Saturday, January 19, 2013

Do 2007 Fed Transcripts Make Yellen Frontrunner To Succeed Bernanke?

I think maybe so.  There is a large photo of her above today's story in the Economy & Business section of the Washington Post entitled "Caught between two outlooks: Fed slow to abandon optimism even as a few sounded alarm, 2007 transcripts show."  Next to the photo of her is a quote by her from the Dec. 2007 meeting in which it is clear that she was one of the far-sighted ones who "sounded alarm" but failed to convince the FOMC to loosen monetary policy more vigorously at the time, when she was still President of the San Francisco Fed.  Bernanke was apparently torn, although he had made warning noises in the summer about deterioration of the markets.  Those who also "sounded alarm" with Yellen are identified as being Tim Geithner, then New York Fed President, Eric Rosengren, then a Fed governor, and Frederic Mishkin, author of the most widely used Money and Banking textbook, then also a governor.   Given that Janet Yellen is currently Vice Chair and apparently in good graces with Bernanke, and Obama is being fingered as a possible sexist, and that aside from being identified by Richard Shelby as an "inflation dove" (and he voted against her appointment), and she has avoided saying anything embarrassing in public or making many enemies, it would appear that she may well now be the frontrunner to replace Ben Bernanke as Fed Board Chair next year.  I would certainly support it.

Ironically, her most serious rival might prove to be fellow Wise Person, Geithner, if he is interested, now stepping down as Treasury Secretary.  He has been viewed by many as kind of a front man of the big banks and also somewhat dissed for not having an academic and professional background in economics, like Bernanke or Yellen have (although neither Greenspan or Volcker did).  However, there is reason to believe that he might well have been ahead of the rest of those in the inner Fed decisionmaking circles in worrying that the decline of the housing bubble could lead to a major financial crisis and economic downturn.  This would have been due to his deeper association with the New York financial markets and is given in a speech he gave on Sept. 15, 2006 in Hong Kong in which he mostly said optimistic things, but devoted several paragraphs near the end to warning that if there were a crisis he would be unable to get everybody in a room and just cut a deal to solve it the way his predecessor, McDonough did during the 1998 LTCM crisis. He noted that the links in the financial system through complex derivatives had become too obscure and global.  This speech can be found at .

While he was not identified in this article, other sources have identified a main opponent of the Yellen-Geithner-Rosengrim-Mishkin position as being Jeffrey Lacker, then and now the President of the Richmond Federal Reserve Bank.  Apparently there were specifically sharp arguments between him and Geithner over bank regulation, with Geithner seeing himself as having a national responsibility, whereas Lacker was protective of his oversight of the Bank of America and Wachovia Bank, both of which had their HQs in Charlotte, NC in his district.  Of course, more recently he has been the hawkish dissenting vote on the FOMC, although he has now stepped off it as a voting member.  An irony of this is that he was a Ph.D. student of Donald Hester at the University of Wisconsin-Madison, who is an old Keynesian and student of James Tobin's at Yale, where he crossed paths with Janet Yellen.  Curiously, Hester defends Lacker and his policy arguments, despite Lacker's apparent capture by the long-time monetarist research staff at the Richmond Fed.

In any case, here is one voice in support of the candidacy of Janet Louise Yellen to be the next Chair of the Board of Governors of the Federal Reserve System of the United States of America!  


Peter Dorman said...

Hey Barkley, I was an undergrad student of Hester -- does this qualify me for anything (other than this blog)?

Incidentally, he taught a great course. I was "banker of the week" in his virtual bank game for the first week....and then went bust. Risk and return, risk and return. said...

Funny thing is that I never actually had Hester, but I played him in a satirical Department Christmas party skit. I was "Pester," and I think I uncoiled a roll of toilet paper, loudly declaring that this was my latest research, or some such nonsense. The grad students put on those skits (I have no idea if they still do such things there), and some of what we did was pretty outrageous.

Anyway, Hester eventually forgave me, and we have been friends in more recent years. Although emeritus now, he remains active and in his office most days, still writing books and papers, a lot of them on Italian banking.

It is my observation that if he decides you are OK and you are one of his people, then he is very personally loyal. I think that this explains his attitude towards Lacker, even though I suspect that he is not entirely in agreement with all he is doing. I have never heard him say a bad thing about any of his former students, those for whom he was their major professor that is, which was the case with Lacker (PhD, 1980).

Mark A. Sadowski said...

My impression is that the following exchange has somewhat diminished Geithner's chance at Fed Chair.

"...Lacker suggests Geithner may have discussed rate cut with banker

During the Aug. 16 videoconference, when the Fed elected to cut the discount rate for bank lending, Richmond Fed President Jeffrey Lacker suggested that Timothy Geithner, then the New York Fed president, may have allowed word of the impending rate cut to leak to one leading bank. That set up a tense exchange between the two officials.

Geithner said that the banks “obviously don’t have any idea that we’re contemplating a change in policy or what might be possible and what we might say or not say going forward.”

Lacker said, “Vice Chairman Geithner, did you say that they [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?”

“Yes,” replied Geithner.

Continued Lacker: “Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.”

Responded Geithner, “Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.”..."

Carola said...

Last summer I worked on updating an undergrad-level macro textbook by Boyes and Melvin. I asked if I could add a feature box about women in economics, to hopefully encourage more diversity in the field. In the box I profiled Janet Yellen. It would be so awesome if in the next edition, it could be updated to say that she was Chair. (I'm at Berkeley, so I may be biased!)