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Friday, July 19, 2013

Janet Yellen for Fed Chair

by Calculated Risk on 7/19/2013 09:11:00 AM

I've been an admirer of Dr. Janet Yellen for a number of years (In 2009 I suggested her as an alternative to reappointing Ben Bernanke). I've linked to a couple of articles below and they suggest the choice is between Janet Yellen and Larry Summers - and the key difference is "leadership style".  However another key difference is that Yellen has a much better track record of correctly analyzing the economic situation, while Summers has frequently been wrong (but never in doubt). As an example, in 2005 Yellen was expressing concerns about housing:

" ...there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk."
And in 2006 she was talking about "ghost towns" in the West:
According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West.
What was Larry Summers saying about housing in 2005 and 2006? From the WaPo:
In August 2005, Raghuram Rajan, an economist at the University of Chicago’s Booth School of Business, predicted the financial crisis. And he did it at possibly the least friendly of venues: a conference of high-powered economists who had convened in part to honor Federal Reserve Chairman Alan Greenspan.

Rajan presented a paper titled “Has Financial Innovation Made the World Riskier?” His answer, put simply, was “Yes.” He was dismissed by the assembled masters of the universe. “Misguided,” said Larry Summers. But Rajan was right.
Note: I started this blog in January 2005, and I was writing frequently about the housing bubble - the coming housing bust - and the impact on the U.S. economy.  I quoted Yellen on housing, but never Summers (I'm pretty sure Summers didn't see the housing bubble).

I'd like to see reporters dig into the track record of both individuals instead of just reporting on "personality" differences. As an example, most people (not all) now understand that a little inflation is better than no inflation. Janet Yellen was able to convince Alan Greenspan of this view in the '90s. From Binyamin Appelbaum at the NY Times: Possible Fed Successor Has Admirers and Foes
In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed’s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank’s primary mission.

But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing. She marshaled academic research that showed it would reduce the depth and frequency of recessions, articulating a view that has prevailed at the Fed. And as the Fed’s vice chairwoman since 2010, Ms. Yellen has played a leading role in cementing the central bank’s commitment to keep prices rising about 2 percent each year.
Unfortunately most of the focus now seems to be on leadership style (I prefer Yellen's style), from a Bloomberg article: Yellen or Summers: Who'd Be Better at Running the Fed?
Where Yellen and Summers may differ most is in their leadership style. That may be the critical issue for a Fed that's trying to be more open about its thinking despite disagreements among its top policy makers. The Fed's minutes show Yellen as influential but not particularly loud and outspoken. It's safe to say Summers would be loud and outspoken -- and authoritarian rather than merely influential.
And from the LA Times: Obama may choose between two economists to replace Bernanke at Fed
President Obama's choice for replacing Federal Reserve Chairman Ben S. Bernanke probably comes down to a quiet consensus builder, who would be a historic pick, or one considered brilliant but difficult to work with.
I don't believe in the indispensable man (or woman), but I think Janet Yellen is the right person for the job.