Dean Baker Assesses Janet Yellen And The Federal Reserve [Video]

We recently interviewed Dean Baker, economist and co-director of the Center for Economic and Policy Research, on the Federal Reserve’s response to recent economic developments. A clip of the interview can be found above.

Highlights of the conversation included Baker’s reflections on Fed Chair Janet Yellen’s recent remarks about potential bubbles forming in tech stocks. He has since written a piece entitled “Did Yellen slay the ‘tech bubble’ dragon?” in which he offers related observations. Baker pointed out that Yellen’s remarks stood in strict contrast to remarks made by Alan Greenspan more than a decade ago, when Greenspan argued that the best way for the Fed to handle bubbles is by ignoring them.

Baker told us that Yellen was adopting a more activist, interventionist stance as Fed chair, something he and other progressive economists had been advocating for some time. He also speculated that Yellen might have been using these remarks, which were focused on a relatively small sector within the tech sector, as a test case to say how the market would react to this kind of remark from the head of the Fed.

Baker also noted that Yellen had said that assets overall aren’t dramatically overvalued. We asked whether, given ongoing wage stagnation and unemployment, that meant that our economy was essentially splitting in two – with Wall Street booming and Main Street struggling. He responded by noting that “the stock market isn’t an economic measure; it’s a measure of corporate profitability.”

Added Baker: “That’s not telling you Obama did a good job. It’s telling you Obama did a good job for people who own stock.”

But, we asked, wasn’t there a stronger relationship between the two in prior decades? Baker responded with the concept of a “virtuous circle” that enfolds profitability, productivity, and wages in a cycle of mutually reinforced prosperity. The circle is currently broken.

We went on to discuss what might happen if that “virtuous circle” were restored – to wages, employment and corporate profitability.

We closed by discussing ways of moving the Fed toward a more productive engagement with the ongoing economic needs of the majority. Here, as elsewhere, Baker’s thoughts were interesting and important.