WARNING: Obama, Yellen Ignoring the Rules

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I’ll admit it right from the start. I found a way to use “Obama” in the headline to grab your attention. But, just because I used a cheap, journalistic trick doesn’t mean that you shouldn’t keep reading. There is something very dangerous going on in the White House and at the Federal Reserve (not to mention the State Department, the NSA, the EPA and the IRS), and it’s become a cause for concern for economists, finance ministers, and investors around the globe.

Washington keeps deciding to ignore the rules. Actually, they have gone a giant step beyond ignoring the rules – they are changing the rules during the game. The next step – and don’t be surprised if you see it happen soon – will be to officially remove the rules altogether. We are on the brink of watching something like a soccer game without markings on the field, no yellow cards, no red cards and no goals – a game of just kicking the ball around and seeing where it goes. Such a scenario would be dangerous for some players, as others could get away with doing whatever they want to do.

The very serious problem with the Obama administration, and the Fed in particular, is that this is not a game. It is world politics and world economics. On this field, the number of potential injuries is far greater and the damages done much longer-lasting. Leading with his cavalier, Starbucks-salute mentality, the president has set a precedent of ignoring rules (like the Constitution) and making arbitrary decisions, many of which have caused a massive loss of support internally and skepticism externally regarding the reliability of the U.S. in nearly any matter. Lack of predictability breeds a lack of confidence and it leads to increased instability.

Our confidence in others is predicated on their devotion to a moral or legal code. Obama has spent six years demonstrating that he is going to do only what he, in his infinite wisdom, decides to do. The Fed has been demonstrating the same attitude.

Just in case you are wondering when I am going to make my point, it’s now.

One of the long-standing guidelines for the Federal Reserve to raise interest rates has been the U.S. unemployment rate. Up until the first quarter of this year the mark was 6.5%. Once the rate actually began to drop close to 6.5%, the Fed lowered the guideline to 6.0%. In other words, Yellen moved the line so that the unemployment rate could go below 6.5% and the Fed would not, therefore, have to increase interest rates because the unemployment rate had not dropped below the line. I call that corrupt politics corrupting economics. In a word, it’s dangerous.

So, now we have a new problem. The reported rate of U.S. unemployment (a rose-tinted perspective of the true jobless picture) dropped below 6.0% to 5.9% in September. Whilst that provides some political fodder for the Obama people to feed the blithely ignorant voters in the upcoming November mid-term election, the Fed must now raise interest rates. But the mass of voters would find that distasteful, so that leaves Janet Yellen a problem and with only two near-term, viable options to address it:

  1. Arbitrarily lower the guideline again.
  2. Arbitrarily ignore the guideline completely.

Based on her past comments, I’m betting she goes with option #2. She is going to lead exactly the way that the president leads – by relying on her own superior intellect.

This kind of leadership is not leadership at all. Winston Churchill defined it as ears-to-the-ground leadership. he also said, “The nation will find it very hard to look up to the leaders who are keeping their ears to the ground.” John Maxwell, noted authority on leadership principles, has said that, “A leader is one who knows the way, goes the way, and shows the way.

A real leader understands why the rules are in place and makes the hard choices to follow them, come what may. Obama and Yellen refuse to respect the wisdom of those who created the rules and guidelines, holding themselves up as smarter than the rest. That is the kind of thinking that leads to chaos, and chaos is not where the rest of us, all over the world, want to go.

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