Janet Yellen's Speech at Jackson Hole: Do We Need a Stable Financial System?

Janet Yellen, Fed Reserve photo

Federal Reserve Chair Janet L. Yellen spoke yesterday at Jackson Hole to talk about "Financial Stability a Decade after the Onset of the Crisis." The financial world expected her to talk about future Fed policy; instead, she talked about general government financial policies. Her theme, which should not be controversial but is, was that a secure financial system requires regulatory safeguards. Her speech was highly controversial, and yet she delivered it in a very scholarly, serious tone.

To understand her speech, we need to understand its controversial political and social context. This has been well understood since the days of Adam Smith, but the finance industry has a lot of political and media power, and many of its representatives do not want to be regulated. Conservative and libertarian politicians had long blamed the financial crisis on government regulation, which never made any sense, but which appealed to them ideologically. Their argument, which was factually false, was that the government required lenders to finance home-building by minority families who could not afford it. Much of what we hear in public discourse on this topic has been vitriolic, angry, and totally uninformed. I suppose I should write a future post about the influential rantings of popular Libertarian politician Ron Paul, who seems to have quite a following of people who would, apparently, love to lose bunches of their money by investing in risky commodities.

Anyway, let's take a quick look at Yellen's speech. She reminded her audience that it is been 10 years since the global financial crisis, "that resulted in the most severe financial panic and largest contraction in economic activity in the United States since the Great Depression." She pointed out that: "A resilient financial system is critical to a dynamic global economy." She also reminded the audience that borrowing and debt are essential to our economic system, as they enable people to purchase things like cars, houses, and businesses that they need to have successful lives.

Yellen reviewed the dramatic steps that the government took to resolve the financial crisis, which she admitted were helpful but insufficient. She then explained the various new government policies that have greatly strengthen the financial system in which prevented a second crisis. She also reminded the audience that all of the lessons that the finance industry learned after the financial crisis were lessons that had been learned before, but which they then forgot. She cited considerable evidence: "The evidence shows that reforms since the crisis have made the financial system substantially safer." The prepared text of her remarks included 27 footnotes citing technical and statistical sources to support her opinion. Yet, do policymakers care? Policymakers tend to respond to political donors and to the public opinion, neither of which is reliable with financial decisions. Political donors have their own best interests at heart, not the public's, and public opinion is, as our Founding Fathers worried many centuries ago, easily swayed by polemics.

Do we need more sober, scholarly, serious, well-informed speakers like Janet Yellen? The answer, obviously, is yes. But with respect to economic opinion, I greatly fear that people are more swayed by cable news commentators, Wall Street Journal editorials (what a shame! The Wall Street Journal used to offer accurate conservative opinions not too many years ago), and the angry ravings of talk radio hosts. From what I have seen in public commentary, a surprising number of people are more upset about Yellen's Jewish heritage than about the financial crisis from which he helped rescue us; a surprising number of right-wing commentators disparage the very idea of fiat money. The main problem is that economics is a technical subject, and yet, although everyone handles money, many people do not make the effort to understand it. Maybe they would be happy trading Krugerrands with Ron Paul.

With President Trump and the Republicans in Congress making noise about deregulating the financial industry further, many pundits seem to think that Yellen was laying down the gauntlet. She was more interested in telling the truth to powerful people than she was in getting another term as Fed chair. Good for her! It's about time that public leaders began to show some courage, giving their real opinion even when the truth is unpopular. Wall Street banker Gary Cohn was slated to replace Yellen, until he made the political mistake of criticizing racist demonstrators, which, apparently, put him at odds with President Donald Trump. So, now, who knows?

Aristotle said that persuasion was due to logical, emotional, and credibility appeals. He felt that credibility was the most powerful. Yellen, instead, relied on logical appeals, the kind of appeals that Aristotle said were most important and reasonable. But are enough people listening?