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Analysis
Janet Yellen: Best man for the Fed

Janet Yellen: Best man for the Fed

The candidate who is too smart to dominate

by Meghnad Desai

Mon 5 Aug 2013

President Barack Obama has been unusually articulate about his difficult task of choosing the next Fed chairman. The burden of his reported comments was that while the Fed chief had to watch both inflation and unemployment, his own preference was for a chairman who would lean more on the 'Keynesian' side, while keeping a beady eye on inflation.

Obama also discussed some names. While the story as reported began with Larry Summers, he also mentioned Janet Yellen and Donald Kohn. The issue has been complicated by the letter from 20 Democrat senators opposing Summers, while a group of women Congress members have urged the appointment of Yellen.

Given the high level of competence of both Yellen and Summers, I think it is a mistake to make this a gender issue. If Yellen is to get the job (as I think she should), it should not be because the time has come to hand it to a woman. Once you do that, then standard misogynistic attacks will be made every time the markets are unhappy with the Fed. Mood swings will be blamed, as will emotional outbursts etc.

The real point is that Larry Summers has a very high intellectual reputation but his performance in office has been less than shining. His period as president of Harvard, which ended in 2006, was not a glittering success. In his academic work, he was at first on the New Keynesian side but went over to the Chicago view increasingly over time.

The removal of Glass-Steagall, a major if not the prime cause for the 2008 crash and bail-out of banks, is his handywork. It was his belief in the super-rationality of markets, the going fashion in New Classical Economics at that time, which made him drive through the banking legislation. The markets love Larry. And why wouldn't they, if someone had made it possible for a few thousand people to have a bonanza at taxpayers' expense?

There is also the issue of arrogance which has been cited in the press. I have known Larry Summers slightly since he was a kid, as his father was my teacher at Penn. He was born in the intellectual purple with two of his uncles Nobel Prize winners. He had a glittering academic career winning the John Bates Clark award (attained by both his uncles) in 1993 as the best American economist under 40 (or, as they say, the best 39 year old economist). His move into policy has meant much less time for high-powered academic work. I am sure even Larry would trade in Fed chairmanship for a Nobel. But I suspect there's only a remote likelihood that he would have a chance.

Yellen has no issues of arrogance. She has come through on sheer merit. She is intellectually tough. After all, you have to be doubly smart to win a chair in any economics department if you are a woman, and a multiple of that to be Fed vice-chair. Her work in economics has been both technically good and also theoretically quite innovative. Along with her husband George Akerloff (a Nobel winner also), she has explored aspects of employment and wages, among other issues which have won attention. She has good communication skills and has a cool head. She is unlikely to try to dominate her colleagues but, if push comes to shove, is tough enough to let them know who is boss.

Janet Yellen would be more inclined to talk to Congress rather than down to it. Alan Greenspan had all the charisma and the loyal following of Wall Street who thought he was invincible. This arrogance led to tears at bedtime when Greenspan showed surprise that people did not behave as predicted in textbooks.

Markets love those who love them. What a Fed chairman needs is a certain distance along with a deep and critical understanding of how markets work, as well as when they do and when they fail. Janet Yellen's work has amply demonstrated she fits that bill. President Obama has to show he understands that - and appoint Yellen as Fed chairman.

 

Prof. Lord (Meghnad) Desai, emeritus professor of economics at the London School of Economics, is chairman of the OMFIF Advisory Board.

This is the first of two OMFIF articles on 5 August 2013 on the selection of the new Fed chairman.

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