One week after Larry Summers reluctantly removed himself from the running for the chair of the U.S. Federal Reserve Bank, President Obama is now sending strong signals that he will nominate Janet Yellen, who is currently second-in-command under Ben Bernanke, for the top job at the Fed.
Liberal Democrats and activists cheered when Summers withdrew his name last Sunday, declaring it a win for Main Street over Wall Street. A longtime friend and economic advisor to Obama, Summers was closely tied to the financial industry. Some Senate Democrats were hesitant to rubber-stamp the president’s pick.
But will Yellen’s policies as Fed chair prove different from Summers’, or even Bernanke’s? Her past statements and behavior raised doubts.
Yellen is a career academic and bureaucrat, having taught at Harvard and the University of California at Berkeley before taking on a job at the Fed.
Some are concerned by this lack of private sector experience. “She’s spent her whole life as a monetary bureaucrat in the Fed system,” said David Stockman, a former congressman and budget director to President Reagan. “[She] has no clue what honest capitalism, what genuine free markets are about.”
Except for a brief stint in the financial industry from 2006 to 2009, Summers’ resume is almost identical to Yellen’s, with long periods of academic research broken only by his tenures at the World Bank, Treasury and the White House.
At stake is Yellen’s commitment to devaluation of the dollar. Bernanke, a scholar of the Great Depression who has criticized the 1930s Fed for failing to create dollars fast enough, responded to the credit crisis by creating nearly a trillion dollars a year, quadrupling of the monetary base since 2007.
Nevertheless, Bernanke has been unable to create higher than average wage and price inflation. The dollar lost only 13 percent of its buying power since 2007, according to the Bureau of Labor Statistics’ inflation calculator.
Yellen’s supporters hope that she will commit more seriously to debauchment of the currency, which they believe will help reduce unemployment. An economic theory called the “Phillips Curve,” which posits an inverse correlation between unemployment and inflation, remains popular with the public policy community, though it has been abandoned by most others after failing to pan out in real-world conditions.