, back and forth between government and academia.

In the late 1970s and ’80s, Yellen’s employment ranged from staff work at the Federal Reserve

to an appointment as a professor at Berkeley — not shabby at all. In the 1990s she found a gig with the Clinton administration, and some years later, under President Obama, rose to become vice chair of the Fed, 2010–14, and Fed chairwoman, 2014–18.

Note that those years — the 2010s — with Yellen near or at the top of the Fed were also a time of long-term, historically low interest rates, and in fact negative real rates when inflation is counted.

It’s not inaccurate to say that low interest rates of the 2010s were a backdoor central bank subsidy to the broader bank sector. The macro idea was for the Fed to help recapitalize the banking sector in the wake of the 2008–09 global financial crash.

But at the same time, this low-interest subsidy came out of the collective hide of savers and investors who muddled along with next to no return on their socked-away cash. Some commentators have calculated a $4 trillion cost to all of this, taken from savers and handed to bankers.

And if you dust for fingerprints during that decade-long spree of government subsidy, you will

absolutely find those of Janet Yellen. Her Keynesian upbringing was on display throughout that episode. Yellen’s central bank approach dramatically reshaped the economy in a low interest environment, and a certain class of people made one heck of a lot of money.

With this in mind, it appears that across her career Ms. Yellen’s inner Keynesian instinct has always been at the forefront. She literally talked her book in the 1970s at Harvard, and even today still deeply believes the Keynesian dogma that central bank monetary tinkering can successfully manage a vast economy.

To keep with nautical analogies, Yellen believes that Keynesian economics will steer the proverbial ship through the field of economic icebergs.

Another angle of the Yellen-Keynes approach is that if the economy doesn’t respond as intended, then there just wasn’t enough government oversight and central bank tinkering.

Recently, we saw more of that Yellen Keynesianism on display when she simply and summarily overrode the law and rules that govern federal deposit insurance on bank accounts, in the matter of Silicon Valley Bank (SVB). No doubt you’ve followed the tale.

The Federal Deposit Insurance Corporation (FDIC) will backstop a maximum of $250,000 per account holder at any given bank. But at the ill-fated SVB, about 97% of total holdings exceeded that number, a factor of about 33-to-1. Another way to say it is that the depositor base included a large number of cash-rich, if not well-off people and businesses.

Unilaterally, Yellen and her associates within the Biden Treasury Department rewrote the FDIC rules to “insure” every dollar claimed against every deposit in SVB. Yellen removed the limits, and no depositor lost a dime.

And then Yellen rigged the FDIC fund to tap a new assessment onto other banks out across the country, where the solvent ones — and their customers, like you perhaps — would pick up the slack for the insolvent SVB.

When asked about it, Yellen replied that the idea was to save “systemically important” banks.

Oh, now she tells us. Except that SVB was not previously considered critical, not before a bunch of well-connected people stood to lose some serious money. But hey, with Yellen at the helm, the ship made a quick course change, and the depositors got their money back, no issues.

Even more recently, Yellen testified to the U.S. Senate that she would make those “systemically important” calls when, where and how she determined. Anymore, it’s all up to her and her government staff.

So now, under the ministration of Janet Yellen, the entire banking system has reached a point of profound contradictions. Among those is an FDIC with rules on the books about insurance limits, but the rules don’t apply when Yellen thinks differently. Another way to say it is that we now live in an era of intellectual chaos within the field of economics writ large, and banking more specifically.

“Buy rumors, sell news,” goes the old saying. And the news is that America’s economic system has just hit one of the biggest icebergs in the sea, with Janet Yellen at the helm. Sad to say, her Keynesianism never faded away before we reached this awful point.

Oh, and if you want a more direct takeaway, buy gold.