After President Obama announced her nomination Wednesday, Janet Yellen will likely become the first woman to head the Fed. The Maestro has morphed into the Mistress.
Summers has exited stage right, chased not by a bear, but by the indignant howls of those who saw him as unfit—too hawkish, too connected to Wall Street, and insufficiently empathetic. There is a breathless debate over whether Yellen will be the most powerful woman in America so far, perhaps above a Secretary of State or a Supreme Court justice.
Yellen, many believe, is the perfect choice, a first-rate academic whose sense of timing is exquisite and nuanced. Her transformations are perfectly timed. She criticized Greenspan for being too loose in the 1990s and now backs quantitative easing. She would never have used the “T” word, “tapering,” because unemployment remains unconcionably high. The implication is that she is wiser than both her predecessors. She is a dove when a dove is needed but easily turns into a hawk when inflation appears to actually be imminent. She is not too hot or too cold, but just right, the Goldilocks of Fed chairs.
This is how we like our heroes until we tear them down in disappointment. Finally, a savior! She won’t be flawed like those who came before her. She’ll be the One who can steer the economy, a steady hand on the tiller.
But there is no tiller. It’s a lousy metaphor. Being Fed chair is less like Odysseus steering between Scylla of inflation and the Charybdis of unemployment and more like the Wizard of Oz: grand pronouncements in a booming voice amplified by the media who love the theater of the wise man or woman who will find a way to get us home. We are not to pay attention to the real man or woman behind the curtain, the uncertain one who is whistling in the dark while purporting to find just the right calibration of the dials of monetary policy.
When it comes to running the Fed, you’re almost always a wizard until you’re not. Bernanke today looks a lot like Greenspan did in 2006—honored by the financial sector for his innumerable kindnesses and feted by the small community of macroeconomists who love the system because it makes them more important than they should be. But it is too early to judge. If Yellen cannot manage a safe way to unwind the trillions of dollars of assets on the Fed’s books, Bernanke’s rep will take a tumble just like his predecessor’s did. And then there is his protection of Wall Street that began with a walk down Maiden Lane, protecting Bear Stearns’s enablers from even the tiniest haircut. History may not judge those decisions as kindly as the present does.
The pretense of precision is only one of the fantasies we expect of our Fed chairs. Another illusion we all pay homage to is the independence of the Fed. But the chair of the Fed responds to political incentives just like everyone else. Those political incentives dwarf almost everything else—which is why it is so foolish to parse past pronouncements of Yellen trying to figure how where she will fall on the dove-hawk spectrum or how she will treat Wall Street.
Is it likely that Yellen will stop paying interest on the reserves that banks hold at the Fed? I wish it were otherwise, but the answer is likely to be no.
When the next crisis comes and big banks fail, will she force their creditors to lose a lot of money or any at all? That would stop the music on Wall Street and kill the easy leverage the investment banks enjoy. I wish it were otherwise, but I think she will keep that music playing.
If inflation comes and it is near an election, will she step on the monetary brakes risking unemployment to avoid a higher inflation rate? I would be surprised.
Here is how powerful the incentives are. When an acolyte of Ayn Rand became chair of the Fed, an alleged advocate for government keeping its hands out of the private choices of free individuals, he relentlessly sheltered investors via monetary policy (the Greenspan “put”) and relentlessly sided with the big banks.
So yes, he opposed regulation—”a free-market ideologue” the critics chorused. But the ideologue also testified before Congress in support of the government guarantee of Mexican debt in 1995, calling it a bad policy but a necessary one and insuring that the large banks that had financed the debt of the Mexican government lost not a penny. When his ideology conflicted with helping the banks, he helped the banks.
Bernanke has been even kinder to the banks. He comes from Princeton. He’s not a conservative or a free-market ideologue. You might think he’d be a little more populist. But when push came to shove, he took skin out of the game for the financial sector and replaced it with your skin and mine, against our will.
Yellen is from UC-Berkeley. But I would expect her to follow the same policies as her predecessor, not because they are right—the coddling of banks is very wrong, in my opinion—but because the political forces will encourage her to lean not left and not right, but north, toward New York City and Wall Street.
I would love to be wrong. I would love for a chair of the Fed to put Wall Street’s skin back in the game, to stop artificially inflating the stock market and to rely more on rules than on discretion. But until the political incentives change, who is chair of the Fed is simply not important as we pretend it is. I expect Janet Yellen to be more of the same.