The Senate Banking Committee’s hearing for Janet Yellen’s Fed Chair nomination taught us several things:
1. The Senators should be applauded for dealing with Ms. Yellen in a dignified manner and allowing substance to prevail over theatrics. The questions were about issues of importance, and as I wrote on reading the Wednesday afternoon release of her prepared testimony, heavily oriented on the issue of the Fed’s regulatory responsibility. Yellen made it clear in her response on the issue of the FED‘s policy on deflating ASSET BUBBLES that monetary policy was too blunt an instrument.
If monetary policy is too blunt, the use of regulatory tolls can be a much more precise instrument. The three main Senate powers for more stringent financial regulation battered the nominee with questions related to MACROPRUDENTIAL TOOLS AT THE FED’S disposal. Senators Brown (OH), Vitter (LA) and Warren (MA) were on the offensive in getting Vice Chairwoman Yellen to acknowledge that the Too Big To Fail (TBTF) banks were the recipients of subsidies through the way the present system of deposit insurance rewards the large banks. Ms. Yellen noted that one of the Fed’s objectives should be to level the playing field for credit unions and community banks. Why should nonsystemic, dangerous banks pay more for deposit insurance then the TBTF banks? Senator Vitter pushed Ms. Yellen about the need to increase leverage ratios for the ultra-large banks. Senator Warren expressed her desire that greater regulation should be a top priority of the FED/FOMC, going so far as to get Yellen to admit that better Fed regulation could have diminished the banking crisis.
2. Jim Sinclair needs to invite Janet Yellen to one of his town hall meetings for the Fed chairman to be needs a tutorial on the importance of gold as a measure of central bank policies. When Yellen was asked about her view on GOLD, she responded that she is not sure of its role because she hasn’t seen a “GOOD MODEL” for determining what it means as an indicator. Bernanke and Yellen have each weighed in on the issue of GOLD and neither has voiced the answer that represents the wisdom of Chairman Paul Volcker: GOLD IS MY ENEMY. If every central banker were to advance similar wisdom the global financial markets would be on a much sounder basis. The Chinese seem to be advancing a similar opinion as the balance sheet of its central bank continues to increase its gold holdings. Yes, gold has had a bad year as an investment but its role of a store of value during the last 13 years is unquestioned. An asset class that reflects the psychology of global investors needs to be understood by the world’s central bankers. Failure to understand gold because of flaws in your models calls into question the reliance on theoretical models versus practical actions. Or, as the street slang goes, “money talks, models walk.”