Why you should cherish Yellen’s academic background

Why you should cherish Yellen’s academic background

A look at new Fed chair Janet Yellen’s academic background offers interesting insights into Obama’s pick for America’s top financial position.

Robin Harding summarized the situation that Janet Yellen, President Obama’s pick for Federal Reserve chair, has inherited in the Financial Times last week:

The federal government is shut down. The unemployment rate is still up at 7.3 per cent, four years into a recovery. The institution you will lead is formidable but war-weary; intellectual positions are entrenched. Fateful decisions are already made – the Fed’s balance sheet is nearing $4tn – and their repercussions will define your four-year term.

The situation appears even more sober when compared to the starting point of the previous central banker. The Washington Post summarized this as follows:

When Bernanke became chairman of the Fed on Feb. 1, 2006, this was the organization he led: It had $861 billion worth of securities on its balance sheet, almost all of it in simple Treasury bonds. The Fed’s most recent policy statement was a simple 110 words long. The chairman never took on-the-record questions from the media. The Fed regulated banks, but that job was considered a backwater within the organization. The idea of the Fed bailing out an investment bank or an insurance company was downright preposterous. The unemployment rate was 4.7 percent. When Yellen takes over on Feb. 1 (barring unexpected problems during her Senate confirmation hearing), she will probably inherit an organization more like this: A $4 trillion balance sheet stuffed with all manner of financial exotica, from mortgage-backed securities to portfolios acquired as part of the 2008 bailouts. Policy statements are now north of 700 words, explaining not just the Fed’s policy stance but what the central bank expects to do far into the future. Yellen will be expected to continue the practice of quarterly news conferences, or maybe even to turn them into an every-meeting, eight-times-a-year affair. And the organization she will run has the power to regulate any financial company, bank or otherwise, that endangers stability. The unemployment rate is 7.3 percent.

Most people should be happy that Yellen, and not someone more politically driven, has inherited this task. Unlike a professional politician, Yellen is not tied to old promises from bygone eras that can come back to hunt her. The press has tried to dig up patterns from her previous interventions and predict her behaviour, but this is difficult to do with an academic, and especially one who has served in multiple committees before. The contrast between dovish and hawkish behavior works for politicians, but it is hard to do the same when judging an academic. In the end, a large part of the coverage of her nomination and acceptance has become nothing more than a parade of awful puns and tendentious predictions.

On the other hand, it is worth considering the possibility that seeing Yellen exclusively as an academic is too narrow. Academia is sometimes rightly understood by conservatives to be a favourite catchword of the liberals. It is undeniable that the word is at times used to add a layer of neutrality to an argument, while the argument itself might be very tendentious.

However, academics cannot always be defined politically along party lines. On the one hand, some Republicans seem very unhappy with her nomination because they see some liberal tendencies in her. Rand Paul published a scathing article in TIME magazine on the negative effects of the recent dynamics of the Fed and sees Yellen as preserving these.

Conservatives should not be so negative about her appointment. An article published in the New York Times by Binyamin Appelbaum suggested that “She would be the first Democrat to lead the Fed in nearly three decades, but a liberal central banker is something different from – and more conservative than – a liberal politician.” Appelbaum outlines that she was key in the Fed’s decision in 2012 to establish a goal of 2 percent annual inflation.

An article published in the Huffington Post by Zach Carter pointed out the less progressive policies supported by Yellen, particularly during the Clinton era, which included urging the repeal of the Glass-Steagall Act, cutting back social security cuts and supporting NAFTA. The article argues that her reputation as a progressive comes from her years serving in the San Francisco Federal Reserve under George W. Bush.

Ultimately, both parties should encourage her to continue her academic approach to economics as the head of the Federal Reserve. This approach usually forces one to consider all options and assess them with analytical rigour. If she can transfer the transparency expected from academics in their work to her new job, this might improve the public view of the Fed, which has recently been described by some as secretive, and allow more people to engage with the economy.

Categories: Economics, North America

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