Ben Bernanke, who has been serving as Chairman of the Federal Reserve since 2006, will leave his post in January of next year. Mr. Bernanke has served his two terms under two very different presidents in historically difficult times.
President Obama will soon appoint a new Chairman to replace Mr. Bernanke. The two likely choices are former Secretary of the Treasury Larry Summers and current Vice Chair of the Federal Reserve Janet Yellen. I am writing this article in support of Ms. Yellen’s nomination to the post.
Full disclosure: Janet Yellen and I were classmates at Brown University, although we weren’t really in the same circles. It is possible that we took Econ 101 together, and if so, I’m sure she found it far more interesting than 19-year-old Joe Parsons did.
Mr. Summers has an enviable pedigree: BS in Economics from MIT, PhD from Harvard. He went on to become, at age 28, the youngest tenured professor at Harvard. He left Harvard in 1991 and served two years as Chief Economist of the World Bank. He joined the Clinton administration as Undersecretary for International Affairs in 1993. He was appointed Deputy Secretary of the Treasury in 1995, then Secretary of the Treasury in 1999, a post he held for 18 months. He left that position in 2001 with the inauguration of George W. Bush and served as President of Harvard until June, 2006.
Janet Yellen has an equally distinguished CV: She graduated Summa Cum Laude from Brown University in 1967. She received her PhD in Economics from Yale in 1971. She joined the faculty of Harvard as an Assistant Professor of Economics in 1971 and held that post until 1976, when she joined the Federal Reserve Board of Governors to serve as an economist for two years. She has taught at U.C. Berkeley’s Haas School of Business and received awards for excellence from that institution.
She served on President Clinton’s Council of Economic Advisers for two years. From 2004 until 2010, she was the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco. She was made a voting member of the influential Federal Open Market Committee in 2009. In October, 2010, she was sworn in as Vice-Chair for the Federal Reserve System.
Ms. Yellen is generally regarded as a “dove,” meaning that she is in favor of continuing the Fed’s accommodative monetary policy (the “hawks” believe such a policy leads to unacceptable inflation).
Unlike Ms. Yellen, Larry Summers’ career has been marked by a certain amount of controversy. Although public life carries a certain risk of this, I believe some of these controversies make him a far less desirable candidate for this influential post than Ms. Yellen. In 2000, He teamed up with Alan Greenspan, then Fed Chair, and Ken Lay, then CEO of Enron, to pressure California Governor Gray Davis to relax California’s environmental standards. He explained that government regulation was the cause of the energy crisis.
Mr. Summers spearheaded the passage of Gramm-Leach-Bliley, the 1999 statute that repealed key provisions of 1933’s Glass-Steagal. Many believe that this deregulation contributed significantly to the financial crisis of 2008. He continued his campaign for financial deregulation with his support for the Commodity Futures Modernization Act of 2000, a law that deregulated certain financial derivatives—along with energy futures. The deregulation of Mortgage Backed Securities, Credit Default Swaps and Collateralized Debt Obligations were essential components of the mortgage crisis that led to the Great Recession.
During his presidency at Harvard, the university entered into a series of investments in financial derivatives totaling over $3.5 billion. These questionable investments ultimately lost $1 billion in value, forcing the University to borrow significant sums to meet margin calls. The decision to enter into these investments has been attributed to Summers and has been called “a massive interest-rate gamble.” He resigned in February, 2006.
There is a stark contrast between these two candidates for this powerful position. Where Larry Summers has continually advocated for ongoing deregulation and has personally profited millions of dollars in various fees from hedge funds and other companies, Janet Yellen’s career has been marked by a thoughtful approach to economic and monetary policy. In her years as an economist and as a public servant, she has consistently demonstrated a rational, studied approach to monetary policy.
For whatever it might be worth, I am pleased to offer my wholehearted support of her appointment to Chair of the Federal Reserve.