Janet Yellen’s Testimony and What it Means for Investors

The Stock Market crash threw the United States and the world into a state of chaos. Within a few months 7 TRILLION of American’s wealth vanished into a black hole. 16.4 TRILLION was lopped off real estate values. To plug the dike Ben Bernanke, Chairman of the US Federal Reserve, embarked on a never before tried program of Quantitative Easing whereby the Fed bought bonds and mortgage backed securities from banks and mortgage companies. The big banks received this money as credits on their balance sheets.
To date, the Fed has purchased about 4 TRILLION worth of these securities. Where did all these trillions go? The goal was to lend out the money to small and medium sized businesses to promote growth. However the greed of the bankers got in the way. They used most of the money to speculate in the Stock Market. The rest is sitting idle as reserves. Banks make money lending long term. With mortgage rates barely at 3%, they saw that they could make more money in the markets. In this frenzy, J.P. Morgan Chase lost $5.8 BILLION on just one trade. Where to you think that money came from?

Small and medium size businesses did not benefit. This has placed the economy in a straight jacket, with the Stock Market soaring to new heights and Main Street just hobbling along near the flat line. Some progress has been made, however, with unemployment falling to 7.3% from 10% and housing prices rebounding a bit.

In January 2014, there will be a changing of the guard. Ben Bernanke will end his term and Janet Yellen has been nominated to replace him. She testified before Congress for her confirmation hearing. Here are some excerpts from her speech:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve’s goal of 2 percent and is expected to continue to do so for some time.
For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”
Yellen clearly states that she will continue the present accommodative policies to stimulate a “more robust recovery.” She sees a strong recovery as a means of reducing the Fed’s asset purchases.
If she will tell the bankers point blank: “Look, I want you to start lending out the reserves you are sitting on and taper your speculation in the markets” then we will see this economy really take off. An economy starts to grow when the velocity of money increases. Bank lending has a multiplier effect. When a bank lends say $500,000 to a business it credits their checkbook, thus creating an added $500,000 to the economy. Now that business can expand, hire more workers who, in turn, will have more money to spend and unemployment numbers come down.

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