Tags: Domitrovic | Yellen | ultra-loose | monetary

Forbes' Domitrovic: Yellen's Ultra-Loose Monetary Bent Has No Winning Record

By John Morgan   |   Thursday, 31 Oct 2013 08:13 AM

Janet Yellen, the Federal Reserve chair-apparent, is the embodiment of something that has been a repeated flop in history — ultra-loose monetary policy, according to Forbes columnist Brian Domitrovic.

Domitrovic, a Harvard-trained economist and professor at Sam Houston State University, said Yellen's academic paper trail and her years as a public servant demonstrate she is a "major monetary dove."

"This means that she wants the Federal Reserve to work strenuously, as it has under outgoing Chair Ben Bernanke, to buy up bonds and such out there in the private markets so as to increase theoretically available credit beyond any conventional constraint," he wrote.

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But the problem is that there's no evidence that running the monetary printing presses overtime has solved a recession or prompted an economic recovery in the last 100 years, Domitrovic asserted.

According to his research, the Fed was mostly prevented from using ultra-loose money stimulus from 1934, when President Roosevelt reestablished the gold standard, until 1971 when the gold standard was revoked under President Nixon.

Tying the dollar to the gold standard apparently helps to put a lid on loose money policies, Domitrovic concludes.

During World War II, when the Fed "printed mightily under the cover of price controls and a broken world gold market," he wrote, a shortage of regular goods cropped up in the private economy — not exactly a sign of economic recovery.

The next example came after the 1960 recession, when the Fed tried to manipulate the private price of gold and stocks promptly fell 30 percent. The Fed then tightened its monetary policy again and the go-go 1960s economic recovery took root, he explained.

The repercussions when Nixon ended the gold standard and eased the money supply were even more dire, Domitrovic noted. Stagflation ensued, gold soared 23-fold, consumer prices gained 150 percent and unemployment more than doubled.

Now, through all the stages of quantitative easing during the era of President Obama, there is little economic benefit to show from ultra-loose money, he said.

"It is one thing to contend that super-sized monetary easings are advisable in the teeth of a crisis," Domitrovic wrote in Forbes.

"It is quite another to say that unconventional monetary policy of a loose variety has any record at all, across our well-populated history of recessions, of bringing the economy to recovery. It has never happened."

Sen. Rand Paul, R-Ky., a member of the Senate Banking Committee, said he would place a hold on Yellen's nomination to chair the central bank, pending the outcome of a bill that would force an audit of how the Fed implements monetary policy, Politico reported.

A CNBC survey found almost nearly 60 percent of the respondents believe Yellen will be more dovish than Bernanke is, himself no slouch when it comes to ultra-loose money.

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