Wednesday, September 11, 2013
The future leadership of the Federal Reserve, at a time when the Fed has indicated an inclination to change policy and lessen quantitative easing, is uncertain with the anticipated retirement of Chairman Ben Bernanke at the end of this year. At the center of the debate is whether President Obama should pick Lawrence Summers or Janet Yellen, the two front-runners, to replace Bernanke. The topic has been surprisingly controversial and received significant play in the mainstream press fueled in no small part by the spotlight the contenders shine on gender issues. Lawrence Summers, ended his term as Harvard’s president amid controversy for his remarks attributing the gap between male and female advancement in hard sciences to inherent differences between the sexes. (The legacy of his presidency was also marred by a billion dollar endowment loss due to poor investments under his leadership.) Janet Yellen is not just a counter point to Summers; she serves as her own figurehead in this debate. If appointed, Yellen would be the first female to lead the Federal Reserve, an important milestone for women. It could also be a potentially important litmus test for the Obama administration, which has come under scrutiny for the absence of women in top leadership positions, especially in economic issues.
Of course, the heart of the differences between the two stands not on gender alone, but on substance. While both Summers and Yellen have incredible CV’s combining academic, regulatory and policy-focused credentials, I categorize the differences that will make a distinction between them as foresight, process and balance. (In full disclosure, in August I signed on to a letter in support for Janet Yellen as one of many business law professors who favor her candidacy. That letter is available here Download Fed Nomination Letter final.)
On the foresight issue, Janet Yellen, in her role as the President of the San Francisco Federal Reserve Bank, expressed concern for the housing bubble and its impact on price stability as early as 2005. Lawrence Summers, on the other hand, supported the repeal of the Glass-Steagall Act and the Commodity Futures Modernization Act while also touting the role and continued deregulation of derivatives—all considered contributing factors to the Great Recession, as it is now called.
Process speaks to how the Fed Chair will be appointed and how the Chair will operate in the position. Without having personally worked with either, Janet Yellen is believed to be collaborative and open-minded in her decision-making process drawing comparisons between her style and that of current, and highly regarded, Chairman Ben Bernanke. More than 200 economics professors (the number is now reportedly 350) signed an open letter to President Obama lauding her leadership style and praising her for being “willing to hear multiple points of view and to bring many voices into the policy making arena.” Summers’ reputation, on the other hand, is one of confrontation. While Summers is rumored to be the top Obama contender, the uncertainty surrounding the Syria vote and the lack of unity behind Summers as a candidate among the Democratic ranks means that limited political capital may tip the scales in favor of Yellen as the less controversial candidate, at least among Democratic lawmakers.
Balance. A main function of the Board of Governors of the Federal Reserve System is to set monetary policy, which is done, in part, through the Federal Open Market Committee or FOMC, comprised of 7 of the Governors and 5 of the 12 Reserve Bank presidents. The FOMC influences monetary policy through interest rates, which it sets directly through the discount rates and can also impact through the buying and selling of government securities. These actions can result in a higher (tightened monetary supply) or lower (eased monetary supply) interest rates. The current composition of the Board or Governors is about to undergo a dramatic change with the anticipated retirement of Chairman Bernanke and 3 other female Governors: Elizabeth Duke, Sarah Raskin and Sandra Pianalto. If Summers is selected as the new Chair, it is speculated that Janet Yellen would resign from the Board of Governors creating significant turnover, a power vacuum, a loss of institutional knowledge, and an absence of women at the head of monetary policy. Additionally, in a brilliant little diagram provided by the folks at Chart of the Day, the loss of these particular Governors would mean that the economic policy of the Fed would be tipped away from its current dovish tendencies of lower interest rates towards a more hawkish inclination.
As an aside, a new favorite past-time since the birth of my son in July has been watching re-runs of The West Wing during those late feedings or hours when I am awake, but brain-dead. Of the many political scenarios that play out, one involves the unexpected death of the Federal Reserve Chairman and a public dispute over who should be named the successor. Sound familiar?