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.
Historically Summers has been against overly-inflationary policies, while Yellen is almost universally viewed as an inflation “dove,” willing to accelerate the weakening of America’s purchasing power in the belief that this will produce jobs.
“When the goals conflict and it comes to calling for tough trade-offs,” she said back in 1995, “to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”
But even the distinction between Yellen and Summers on inflation has blurred over time, particularly as Summers angled for the Fed’s top job. “I think we’re a long way from tight labor markets and therefore that the risks of acceleration in inflation are substantially less than many people suppose,” said Summers in July, dismissing the risk of runaway inflation due to quantitative easing.
It is also not clear Yellen will take Wall Street to task, as some liberals hope. Former Fed vice chair Alan Blinder called her one of the chief architects of quantitative easing, the Fed’s pumping of nearly a trillion extra dollars into the economy each year. Begun by Bernanke in 2008, the policy has been an unmitigated boon for the financial industry.
“I think Yellen is really the candidate of complete continuity with Bernanke,” Stephen Oliner, an economist at the conservative American Enterprise Institute, told The Daily Caller News Foundation. “I’m sure her fingerprints are all over the policy decisions that are made.”
Stock markets shot up at the news that Summers had backed out of consideration for the chairmanship, a sign that Wall Street is quite comfortable with Yellen.
“Quantitative easing has the virtue of keeping interest rates low and thus bond prices and stock prices high,” said Walter Schubert, a finance professor at La Salle University. “Summers appeared to doubt the efficacy of quantitative easing.”
“She has no clue how to wean Wall Street from its pathetic addiction to this massive stimulus — easy money — that’s been going on for this entire century,” said Stockman.
There is one difference between the two, however. If nominated and confirmed, Yellen would be the first female Fed chair in history, a fact often repeated by feminist advocacy groups and Democratic politicians. Summers is notorious among many of these groups for his comments on women and science while he was president of Harvard University.
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