March 24, 2014
This week the diminutive Janet Yellen, by far and away the most powerful woman in the world, sent the macho and male-dominated financial markets into a hissy fit when she mused aloud that she may raise US interest rates early next year.
The new head of the Federal Reserve is different. In putting a potential date on economic policy changes she patently wasn’t playing the game.
The game between the Federal Reserve and the world’s financial markets has always been one that would be fairly familiar to someone from the North. Up the North, when anyone asks, “What part of Belfast are you from?” or “What school did you go to?” or whether “Yer man’s name is Mervyn or Seamus”, all is known, but never directly asked and never pinpointed exactly.
Sometimes the structure of an initial conversation in the North amounts to a weird ethnic GPS system – everyone plugs in the cultural coordinates and in no time, you’re home and dry without ever asking the question directly.
In his brilliant poem ‘Whatever you say, say nothing’, the late Seamus Heaney, summed up this form of communication and inquisition brilliantly. (It’s well worth watching his 1999 reading of the poem on Channel 4 News). As someone who is married to a Northerner, I can vouch for this strange form of relentless sectarian data mining.
The ethnic GPS approach to conversation is a form of communication whereby we all know more or less what is being said, and who is saying what about whom – but we can never be direct about it.
In central banking there is a similar game that goes on between the financial markets and the central bank. (In fact, come to think about it, Seamus Heaney on the strength of that poem would have made a brilliant central banker!)
For years the central banker skirted around the issue, offering signs and smoke-signals, but never quite nailing his actual intentions. The financial markets plugged these hints, nods and winks into their economic GPS to come up with a route map spelling out where the stock-market or gold or bonds were likely to go.
Indeed, my own time in central banking was one large exercise in knowing stuff, but never saying it clearly. In this Delphic world, my former boss, the then governor of the Irish Central Bank once told me, “You wouldn’t want to explain that too much . . . for fear of frightening the horses.”
The expression ‘frightening the horses’ comes from the trial of that other giant of Irish literature, Oscar Wilde, and also involves another Irish Nobel prizewinner, George Bernard Shaw. During Wilde’s trial in 1895 when Victorian Britain was up in arms against gay men, a society actress, Mrs Pat Campbell, was asked by some Victorian prudes about what it is ‘those gay men do.’ She responded calmly, “I don’t care what affectionate people do, so long as they didn’t do it in the street and frighten the horses.”
The tolerant Campbell went on to be the first actress to play Eliza Doolittle, in George Bernard Shaw’s Pygmalion.
Frightening the horses implies offering too much information either in word or deed.
This week, Janet Yellen, in what I regard as a refreshingly honest Federal Reserve testimony, frightened the horses, and revealed too much about the Fed’s thought and deed.
Maybe Yellen could have entered the Heaneyesque world of nods and winks at her press conference, but she didn’t bother. She spoke openly and said she thought she would raise US interest rates in March next year. The horses scattered all over the pen and the markets sold bonds and stocks aggressively.
There was much talk about whether Yellen meant to mention March, or whether it was a slip of the tongue. But I think financial markets who have spent the past two decades being weaned on the mother’s milk of cheap interest rates, QE and other schemes – which link the fortunes of Wall Street to the Federal Reserve – do not yet understand that they are dealing with a different type of central banker in Yellen. She meant what she says.
In the same way as Seamus Heaney comes from a tradition, so do all of us. That goes for Janet Yellen too. Sometimes, these echoes of those who went before us are very strong, and can be deep inside us without us even knowing – as if someone is whispering to us.
Yellen comes from a long and noble tradition of left-leaning, originally eastern European, Jewish intellectuals who are deeply concerned, as their parents and grandparents were, with social justice and inequality. In short, she is more interested in civil rights issues than rights issues – and Wall Street better get used to that.
In America there is a long tradition of Jewish thinkers being on the progressive Left, at the forefront of the civil rights movement, defending unpopular causes and fighting for gender equality – from Bob Dylan, to Betty Friedan and Alan Dershowitz.
Even now, 80 per cent of American Jewish people vote for the Democratic party. Yellen and her husband, the Nobel prize winner George Akerlof, are from this central European leftist tradition, as too is Paul Krugman and Jeffrey Sachs and many, many others.
For these economists the point of a successful economy is not to keep Wall Street rich, but to create a society that is more equal, where people have a chance and where wages are higher and unemployment as low as possible.
In many ways, Janet Yellen is to the bull market of 2014 what the former Federal reserve chairman, the patrician Paul Volcker was to the 1981 bear market.
It is not that she doesn’t care about Wall Street and financial markets, but their reactions are not her primary concern and therefore, rather than play the game of Delphic nudges and winks, she calls it straight. Her message to the wolves of Wall Street, is something like: ‘Here is what I think, you guys go and figure out what that means to you.’
I sense that she is against QE because it makes rich people rich and exacerbates inequality. She will tell Wall Street what she is going to do, and as far as she is concerned whether the horses decide to be frightened or stay calm in response to her actions is really up to them.
Now this is a change and may go someway to undermining the Wall Street/Washington corridor which has dominated American policy making since Bill Clinton and his chief economic guru Bob Rubin dismantled Roosevelt’s 1930s banking regulation in the 1990s.
Come to think of it, Janet Yellen may well turn out to be more Bob Dylan than Bob Rubin, and that would constitute a proper transformation at the top in America.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com