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Neil Irwin Listens to Footsteps in the Topkapi Palace: Federal Reserve Succession Weblogging

I had thought that the White House's economic advisors were not so much uneasy with picking Janet Yellen as Fed Chair as enthusiastic about picking Larry Summers?

Neil Irwin:

Why the White House is uneasy with picking Janet Yellen as Fed chair: Many of the economic advisers whom President Obama consults with favor Larry Summers…. But what is it, exactly, that they have against Janet Yellen?… People who have worked with Yellen… overwhelmingly spoke favorably of her intellect, diligence and approach to leadership. But… some aspects… are different from the qualities that Obama insiders favor…. [While] Kohn and Ferguson worked much like deputies to the chairman… Yellen… is more of her own thinker… urging Bernanke and her other fellow policymakers to shift policy to try to do more to combat unemployment…. And people dealing with her within the Fed have viewed her not so much as Bernanke’s emissary but as her own intellectual force…. Obama’s advisers… are big on the team player concept, people diving in together to sort through the hard and messy challenges they face.

Wait a minute: Janet Yellen was right. Ben Bernanke has now shifted to what I regard as the Yellen position. So has the consensus of the committee. This has been a good thing. It would not have happened had she not staken out her own position different from the 2010-era Fed consensus.

How can anybody see a willingness to be right and say that you think you are right as a drawback?

Irwin goes on:

When Timothy Geithner was New York Fed president, for example, he, Bernanke, and Kohn were very much a team… [along with] Bill Dudley… and Kevin Warsh…

And they didn't entirely cover themselves with glory, did they?

It would have been much better for the world if they had found the authority they had found on Tuesday to nationalize AIG on Sunday and used that authority to prevent the uncontrolled bankruptcy of Lehman. They didn't take Lehman paper with a haircut as collateral. They didn't even set up a room with a whiteboard where people whom Lehman owed money and people who owed money to Lehman could get together to do deals, did they? It is true that Treasury Secretary Hank Paulson stepped up and took the bullet and the blame, but nevertheless this was not their finest moment, was it?


In the early months of the Obama administration, the same could be said of the group that included Geithner, Summers, Gene Sperling and others…. Throughout this time, Yellen was running the San Francisco Fed--very effectively, according to interviews with people who worked with her closely before and during the crisis. But she was on the outside looking in regarding some of the seat-of-the-pants decisions that were being made over how to rescue the American economy.

And my sense is that the Obama administration would have been very well-served by bringing Yellen in. Back in November 2009 she was more than a year ahead of the "green shoots" consensus of White House senior economic advisors:

Greg Robb (November 10, 2009): Fed's Yellen see signs of jobless recovery: The most recent economic data suggests that the U.S. could be about to experience another jobless recovery, said Janet Yellen…. The past two recessions, in 1991 and 2001, were followed by so-called jobless recoveries, and "things seem to be shaping up similarly this time around," Yellen said in a speech in Phoenix. "I believe the overall economic recovery is likely to be gradual and remain vulnerable to shocks," Yellen said. With such a slow rebound, unemployment could stay high for several years to come.

Then Neil puts his ear to the ground once more:

A second… reason… Yellen’s leadership style isn’t a great mesh with the Obamaites is also one of her strengths. She is always meticulously prepared… careful and systematic…. In a Fed policy committee meeting or a gathering of international central bankers, she typically scripts herself in advance and reads those prepared comments.

As does every competent central banker. When your words can move markets substantially, you don't wing them. You just don't. You don't act:

[like]Geithner… [and] jump… from meeting to meeting, from hearing to phone call, without so much as a set of talking points…. The question is how Yellen’s cautious approach would work when she is dealing with the full panoply of issues that a Fed chair must grapple with…

The answer, I think, is that that style would, I must say, work much better than getting yourself overscheduled and jumping "from meeting to meeting, from hearing to phone call, without so much as a set of talking points". If you have a large staff working for you, you use them, rather than trying to keep all the information in your brain and speaking off the cuts.

Third, the president very clearly frets about the risk of financial bubbles…. Yellen has been at the forefront of the Fed’s thinking on how to use unconventional monetary policy to try to fight unemployment… an architect of its strategy of using more open communications… says all the right things about potential bubble risks…. But she is not particularly vocal on what those risks are and where they might be bubbling up.

This is simply wrong: Yellen was equal to Ned Gramlich and out in front of all other Federal Reserve policymakers in the 2000s in her real-time worries about the housing bubble. Demonstrated ability to see a bubble and think about its risks in real time is one of Yellen's strengths, not a weakness.

Neil concludes:

Essentially, the reservations among Obama advisers over Yellen have more to do with what sort of Fed chair they want--what leadership style and intellectual emphasis--than any particular weaknesses that the current vice chairman may have.

I am not at all sure that what Neil has heard is what the White House staff meant for him to hear. But I must say that I find my line--that either would be an excellent choice, but that I have a small preference for Summers over Yellen because if we wind up in the lower tail of the outcomes distribution we would rather have a central banker not bound by a perhaps-outdated past Fed consensus--more convincing.