Monday, July 27, 2009

Janet Yellen for Fed Chair?

I am one of those who think that Ben Bernanke literally saved the world in mid-September from a 1931-style global economic collapse. He is not getting much credit for that from Congress or many other people, and is increasingly becoming a generalized scapegoat for the continuing recession, even if it probably would be a whole lot worse now if not for his actions then. However, I grant that he can be criticized for many things, including being probably too slow ahead of time to admit things were dangerous (although actions after August 2007 suggest the Fedsters knew bad stuff was up, despite their public rhetoric), along with things like how the Merrill Lynch purchase by Bank of American was handled and the details of the banks bailouts, and other stuff. So, maybe he is damaged goods, kind of like Frodo after Gollum bit his finger off when getting the Ring of Power into Mount Doom, and he should retire into the West.

If so, the two candidates people are mostly talking about to replace him are Larry Summers and Janet Yellen. I will not say anything about Summers other than to say I would far prefer Bernanke to him. But Janet Yellen is quite another matter, a worthy rival to Bernanke for the position. She is certainly more progressive, and also has lots of personal cool and common sense, as well as being exceptionally intelligent and knowledgeable. She currently serves as president of the San Francisco Fed, second most important after the New York one, and is a voting member of the FOMC. She was on the Board of Governors under Greenspan in the early-mid 90s but left to serve as CEA Chair from 97-99. Long at Berkeley, and married to Nobelist George Akerlof, with whom she has coauthored some innovative and influential papers on macroeconomics, she also was on the Board of Governors staff in the late 70s in the international finance division. In short, she knows her way around the place, including the basements where all the wonks and geeks hang out, and I have heard personally from people at the SF Fed that she is a great boss whom they all can say nothing but the most admiring things about.


wellbasically said...

I hate to say it, but what a boot-licking blog entry. The Fed caused the whole collapse by hiking rates for years, and then Bernanke gets credit for saving the world? Rates are close to 0 now, they were at 5 before, and close to 1 before that.... did those gyrations all need to happen? Did they work? Isn't anybody at the Fed implicated, and compromised, and completely in the service of the shareholders of the Fed? said...


"The Fed caused the whole collapse." Really? Did they invent CDOs? Did they have any power to regulate them or stop them? A major place of the development of some of the more sophisticated ones was in Switzerland. What interest rate trajectory by the Fed over some past time period would have prevented what happened? Even if the Fed was more responsible than anybody else business involved a whole lot more than the Fed;s interest rate policy.

Eleanor said...

The housing bubble was pretty obvious, and I really hate seeing all the money poured into Wall Street. My own preference would have been to call in the FDIC and the FBI. Maybe that would have been too dangerous, when the world financial system was teetering on the brink. Right now, it seems to me without regulation and breaking up the too big to fail banks, we are setting up for another bubble and collapse. Bernanke is not responsible for all the things the Administration and Congress are not doing, but he could advocate better; and it is not at all clear to me that he understands how important the real economy is.

Eleanor said...

Yellen sounds interesting.

Myrtle Blackwood said...

I don't believe any one organisation can save the world from another 'great depression'. Climate change, peak oil, the global debt mountain and financial and trade imbalances, resource depletion, widespread pollution....

The US Fed - in cohutes with other agencies, such as the military - has played a large role in determining which nations have succeeded economically and which have failed. Look at the abiliity of the Federal Reserve to raise global interest rates unilaterally and to look the other way when credit is extended to the rich and not the struggling family farmers (late 1970s, early 1980s).

Well, something very significant is wrong here.

homer said...

Dr. Rosser,

would you mind addressing her book, "the fabulous decade" with alan blinder. I would have a very difficult time placing so much power in the hands of someone who so badly misread the 90's and gives so much undo credit to the Federal Reserve. If we cannot be self critical and skeptical, we are useless.

Anonymous said...

Mr. Rosser,

While I agree with your analysis of saving the world; I would like to think that the FED needs to do more than act like a janitor. Cleaning up mistakes is one thing, but prevention and leaning against the wind is another. So is it wise to base our decisions on the very tangible responses over the last few months, or would we be better off with an institution that prevents and subverts these instances?

Mr. Bernanke may not be directly responsible for all the ills of our economy, but he sure as hell is in charge.

The FED chair needs to be skillful at cleaning up messes; but, what about prevention and mitigation of large systemic problems? So what candidate would be good at that?

Barkley Rosser said...

It was easy to say good things about the 90s during them, even with the dotcom bubble. After all, there was real growth and the poverty rate declined for one of the few times since the 1960s,

I might wish to restructure things and see other folks, like Jamie Galbraith. But the hard reality is that there are three candidates for the job: Bernanke, Summers, and Yellen. I definitely do not want Summers.

Anonymous said...

NO, definitely not...she is a terrible choice as she is even more dovish than Helicopter Ben. If she becomes Fed she will blow a bigger bubble than anything we have seen in the past and cause the dollar to collapse.

We need someone with a lot of, even if they pursue an easy monetary policy, the market and other countries do not get very worried about inflation and the value of the dollar. It took Nixon to open China, it will take someone like Volcker to be able to keep money easy and get away with it.

homer said...

I agree that Summers would be about my last choice.
My difficulty is that i expect an organization that believes it can foretell the future and predict how its actions will alter that future, should be able to read the present or recent past. (btw, her book came out in 6/2001, by which time my skepticism about the fake economy had manifested). If this is indeed impossible the organization should dissovle itself or be relegated to the bin with the fortune tellers and homeopaths. Why does the Fed exist?

Anonymous said...

"he should retire into the West" -- why should we be inflicted with him ?

Anonymous said...

"although actions after August 2007 suggest the Fedsters knew bad stuff was up..."


As usual, you speak as though the Fed was not the cause of this crisis, merely a negligent combatant...

Let us be clear on this: This crisis was caused by Washington. It is a creature of Washington. Anyone who doubts this might investigate Larry Summer's 1988 paper on the Gibson Paradox, in which he shows how low interest rates might be achieved through manipulation of gold prices.

That manipulation required a deep and liquid derivatives market - the same markets which blew up in their faces in this crisis... said...


I think the crisis was caused by the private financial sector that invented all these complex derivatives and engaged in speculation in the housing market and more importantly in the complex derivatives markets such as CDOs. Try AIG and Goldman Sachs. They could have done this even with higher interest rates, which is what the Fed mostly controls.

Maybe the Fed could have stopped it or slowed it down, but in fact it did not have the legal authority to do so. Your talk of manipulating gold prices does not speak well of your credibility. Gold is a big zero in all this, nothing to do with it at all. said...


I think the crisis was caused by the private financial sector that invented all these complex derivatives and engaged in speculation in the housing market and more importantly in the complex derivatives markets such as CDOs. Try AIG and Goldman Sachs. They could have done this even with higher interest rates, which is what the Fed mostly controls.

Maybe the Fed could have stopped it or slowed it down, but in fact it did not have the legal authority to do so. Your talk of manipulating gold prices does not speak well of your credibility. Gold is a big zero in all this, nothing to do with it at all.

Myrtle Blackwood said...

How did these crises come about?

My 'guess':

World War II resulted in significant depletion of natural resources, particularly in the US, the main supplier of arms. Along with general waste of global economic resources.

Then came the failure of Bretton Woods. It set up the infrastructure for currency speculation and also guaranteed the re-establishment of world trade imbalances. The Bank of International Settlements was not dismantled as was promised. The BIS then took in huge profits from third world debt transactions.

The 'American Century' played out the US and a small number of other 'developed' nations employed a program of corporate imperialism backed by military intervention to access underpriced labour and natural resources around the world.

The cost of establishing and enlarging American Empire (perpetual war) left the US and most of the planet bankrupt. Profits became extremely difficult to bleed from an increasingly impoverished global population. Inflation became uncontrollable.

The last resort became financialisation and speculation as well as the vastly stepped-up rape of the planet. Deforestation, ocean plunder, use of child and slave labour, military-supported drug trade.

The environmental disaster and the actions of the Federal Reserve are inseparable. By increasing interest rates to usurious levels in 1979 the US Fed ensured third world debt could never be repaid and thus ensured continued access to super-cheap resources from beleaguered nations.

The Republican-Democratic consensus established a facade of 'free trade' in which corporate plunder could continue without social and environmental impediments (NAFTA, GATT, WTO, IMF, World Bank).

It is only now, when frightening signs of runaway climate change are manifesting that the Republican-Democrat political convergence appears to be faltering.

Barkley Rosser said...


WW II ended 64 years ago. Maybe it is the cause of "everything," but that is not very useful for dealing with many things now. The most recent financial crisis involved the collapse of derivatives that did not exist essentially more than a decade ago. They expanded on the back of a housing bubble in the US that dates back at most to 1998.

I think we need to focus on how that came about, which I also do not think had anything to do with the Fed "suppressing gold."

Anonymous said...

The problem was too much capital, so the correct suspects are to be found where capital is created. Households (baby boom are net contributors of capital,) Yen carry trade, the end of GlassStegal (sp?) expandeds the list from banks to banks/broker/dealers/et al, tax code changes favor capital formation, tax code changes that cause repatriation of foreign subsidiary's profits, the big one, the chinese currency peg (artifically large trade deficit,) and finally hot global investment funds. Capital attraction was increased by by Ben's big hike in the central bank's rate. I guess he shouldn't have believed the GDP numbers (see the Aug 07 restatement of the previous 3 year's GDP.) Its never good to wake up and find the 3 previous years' GDP growth has been reduced so much that your economy is actually 2.5% smaller than when you went to bed. Yes, Ben saved the day. Lending all those US dollars to the foreign central banks stopped currency meltdowns and much damage was prevented. While you're quantifying Ben's greatness, don't forget to quantify how much damage was caused by the inital increase in rates Ben felt neccassary?

not anonymous - Frank

Anonymous said...


As usual you are wrong. The price of gold had everything to do with it. It was the reason the Clinton Administration fought to deregulate the derivatives market, with their allies in the Fed and a pompous economist/senator from Texas:

First read this piece on Summers and his study on the Gibson Paradox

This is Summers original paper:

Here is a chart showing how the Gibson Paradox began breaking down during the Clinton Administration:

Try reading here to find out why the derivatives market was deregulated by the Clinton Administration:

Some other information which might interest you on whO your enemy is:

Be sure to put on your tin foil hat before opening any of these pages.

Anonymous said...

The reason for all this mucking about with financial instruments of mass destruction was simple: you accept the Federal Reserve Note as money because Congress says it is money under law in the United States.

But, Congress doesn't make laws for China, Russia, and the rest of the planet. To keep them using the dollar, gold, and any other serious alternative to the dollar, has to be hobbled.

The entire mess blew up in their faces and they blamed Wall Street greed for the catastrophe. In fact, Wall Street was just the hired help - the errand boys doing what Washington told them to do, and holding a "get out of jail free card" if something went wrong.

Anonymous said...

I know this is kind of a random criticism, but I definitely wouldn't characterize the San Francisco Fed as the second most important regional Fed bank. Far and away the two most important regional Fed banks are the New York Fed (obviously) and the Richmond Fed. The Richmond Fed, due to its proximity to DC, has essentially become an extension of the Board of Governors -- which, as we all know, is where all the power is anyway. San Francisco, Chicago, and Dallas are also important, but New York and Richmond are a cut above the rest.

Other than that, I completely agree with your post. I also think Bernanke saved the world from a second Great Depression in September, and I also think Summers would be the worst of the realistic options.

I've been asking friends on the Hill about this recently, and they all say that Bernanke is a lock for re-nomination, and that he's a lock to get confirmed again. But they also say that the confirmation vote won't be a blowout -- since it's a lock that Bernanke will ultimately get confirmed, and since he's so closely associated with the deeply unpopular bailout(s), it'll be hard to hold Senators from taking that kind of freebie vote. (Proving once again that policymaking at the federal level is, in fact, like herding cats.)

Barkley Rosser said...


Gold has not been the basis of anything for any government since 1971, when Nixon finally closed the gold window once and for all. Not even the South African rand is backed by gold. Only four central banks have serious amounts of gold, and they are leftovers of the earlier era (US, UK, France, Russia). They have been gradually selling it off, not to "keep gold suppressed," but because the stuff earns no yield.

Sorry, but I have little respect for gold bugs or cranks, which is probaby just as well that you remain anonymous. This is looney toons stuff.

Econ of Contempt,

Richmond does handle the operating expenses of the Board of Governors (and I once heard a story about some bank refusing to accept a check from Paul Volcker drawn on the Richmond Fed when he was Chairman!). But those operations are not used for any direct policy purposes. SF is important because it oversees so much more of the US economy than any other one.

You are probably right that Bernanke is a lock, but he is not up for several more months. Depends if we really are hitting bottom or not. If we are, he is probably a lock.

Barkley Rosser said...

Before this scrolls off, I am going to make another nasty remark about the gold bugs, along with noting that I share Keynes's view that gold is a "barbrous relic." I think part of what has these people ticked off is that a lot of them have believed their own hype and baloney; that everything it tied to gold and that its price has been "suppressed" and should go much higher. So, lots of them have put all their money into gold during this crisis, only to see it going nowhere. Oooh, let us blame Ben Bernanke, that wicked guy!

So, back around February a friend of mine who is not an economist came to me all hot and bothered asking if he should put his money into gold. Whenever it was exactly, it was right at the point that gold hit $1,000 an ounce, which it did once in 2008 also. I told this guy that it was a speculative bubble and that it was going to go down again shortly (although all the gold bug blogs were ranting about it only going up up up into the stratosphere!!!). I said, "buy if it gets back $500, maybe." Well, it did drop back from $1000, and while it has not gone much below $900 and mostly stays above that, it has not hit $1000 again. Meanwhile the Dow has gone from 6000 something to 9000 something.

Sorry, gold bugs. I have nothing but contempt for you (speaking of the Economics of Contempt). Go worship your sun god barbrous relics in silence and leave the innocent suckers alone.

Anonymous said...


I am not a gold bug. I wouldn't even know how to buy gold.

But, unfortunately, only the gold bugs actually care to study the relationship between fiat money and gold, and, therefore, have data of significance concerning the subject.

Folks like you, who have decided that gold is a barbaric relic, ignore this relationship, and, therefore, speak only from that ignorance.

However, I do believe that gold is still "money" in every respect, despite its being severed from the medium of circulation.

Which is to say, in every respect - as store of value, means of payment, reserve (in other words, all those silly barbaric functions that economists like to dismiss as unimportant) - fiat cannot serve as money.

The function of fiat as substitution for money is limited to medium of circulation alone - hence, the virtual monopoly of ownership of gold by governments in every nation using fiat.

If this were not true, Summers and Barofsky would not have found clear evidence that the fiat price of gold affected interest rates exactly as it did when gold was the standard. (I suppose they are gold bugs as well)

The idea that the price of gold has to be depressed is not a gold bug belief alone - if you had taken the time to read Summer's paper, you would see he and Barofsky hold to this idea as well - supported by lots of empirical data.

Although counter-intuitive, the idea that the price of gold is suppressed, and must be suppressed - even as the purchasing power of the dollar falls - is exactly the reason why it cannot serve as an investment vehicle: An unwind of gold prices to reflect gold's actual value versus fiat would have the effect of an economic implosion the likes of which no sane person could possibly imagine.

So, we do agree that only a fool would buy gold: it is depressed now, and if it weren't depressed there would be no economy within which it might be used.

Having put your objections to the gold bugs aside, their research still supports the conclusion that Summer's research, and Rubin's work during his time at Goldman Sachs' London office, proved that low interest rates could be maintained by hobbling gold prices.

And, it shows that the control of gold prices required the creation of a deep and liquid derivatives market - which market was deregulated by the Clinton administration, with the ardent support of the Federal Reserve.

And, we both know what happened to that market shortly thereafter...

Anonymous said...

Excuse the error: I meant Barsky, not Barofsky...

Anonymous said...

"I share Keynes's view that gold is a 'barbrous relic.'"

Quite a progressive opinion for someone who treats a worthless piece of paper with such awe--

I awoke this morning to the realization of how ironic it is:

The reason Keynes call gold a barbaric relic is that between the long depression and the great depression governments discovered they could build massive war machines only if they went off the gold standard.

It was for this reason alone - to engage in the most barbarous wars in the history of mankind, with more than 100 million dead - that gold was displaced from its ancient role and replaced by its paper token.

Barkley Rosser said...


Probably you will not read this, but I did go and look at the Barsky Summers paper. They found the paradox holding for the high gold standard period before WW I, but not significantly outside of that, and not at all after 1971. You were totally misrepresenting the paper and are totally full of crap.

Maybe you are not a gold bug, just a lying crank.

Anonymous said...

Summers and Barsky, section V. Summary and Conclusion: "The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term interest rates are indeed associated with the movements in the relative price of gold in the opposite direction and this effect is a dominant feature of gold prices."

Anonymous said...

As to the above: This, of course, no longer holds since Rubin and Summer went to Washington...

Anonymous said...

Of course, not being ideologically hobbled by being an economist, I came to the same conclusion based on simply logic: If the price of gold could reflect changes in price levels, people would soon figure out that gold was an superior alternative to fiat.

Example: suppose in 1990 you could buy a house for $150,000 or 300 ounces of gold; and, in 2007 buy that same house for $260,000, or 300 ounces of gold - which would you choose as your preferred form of savings?

The obvious answer is gold.

So over any given period of time, the price of gold has to be depressed to some general range of prices, in order to prevent a general flight to the commodity.

And, once I reached that conclusion, I went looking for evidence gold prices had been manipulated...

Anonymous said...


You will want to follow the discussion on gold at Zero Hedge...lots of juicy declassified stuff dating back to 1968 on the subject.