The Fed

The Chairman of the Board of Governors of the Federal Reserve System, Ben Bernanke, finishes his second term on January 31, 2014.  It’s generally assumed that President Obama will nominate a new Fed Chair to replace him.  Bernanke could stay if he wanted to and if the President wanted to renominate him–after all, Alan Greenspan held the job for eighteen years.  And (in my opinion), Bernanke’s done a good job.  But that opinion is not universally shared, and Bernanke’s an academic, someone who is said to have taken the job out of a patriotic urge to serve; it probably wasn’t ever his dream job (at least, based on what I’ve read about him).

Here’s how it works: The Federal Reserve is run by a seven member Board of Governors.  They are nominated by the President, confirmed by the Senate, and serve for fourteen years, and cannot be replaced because of their views.  The Chair is selected from the Board of Governors; there’s also a Vice Chair, and their nominations are also subject to Senate confirmation.

Although the President has yet to nominate a Fed chair, he has mentioned three possibilities.  One is Janet Yellen, the current Vice Chair, and easily the most qualified Governor to serve.  For one thing, her track record of economic forecasting is far and away the best of anyone who might plausibly serve as Chair.  I can’t link to the Wall Street Journal article that researched this (their content is only available to WSJ subscribers), but the fact is, since 2005, she’s been basically right all the way down the line. The WSJ looked at 700 financial predictions made by Yellen and thirteen other central bankers.  She got the best score–much better, frankly, than Ben Bernanke. And look at what’s happened to our economy since 2005.  She predicted the world-wide financial crisis, what would cause it and how bad it would get.  She was something of a lone voice in the wilderness back then. She’s outstandingly qualified, easily the best candidate for the job.

She’s also unlikely to get it.  President Obama has suggested that he’s leaning towards Larry Summers instead.


Larry Summers was President Clinton’s Secretary of the Treasury.  He was President Obama’s chief economic advisor (officially director of the White House Economic Council).  He was also President of Harvard University, and a controversial one. He’s famous for a speech suggesting that women don’t so much face workplace discrimination–that they’re held back by a ‘different availability of aptitude.’  For what it’s worth, he’s also the nephew of Nobel laureate Paul Samuelson.  (His father changed the family name from Samuelson to Summers–another good reason to dislike him, I’d say!) He’s opposed to the Kyoto Protocol, an international effort to cut greenhouse gases.  He loved Gramm-Leach-Bliley (which I’m on record as calling the worst piece of legislation ever passed by the US Congress).  He worked with Robert Rubin to torpedo efforts to regulate derivatives markets.  In fact, he’s seen as kind of a Robert Rubin guy.  On the other hand, he’s also a respected academic economist, and hardly the doofus I’m making him out to be.  I think Paul Krugman is right in calling him, not a conservative, but a guy a little left of center.  A moderate, with, uh, odd views about gender, apparently. (Views for which he’s apologized).

But his record of prognostication is terrible.  And the Fed is about predicting the future.  It’s about influencing markets through minor adjustments in the prime interest rate.  Bernancke’s been a terrific chair because he’s kept the prime rate very low–almost absurdly low, which is exactly what should be done in a demand-side recession. It’s almost comical to think that anyone would think Larry Summers is a better choice than Janet Yellen. But of course, there are always wheels within wheels.

As the New York Sun put it, the fight over the new Fed chair is a battle between “the Rubin boys and the California girls.”  That is to say, acolytes and followers of Robert Rubin (and Wall Street bankers, new economy cheerleaders, deficit hawks), and three female economics professors from Berkeley, who are friends and who share similarly dovish views.  Pro-Keynes, in other words, pro-stimulus, unafraid of deficits and a minor increase in inflation.  Yellen is friends with Christina Romer, who chaired President Obama’s first Council of Economic Advisors, and with Laura D’Andrea Tyson, who had the same job under Clinton.  And although it seems incredible to imagine that this could be the case in 2013, the Wall Street Journal editorial page (which is way more knee-jerk conservative than the rest of the WSJ) played the gender card.  The logic is pretzel-twisted, but it goes like this–those nasty gender conscious Democrats want a woman in the job solely because she’s female, but let’s face it, her credentials pale next to Larry Summers, so this is reverse discrimination, sort of.  Wow.

Ah, the entertainingly schizophrenic Wall Street Journal! One article saying Yellen should get the job because she’s been right all the time, when Summers has been, you know, wrong.  And an op-ed piece saying ‘liberals only want her because she’s got lady parts, which is bad because obviously someone with lady parts couldn’t be qualified for the job.’  Same old Journal.  One imagines the financial reporters and op-ed writers spending their days lobbing water balloons at each others’ desks.

Paul Krugman has been weighing in on this with his usual insight.  Also here, where he makes a point well worth making–all those guys back in 2005 who were touting new economic models and all these nifty new financial instruments and wow look at real estate derivatives, isn’t this great!, now they all look like dinosaurs.  In fact, since Obama took office, the standard Republican line has been that the President’s ‘reckless spending’ was ‘bankrupting future generations,’ and that what we needed was entitlement reform.  Which means, in essence, the way out of the mess the Goldman Sachses of the world created is to screw old people.  This narrative was always nonsense, and the main person in the Obama White House fighting against it was Christina Romer. Friends with Janet Yellen.

The most discouraging thing about the Obama Presidency, the most disappointing, was the realization that he wasn’t really a liberal after all, but a pro-business moderate. The answer to the financial crisis was not austerity, it was not budget reduction, it was stimulus.  And Obama got a stimulus bill passed, but it was much too small–probably less than half what it ought to have been, with nowhere near enough money for states.  (The leading driver in unemployment has been job losses at the state level, in the public sector).  Obama did pass Obamacare, but it was never more than a barely adequate compromise measure–the President wouldn’t even fight for a public option.  And the whole NSA surveillance scandal, and the use of unmanned predator drones are instances where he’s just been wrong, unequivocally wrong.

Now, he’s seriously considering Larry Summers over Janet Yellen for the Fed. And who knows, maybe Summers has learned something, maybe he’s been humbled by the events of 2007-9.  Alan Greenspan did, and Summers reminds me a bit of Greenspan.  Brilliant.  Articulate defender of capitalism.  I just remember Greenspan standing before the House committee admitting he was wrong, describing himself as being in a state of ‘shocked disbelief.’

It would be very nice if that didn’t happen again.  I trust Janet Yellen to manage the Fed sensibly.  I think it’s possible that Larry Summers might turn out to be better at the job than his track record would suggest.  Given a choice between someone we know will be good and someone we think might be okay, it doesn’t strike me as a tough call.  But apparently it is.



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