A Nicholas Lemann profile of Janet Yellen in the New Yorker, based on interviews with her, is creating quite a stir, and for many of the wrong reasons. The article verges on fawning, but even after you scrape off the treacle, it’s not hard to see how aggressively and consistently the Fed chair hits her big talking point, that’s she’s on the side of the little guy. As correspondent Lee put it:
She’s simultaneously Mother Teresa (spent her whole life caring about the poor without actually meeting any poor people) and Forrest Gump (present when all bad deregulatory polcies were made, but miraculously untainted by them).
Puh-lease! She’s Bernanke in a granny package, without the history lessons.
In fact, as we’ll discuss, Yellen’s record before and at the Fed shows she’s either aligned herself with banking/elite interests or played two-handed economist to sit out important policy fights. Even if she actually harbors concern for ordinary citizens, she’s never been willing to risk an ounce of career capital on it.
It’s striking how often in the direct quotations from the interview that Yellen and her Nobel Prize wining economist husband, George Akerlof, assert that she’s concerned about the unemployed and feels for their distress. Lemann makes this a central focus of his piece, by starting with her first speech as incoming Fed chief, and highlights her remark, “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” Readers are also supposed to be favorably impressed by the fact that her staff was able to find three living, breathing poor people for her to speak to on the phone so she could include them as anecdotes in her talk. As Lambert points out, they couldn’t have been destitute, since they did have phones.
Some passages are cringe-making. For instance:
…she wound up majoring in economics, which she talks about as if it were a helping profession. “What I really liked about economics was that it provided an analytical, rigorous way of thinking about issues that have great impact on people’s lives….Economics is a subject that really relates to core aspects of human well-being.”
One can Yellen’s remarks as taking interest in economics simply for its power. And we also have this about James Tobin, who Yellen said inspired her to apply to do her graduate training at Yale, where he taught:
Tobin was a person who really impressed me, because he had a passion for social justice and public policy….for Tobin it was always about making the lives of people better.
The article is also generously larded with standard defenses of the Fed, that it lacked the power to do much of anything about dodgy mortgage lending in the runup to the crisis. In fact, the Fed was so firmly in denial that even in 2007, Fed officials were convinced that banks were victimized by subprime borrowers, which is hardly a pro-intervention stance. Accordingly, the Fed did even less to enforce the Home Ownership Equity Protection Act, which required banks to report on subprime lending and also gave provided greater consumer protection for high cost borrowers in the subprime category, than even the bank-cronyistic OCC did.
And why did the Fed take so little interest? The real reason was that prior to the crisis, if borrowers bought more costly housing than they could afford, the losses fell mainly on them. There was enough of an equity cushion on average that the banks came out at worst only mildly dented.
In other words, readers are supposed to take Yellen’s claims at face value, when the Fed’s policy of saving banks by goosing asset prices and convincing itself that ordinary people would benefit because the “wealth effect” would lead to more consumption. The result has been widening income and wealth disparity and corporate profits at record levels as a percent of GDP, meaning workers are getting less than they’ve ever gotten. Yellen as the head of one of the regional Federal Reserve Banks and member of the FOMC can’t escape from responsibility for these policies. And there’s no evidence of meaningful opposition; unlike some Federal Reserve presidents, like Charles Plosser and Dick Fisher, who have often taken issue with the Fed’s official position in their speeches, Yellen made little use of her bully pulpit at the San Francisco Fed.
The article also contains an extended discussion of “Keynesians” in which Yellen declares herself to be a true follower and argues that the crisis proves Keynesians were right. Huh? Please tell me how many Keynesians predicted the crisis.
Lemann fails to distinguish that American Keynesians followed Paul Samuelson and bastardized Keynes by rejecting one of his central beliefs, that economies were inherently unstable because investors could freak out and suddenly take all their marbles home. American Keynesians instead adopted an equilibrium assumption (ergodicity) because that allowed them to create tidy mathematical models and proof-like analyses (I am not making this up; see Chapter 2 of ECONNED for the long-form treatment). That supports a “markets” orthodoxy, since economies are seen as self-correcting, absent periodic external shocks. The American Keynesian’s big bone of contention with the Chicago School is the correction time takes too long and that prices for labor are often “sticky”, which also means that the usual hallowed market clearing mechanisms don’t always operate well. That results in overly high economic and social costs, hence the need for intervention. The idea that internal factors, such as Minskian stability leading to financial instability, is absent from this sort of thinking but consistent with Keynes himself.
Although these differences are significant, Lemann overstates the dichotomy between monetarist followers of Milton Friedman and American Keynesians. In particular, Keynes himself debunked the “loanable funds” fallacy, that putting money on sale would induce businesses to take advantage of the cheap price and borrow and invest (the only ones that do are ones where the cost of money is a major product cost, and that’s financial players, who as we have found, plow it into speculation). Yet you see defenders of the Fed’s actions (usually making the argument that QE was beneficial, if less so than fiscal stimulus would have been) relying on “loanable funds” type arguments.
To put it more simply, if Yellen were as true to Keynes as she claims to be, she’d have been calling for more fiscal stimulus, particularly when it mattered, in the 2009 debates and during the fiscal cliff negotiations, rather than supporting the poor, wealthy-favoring, emerging-economy-imperiling substitute of super easy money.
So what are we to make of Yellen’s wildly-disconnected-from-reality patter? That Yellen is a closet socialist who has managed keep her head down and fool everyone for decades and is coming out now that she is safely in charge of the Fed? That Yellen is such a cloistered member of the economics orthodoxy that she really believes in “Let them eat QE”?
How about the most obvious answer, that Yellen is using this interview to run PR for the Fed. She leading a major institution that is under well-deserved criticism for its obvious preoccupation with banks during the crisis and post crisis period (and Lemann takes note of that issue, pointing out that the central bank’s critics range from Rand Paul to Bernie Sanders). She’s trying to brand herself as a caring grandmother who can relate to regular folks because she came from the wrong side of the tracks, and the chump public should trust the Fed’s actions as embodying her professed world view. Lemann promotes this effort to identify the Fed with Yellen’s supposed compassion for regular folk, starting with the article’s subhead: “How Janet Yellen is redefining the Federal Reserve.”
This positioning of Yellen comes off as heavy-handed “nurturant mother” imaging, recommended by George Lakoff’s to appeal to left-leaning voters. But this may not even be conscious; it may be so much part of the Democratic party hive-mind as to be reflex.
But a look at Yellen’s record shows she’s consistently advocated bank and corporate-friendly policies. As Zach Carter wrote in Huffington Post last September:
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…..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.
And this isn’t all she stood for. Contrary to her pious claims of empathizing with the downtrodden, if you read her testimony during the 1990s, she was regularly described by Senators during her tenure at the Council for Economic Advisers as one of the most hawkish members of the Administration. She advocated cutting veterans’ benefits. She pointedly refused to cite increased concentration in banking as an antitrust risk and approved of communications industry mergers. She supported cap and trade. She favored austerity for Mexico during its 1994-5 crisis. She also stood with Gene Ludwig complained about deadbeat borrowers declaring bankruptcy in 1997, which was tantamount to throwing her support behind the bankruptcy reform bill that eventually passed in 2005. Reversing that bill has been widely cited as one of the most powerful single steps the government could have taken to stem foreclosures, since the threat of bankruptcy would have forced more servicers to restructure mortgages.
At the Fed, Yellen is given more credit than she deserves for sounding some mild concern about rising housing prices. She’s also been cited as the best forecaster on the FOMC, but given how the FOMC failed to see the crisis coming, her “success” is tantamount to declaring her the winner of a height competition among peanuts.
In other words, Yellen was in the center to center-right of the Democratic party technocratic elite of the 1990s and never departed from conventional thinking. She’s now trying to rewrite her record by making pious statements and getting her interlocutors to focus on what she presents as her character in the hope that they won’t bother looking at her actions. And Lemann proves that strategy works.
Yellen’s contention that she’s really out to help little people would be far more credible if she acknowledged her past anti-middle class policy positions and claimed that she’d made a Pauline conversion. But her institutional and political loyalties preclude that.
If you have any doubts as to whose side Yellen is really on, watch this exchange yesterday with Elizabeth Warren, in which Yellen gave evasive responses to Warren pointing out, in so many words, that the Fed has clearly punted its duties mandated in Dodd Frank to make sure the banks have credible living wills or else force them to divest operations so they can be resolved:
Lee nailed the strategy behind the Lemann article:
The piece is weirdly designed to prevent New Yorker-reader limo-liberals from joining forces with right-wingers who justifiably want to know WTF the Fed is doing.
Lemann’s most insightful remark is an aside: “Yellen doesn’t leave footprints.” And that’s the real reason she got the job. She represented policy and even stylistic continuity with Bernanke, who was collegial and consensus-oriented. So Lemann’s lead in, that she’s redefining the Fed, is all wet. Her biggest effort at change seems to be new, more flagrant exercises in optics.