While it’s a relief to have Larry Summers out of the running for the Fed chairmanship, it’s also important not to labor under any delusions about Janet Yellen, the nominee presumptive. Larry Summers set a very low bar to beat.
The modern Fed has become a citadel for orthodox-thinking, meaning entirely mainstream economists. And even though the global financial crisis revealed mainstream economics to be intellectually bankrupt and worse, affirmatively destructive, it has lost no hold over policy. It’s hard to imagine that a keen empiricist and original thinker like Marriner Eccles, the Fed chairman from 1934 to 1948, would have a snowball’s chance in hell of being appointed to any important position at the present-day Fed.
Obama embraces and will continue to perpetuate the conservatism of our central bank. He reappointed Bernanke, who has continued the policies of the Greenspan Fed: aggressive market intervention with a permissive posture on regulation (Dan Tarullo is the moving force behind the push at the Fed for tougher oversight). The Bernanke put has proven to be the Greenspan put on steroids. And recall that the Bernanke reappointment was not a shoe-in. Bernanke got an unheard-of five holds in the Senate and was confirmed with the largest number of no votes in the history of the Fed. And even that result came only after Obama whipped for him personally.
Zach Carter at Huffington Post gives a bill of particulars on Yellen’s policy positions. The fact that she has been touted as being more dovish on interest rates right now and a better forecaster than Summers has directed attention away from the fact that her economic views are firmly neoliberal, meaning antagonistic to the interests of ordinary citizens. In addition, she has a history of being a “don’t rock the boat” type, which is safe from a career advancement standpoint and looked sound during the 1990s, when the great experiment in creating an appearance of prosperity via rising consumer leverage still has a way to run before it hit its inevitable limits.
Yellen supported a host of economic policies during the Clinton era that have since become broadly unpopular. She backed the repeal of the landmark Glass-Steagall bank reform and she supported the 1993 North American Free Trade Agreement. She also pressured the government to develop a new statistical metric intended to lower payments to senior citizens on Social Security….
A full transcript of Yellen’s Feb. 5, 1997 confirmation hearing is available here. At the same event, Yellen endorsed establishing a new statistical metric that would allow the federal government to reduce Social Security payments over time, by revising the consumer price index, or CPI, the government’s standard measurement for inflation…Once in office, Yellen put that belief into action, writing a letter to the Bureau of Labor Statistics encouraging it to devise a cheaper inflation metric…
At the time, this new metric, known as chained CPI, was being aggressively pursued by House Speaker Newt Gingrich (R-Ga.), following then-Fed Chair Alan Greenspan’s criticism of the existing cost-of-living calculations…Some economists argue that a more appropriate inflation measure for Social Security would look at price changes for elderly people, and the BLS does track an experimental metric addressing inflation for older Americans. Such a metric is not useful for politicians looking to cut Social Security spending, however, as it shows that living expenses tend to go up more for older people, driven in part by health care spending.
Chained CPI has been a major point of contention in budget negotiations between Obama and congressional Republicans, with both camps alternating between supporting the measure and decrying it. Adopting Chained CPI to cut Social Security is extremely unpopular with both the general public and senior citizens.
Oh, and Carter also points out that Yellen also pumped for NAFTA in 1993.
Yellen advocated cap and trade in 1998. She argued for only narrow application of anti-trust the same year:
In addition, the claims about Yellen’s accomplishments are exaggerated. For instance, the mainstream media is touting the idea that she was one of the economists who recognized that there was a housing bubble forming. Huh? A read of FOMC minutes shows no such thing. The most she did was consider the idea that housing prices might be too high. She missed the bubble, just like everyone else in the cloistered Fed. As John Hussman wrote (hat tip Scott):
We now face the prospect of Janet Yellen, who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions:
“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”
If you read the entire speech, Yellen points out that housing prices have risen considerably, putting them way over their long-established relationship to rentals. But she also says:
Higher than normal ratios do not necessarily prove that there’s a house-price bubble. House prices could be high for some good, fundamental reasons. For example, there have been changes in the tax laws that reduce the potential tax bite from selling one home and buying another. Another development, which may be making housing more like an investment vehicle in the U.S., is that it’s now easier and cheaper to get at the equity—either through refinancing, which has become a less costly process, or through an equity line of credit. These innovations in mortgage markets make the funds invested in houses more liquid. There are also constraints on the supply of housing in a number of markets, including the Bay Area. Probably the most obvious candidate for a fundamental factor is low mortgage interest rates. Even so, the consensus seems to be that the high price-to-rent ratio for housing cannot be fully accounted for by these factors. So, while I’m certainly not predicting anything about future house price movements, I think it’s obvious that the housing sector represents a serious issue for monetary policymakers to consider.
In other words, this is the steotypical two-handed economist analysis.*
The image that emerges from Yellen’s record is that of a mainstream Clintonista, someone who does not rock the Beltway consensus, reflexively pro-market, hesitant to regulate or intervene. It’s possible her views have shifted somewhat in the wake of the crisis, particularly since the research out of the San Francisco Fed isn’t rigidly orthodox. But the IMF famously publishes research that is well to the left of its policies, so it’s not clear that the San Francisco Fed’s research is a valid indicator. The best guide will be Yellen’s stance in her confirmation hearing, assuming she is nominated. Hopefully the same Senators that opposed the Summers nomination will ask tough questions.
Mind you, I don’t oppose Yellen, but caution readers to be realistic about her. She is the best candidate Obama would nominate. Just don’t confuse that with all that good.
*In fairness, she was right in saying that monetary policy is not a great way to address a bubble in a specific type of asset. This is an issue we discussed prior to the crisis, for instance, citing the governor of Australia’s Reserve Bank Ian MacFarlane, who was concerned about a much more obvious housing bubble in Australia (one which curiously has only managed to inflate even further).