Dazed and confused in Toronto and DC

The Toronto Star's oft-befuddled business columnist, David Olive, recently penned this wonderfully confused piece about the challenges facing new Federal Reserve boss, Janet Yellen. Start with these two quotes:

"Yellen’s two predecessors each failed on the issue that arguably matters most, which is to identify and end wildly excessive speculation that puts the global economy at risk. They did not curb the easy money Fed practices that financed the ultimately ruinous speculation that cost eight million Americans their jobs in the Great Recession and destroyed more than 400,000 jobs in Canada."

And just a paragraph or two later:

"U.S. economic conditions have gradually improved, due to the Fed’s unprecedented policy to provide the economic stimulus that gridlocked politicians will not, by means of the Fed’s controversial policy of buying a staggering $75 billion (U.S.) worth of federal debt each month, a practice called “quantitative easing” (QE)."

Pop quiz, David.  That "buying a staggering $75 billion worth of federal debt each month" differs from "the easy money Fed practices that financed the ultimately ruinous speculation" how, exactly?  I'd say it's just more of the same, except in an unprecedentedly extreme form. 

Or consider this: 

"Bernanke also became a convert to Keynesian economics, by introducing and holding to his QE practices, of which economic purists despair no matter the obvious good they have done."

That sentence can only suggest that Olive has never read a word of Keynes, or at least not of the General Theory, which is the book on which so-called Keynesian economics is largely based.

In truth, though, I don't want to be too hard on Olive, fun though that is, because he seems to perceive very well what Janet Yellen's big challenge is.  Back to the article:

"Yellen needs to keep promoting economic growth, but in a way that doesn’t spark renewed instability from the recklessness of financiers who caused the Great Recession." 

Oh indeed, as that great economic savant Omar Little would say.  Olive has just demonstrated that he understands the problem, even if he has little clue about what needs to be done about it.  To date, alas -- and it's obviously very early days as far as Janet Yellen is concerned -- there's not much evidence that the Fed knows how to get from here to there either.  The taper may be underway, but the gyrations in markets over the past couple of weeks could yet become severe enough to spook the Fed into slowing down the process, and once that happens, it's not clear that there's a Plan B in the wings.  And remember, even after the Fed stops buying new securities altogether, there's upwards of $4 trillion on its balance sheet as a result of three rounds of QE, and at some point that will have to be dealt with.

Alan Greenspan got us into this mess with his hubristic and reckless policy moves at a time when the US economy was, for the most part, in no need of easy money.  Ben Bernanke arguably had little choice than to do more of the same once the financial crisis hit, though his pre-crisis pronouncements suggest that he was always longing to do a "helicopter drop" of money into the economy, just to observe the results.  Now it's up to Janet Yellen to find a way out.  Good luck, Ms Yellen -- just be sure not to take any advice from David Olive.