After Bernanke -

After Bernanke

Why Janet Yellen should lead the Federal Reserve


(Eugene Hoshiko/AP Photo)

“The White House doesn’t take kindly to being told they have a gender problem on their economic team,” the Washington Post‘s Ezra Klein noted a few weeks ago writing about the race to succeed Ben Bernanke as the new chair of the Federal Reserve. One of the two top contenders for the job is current Fed vice-chair Janet Yellen, whom a colleague famously described as “a small lady with a large IQ.” The other is Larry Summers, a guy who’s had his share of top jobs, from treasury secretary under President Bill Clinton to National Economic Adviser to the first-term Obama administration. The White House doesn’t want to be told that they should hire Yellen because she’s a woman.

I sympathize with the White House. I don’t like when people are told to hire women — not because the world doesn’t need more of them heading corporate boardrooms and government cabinets — but because such pressure, in my experience, has a good chance of getting the wrong women hired. The Obama administration should simply pick the best person for the job.

That, though, is still Janet Yellen.

The new Fed chair will likely take the reins from Bernanke in January of next year, right as the central bank dials back its unprecedented $85-billion a month bond-buying program. Whoever succeeds him will be navigating uncharted territory at a time when the U.S. recovery will be still on uncertain footing, and the global economy likely grappling with a widespread slowdown among emerging economies.

There are a number of reasons why Yellen seems better suited for this delicate job than Summers, including the fact that she is a Fed veteran and has helped design many of the unconventional policies the bank has been experimenting with since the crisis (Summers, by contrast, would be a newbie). But two in particular stand out.

First, Yellen tends to get it right. She spotted trouble in the housing market and financial industry early on, when almost everyone else was looking in the opposite direction. And when the crisis hit, she prescribed aggressive interest rate cutting, advice Bernanke initially resisted but eventually heeded. A Wall Street Journal analysis of some 700 forecasts on GDP growth, jobs and inflation made by the Fed’s top policymakers between 2009 and 2012 shows Yellen has been the most accurate prognosticator.

Summers, by contrast, emerged from the financial crisis with a bit of egg on his face. In the 1990s he fought efforts to regulate derivatives — that once-opaque corner of the financial market where mortgage-backed securities and credit default swaps, at the centre of the financial meltdown of 2008, were flourishing.

This has made Summers anathema to the left flank of the Democratic party, while his supporters argue that he’s clearly learned the lesson. The latter are probably right, but that’s irrelevant: I have no doubt a pristine intellect such as Summers wouldn’t make the same mistake twice; the question is whether he might grossly misread another major economic or financial trend.

The second reason why Yellen deserves the job is that she never gets comfortable. Even among her Fed peers, she stands out as a nerd: “As Fed officials deliberated last April about how long to keep interest rates low, Ms. Yellen delivered a 20-page speech, with 18 footnotes and 15 charts, making the argument that rates should stay low until 2015 or later,” writes WSJ Fed correspondent Jon Hilsenrath. She’s a big shot — the number two at the world’s most powerful central bank, a former professor of economics at Berkeley, and a former top White House economic advisor — but she still does her homework.

And when her analysis leads her to conclusions that are at odds with the consensus in the room, she speaks up. She reportedly challenged former Fed Chair Alan Greenspan about his views on interest rates — and this at a time when Greenspan was being held as the number one of a “committee to save the world“— as the famous Time magazine cover read.

Summers, along with then-Treasury Secretary Robert Rubin, was the third guy on that imaginary committee — and he seems more eager to please his peers in positions of power. In the 1990s, he stood with Greenspan on financial regulation. A decade later, he still reportedly sided with the prevailing consensus in the power room. As the New Republic‘s Noam Scheiber, who’s written a book on the Obama administration, recalls:

In late 2008 … Summers recognized the need for a much larger stimulus than most in Washington were calling for, but nonetheless pushed for a far smaller package than necessary because he didn’t want to be laughed out of the room by Obama’s political advisers.

Did Summers adopt Greenspan and Rubin’s views on derivatives despite his own better judgement? We might never know — and, frankly, it doesn’t matter.

I still believe that Summers would make a fine Fed chair. There is no doubt that he is enormously smart. And he did help save the world in the 1990s, along with Greenspan and Rubin, when they steered the global economy through the Asian financial crisis. Former Treasury Secretary Timothy Geithner, who later steered the U.S. economy through what is now known as the financial crisis, is said to have borrowed from their playbook.

But a competition for a job like Federal Reserve chairman always has plenty of top-notch candidates who would be perfectly capable of doing the job. The question, though, is who is the best — and in this case, it’s clearly Yellen over Summers.

That Yellen is a woman is a very lucky coincidence. There’s no crack in the class ceiling like the one opened by a woman who rose through it because she was the best.


After Bernanke

  1. Women can’t do math. Everybody knows that.

    • I don’t care whether you’re being sarcastic or sincere, this is an awful thing to say.

      • Yes, it is.

        And it’s a cultural belief that’s been said to me and every other woman all our lives.

        • Look at Mississauga’s Hazel McCallion who’s in her 90’s and compare her to every other mayor it’s had. Now if we could clone her and get her to run everything there wouldn’t be any deficits or fiscal issues anywhere.

    • You are a typical misogynist. I only agree on this, gender should not really be a part of it, other than women have an advantage, they are not as likely to be puppets in the old boys network.

      As an investor, I will not even consider gender in my analysis of the gets the fed chair. And no need to do math, even though I know some women that are at lest as good at it as me, we have computers today.

      Me, I will look at all history, all previous business activity, who they hang out with, their person theories of the past, are they Keynes/Bernanle Doctrine of pyramid debt for governemtn bloat? Or are they against it? What is their historic position of debt.

      I will even ignore the BS and propaganda they spew today as feel good and propaganda isn’t going to fix USA.

      I will take an honest woman over a crooked back room old boys club type any time.

      • You just copy the stuff out of the handbook without reading it, doncha…..

    • Thanks for the link.

    • Carney knew when to leave. In UK he has better access to non-G8 countries so when the G8 monetary system keeps losing value in the world he isn’t stuck on a sinking ship. This ponzi pyramid debt scheme on the USD currency isn’t going to last. Like 1933 follow up to 1929…

      Reality is Chinese Yuan currency float is already larger than USA and much more stable and doing better at holding value. It will not be long before USA is the second largest economy, failing because of debt and fraud.

    • On Obama, he likes the US Fed, they will have allowed Obama at the end of his term to debt-spend more than all presidents before him combined. Assuring USA is in economic purgatory for quite some time.

  2. The U.S. should can the Fed and run its own business through its Treasury Dept. So should every other country in the world whose banking is being run through 3rd parties.

    • Are you aware the ‘Fed’ is the same thing as our Bank of Canada? It is not a 3rd party.

        • Yup, it does.

          ‘The Bank of Canada (French: Banque du Canada) is Canada’s central bank.[1] The bank was founded by the Bank of Canada Act[2] on July 3, 1934, as a privately owned corporation. In 1938, the bank became a Crown corporation, belonging to the monarch in right of Canada.[3] The Minister of Finance holds the entire share capital issued by the bank. “Ultimately, the Bank is owned by the Minister of Finance on behalf of Her Majesty in right of Canada.’

          • The point is that the Government of Canada HAS NO CONTROL over it, just like the U.S. gov’t has no control over the Fed — and it’s been printing money like it’s going out of style, which will lead to the U.S. dollar going the way of the peso.

          • Moreoever from the link I posted, “Canadian banks and Credit Unions are now controlled by both the Bank of Canada and the Bank of International Settlements (BIS) as well. Located in Switzerland, the BIS holds deposits (i.e. they control) of about 120 central banks and other international financial institutions throughout the world, including the Bank of Canada. In other words, the BIS financially controls the globe. It has direct influence over the direction of the economy of every country and, indeed, the world through its banking and monetary policies.”
            So, Emily, the point I’m making is that governments should be in control of their own $$ and monetary policies for the benefit of their citizens — the people who elect them. Otherwise there is no true responsibility of governments to the electorate and we are living in a bureaucratic autocracy.
            You can go back to sleep now.

          • Haha. You should really do your homework.

          • Haha…I work in economics.

          • The govt has control over it…both govts do. They can order more or less money to be printed.

            Printing money has not led to inflation, much less hyper-inflation….our banks mandate for years now has been to keep inflation down.

            As for the Peso….8 countries use it.

            1.00 USD = 12.8792 MXN

  3. A woman could easily do better than Bernanke if given half a chance. Trouble is the positions are typically old boys club positions.

    I don’t really care if it is a woman or not, but I do care about the history and education of the person that will replace Bernanke. If they came from Harvard, it is a big negative. I say this as their liberal economics is a disaster. Bernanke poluy drove is into the depression and kept us there. It also leaves a $9 trillion wall of inflation moneys. See, debt is never free or 0%, its just a mater of who and how it is paid for.

    2006 – Bernanke starts money print for debt to suppress fair interest rates below inflation+taxes. USD begins to depreciate and lose value to non-G8 countries.

    2007 – Legitimate lenders stop lending at rates below inflation+taxes for a credit crisis, Bernanke prints money for bailouts….layoffs begin

    2008 – More layoffs, market bottoms…negative value economy.
    2009 – Minor recovery but without good jobs.
    2010 – USD continues to lose value, people

    If you are objective, the fact is Bernanke should have raised interest rates and not lowered them. But given government spending is out of control and no legitimate lenders really buys US Treasuries for a negative value after inflation+taxes return, well, Burnanke just printed more money for dysfunctional debt and fraud.

    So unless the new candidate is going to reverse this, be they male of female. As you can pass the costs to the American economy with less value depreciating money in a negative value economy, or the debtors need to start paying for the money they borrow. It is really a huge fraud of pyramid debt going on, only legal as the US Fed and US Governemtn are doing it.

    Who gets in, their history, their education and what they have done to get there will determine my future investment in USA and Canada. I already left Europe, but does USA want investors, better start paying investors with inflation+taxes+currency devaluation.