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.

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