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Janet L. Yellen, Possible Fed Successor, Has Admirers and Foes

April 25, 2013 by Leave a Comment

But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing. She marshaled academic research that showed it would reduce the depth and frequency of recessions, articulating a view that has prevailed at the Fed. And as the Fed’s vice chairwoman since 2010, Ms. Yellen has played a leading role in cementing the central bank’s commitment to keep prices rising about 2 percent each year.

Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed’s campaign to stimulate the economy and bring down unemployment.

But some of Ms. Yellen’s critics remain wary. They worry that she would not be sufficiently concerned about the possibility that inflation will accelerate as the economic recovery gains strength. If nominated, she could face opposition from Senate Republicans who have repeatedly expressed concern that the Fed’s campaign would destabilize financial markets and make controlling the pace of inflation more difficult.

“I think people read Janet Yellen’s speeches as saying that she puts a higher weight on joblessness compared to inflation” than the typical member of the Fed’s policy-making committee, said Vincent Reinhart, formerly the head of the Fed’s monetary policy staff and now the chief United States economist at Morgan Stanley. “And that includes Ben Bernanke.”

He added, however, that her nomination would be unlikely to shake financial markets because she already exercises considerable influence, so any shift in policy would most likely be modest.

Moreover, Ms. Yellen’s personal qualities, highlighted by the 1996 episode, have helped her win supporters even among her ideological opponents.

“She makes an argument on the merits and she sticks with it,” said Alan Blinder, an economics professor at Princeton nominated to the Fed alongside Ms. Yellen in 1994. “And she’s good at articulating an argument in a way that doesn’t leave people on the other side hopping mad at her.”

Despite their disagreement at the time, Mr. Greenspan said that he continued to hold Ms. Yellen in high regard. “I did listen to her more carefully because she articulates her position in a way that you can follow it analytically,” he said in an interview. “Intuitions are useless. Janet’s conversation and her presentations were factually based, and that always got my attention.”

If confirmed, Ms. Yellen would become the first woman to lead a major central bank. She is 66, seven years older than Mr. Bernanke. She would be 71 by the end of a four-year term as chairwoman. But she remains in good health, and friends say that, like other prominent women of her generation, she regards herself as being in the prime of a late-blooming career. Nor would she be the oldest person to lead the Fed. Mr. Greenspan began his fifth and final term in 2004 at 78.

Ms. Yellen, slight, white-haired and described by one colleague as a “small lady with a large I.Q.,” does not loom like Paul Volcker nor cut like Mr. Greenspan. Her personal style more closely resembles Mr. Bernanke’s soft-spoken manner. The force of her arguments can catch people by surprise.

Kevin Hassett, a staff economist at the Fed when Ms. Yellen arrived in 1994, recalled that she started to eat lunch regularly in the staff cafeteria to subvert the hierarchical system that limited communication between Fed governors and the vast army of research economists. Other governors had tried to change the rules but Ms. Yellen, he said, found a way around them.

“It showed a kind of grace and wisdom that is very unusual in Washington,” said Mr. Hassett, now a fellow at the right-leaning American Enterprise Institute.

Article source: http://www.nytimes.com/2013/04/25/business/janet-l-yellen-possible-fed-successor-has-admirers-and-foes.html?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: Sheila Bair Could Fill a Fed Vacuum in Bank Supervision

March 7, 2013 by Leave a Comment

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

President Obama should nominate Sheila Bair as vice chairwoman for supervision at the Federal Reserve. This position was created by the Dodd-Frank financial reform legislation (Section 1108 in Title XI) but has gone unfilled for nearly three years – clearly not in line with the intentions of legislators, who even specified that this official should testify before Congress on a semiannual basis.

Today’s Economist

Perspectives from expert contributors.

Ms. Bair is an experienced regulator, the former chairwoman of the Federal Deposit Insurance Corporation and the author of “Bull by the Horns,” an excellent book on what went wrong with the financial system and how to fix it. She currently works as an effective advocate for financial reform as a senior adviser at the Pew Charitable Trusts, and she founded and is chairwoman of the Systemic Risk Council (I am a member of this council).

No one has stronger bipartisan support and a better working relationship with reasonable people across Washington. There is now a potential vacancy on the Fed board, as Elizabeth Duke’s term as governor expired more than a year ago; she continues to serve until a successor is appointed. The reformist wing at the Fed desperately needs serious reinforcement.

And the Federal Reserve itself faces a broader impending crisis of legitimacy if it fails to decisively confront the problem of too big to fail. Anyone who believes in the importance of an independent central bank should work hard to force the Fed to act decisively on big banks.

Since the fall, Daniel Tarullo, an academic expert on banking and currently the lead Fed governor for financial regulation, has given some encouraging speeches, including a discussion of the need to impose effective size caps on the largest banks. He is also known to be in favor of stronger capital requirements than some of his Fed colleagues. And he is much more likely to push for bank holding companies to finance themselves with enough equity and long-term subordinated debt to serve as a loss-absorber in the case of financial failure.

But Mr. Tarullo has not yet made much discernible progress – and there is a real danger that the Fed will slip into a wait-and-see policy that will lead nowhere.

When questioned by Senator Elizabeth Warren, Democrat of Massachusetts, in a recent hearing, Ben Bernanke, the Fed chairman, was vague and unconvincing on the importance of additional measures to reduce the dangers posed by “too big to fail” banks.

And I was further discouraged on Monday by the wording of a speech by Jerome Powell, a relatively new member of the Fed’s Board of Governors. Mr. Powell’s line is that while “success is not assured” for existing measures that aim to end “too big to fail,” we should merely study additional steps (such as size caps; see Pages 12-13 of his speech).

Mr. Powell did not deny the existence of too-big-to-fail subsidies – and this puts important distance between his views and those expressed, for example, by people at JPMorgan Chase. But he did not suggest that the Fed should measure the subsidies these institutions receive – or the dangers that they pose. In effect he and his colleagues are saying, “Trust us, and we’ll continue to provide you with vague answers and promises of future progress.”

There is a more general level of vagueness in Mr. Powell’s speech that is deeply disconcerting (and I felt the same way about Mr. Bernanke’s exchange with Senator Warren). When will the Fed board decide that the “too big to fail” reform project is insufficient and on what basis? It’s already nearly three years since the passage of Dodd-Frank, yet the implicit subsidies and general unfair competitive advantages of megabanks show no signs of receding.

Will the “living will” process – in which banks are supposed to present plans for their own demise in the event of big losses – be used to bring effective pressure to bear on the big banks, as Thomas Hoenig of the Federal Deposit Insurance Corporation proposes? There is no sign of this in Mr. Powell’s view of the world, despite the fact that even William Dudley, the president of the Federal Reserve Bank of New York, views the first round of living wills (submitted last year) as inadequate.

In fact, global megabanks as currently constituted could in no way prepare a credible living will; they are simply too complex for their own management to understand – as demonstrated by JPMorgan Chase’s losses of more than $6 billion in the so-called London Whale case. The materials involved in a full disclosure would fill a small college library, and most of them would prove irrelevant once liquidation started. And any such document can immediately become out of date; a day of intense derivative trading can significantly change the risk profile of a big company, and the nature of the systemic risks that it poses.

Mr. Powell is an experienced financial sector executive and, behind closed doors, most such people are candid about the problems of megabanks. I’m sure that Mr. Powell’s intentions are good, but perhaps inadvertently he is siding with industry people who seek to use delaying tactics at every opportunity.

For example, Mr. Powell referred to the resolution of global megabanks without sufficiently emphasizing the inherent difficulties of cross-border resolution (see Pages 9-10 of his speech). Again, I am confident that Mr. Powell is fully informed about the lack of progress in creating an integrated resolution regime between Britain and the euro zone, as well as the serious difficulties within the euro zone itself.

Citigroup brags about having 200 million customer accounts in 160 countries and processing $3 trillion in transactions every day. How exactly does Mr. Powell or anyone else propose to unwind that when the cross-border issues are profoundly complicated and it’s every regulator for himself? Citigroup, after all, falls into a state of insolvency roughly every decade.

As for the cooperation between the F.D.I.C. and the Bank of England, to which Mr. Powell refers (again, see Pages 9-10), this is a valiant effort. But I have talked in detail with Paul Tucker, the relevant deputy governor at the Bank of England (including at the public meeting of the Systemic Resolution Advisory Committee of the F.D.I.C. in December). The Bank of England has a fundamentally different approach to bank resolution than that of the F.D.I.C. Both sides, by statute and under political pressure, must keep their options open.

In any crisis, national interest comes first, which means the potential for an unseemly scramble by regulators to grab assets. This is exactly how markets become destabilized.

Mr. Powell refers (see Page 6) to a “public simulation of the failure of large financial institution” under an ordinary liquidation agreement that he helped design in October 2011. And he draws encouragement from that experience, which refers to the simulation organized by The Economist at its Buttonwood conference. But according to top-level participants in that exercise, with whom I have spoken, the cross-border piece was designed to be trivial, with the relevant regulators presumed willing and able to cooperate, because the event had to fit within a two-hour time slot. The inherent complexity of modern cross-border banking was simply assumed away in the interest of making for good viewing.

This is not a serious way to think about financial crises.

If Mr. Powell were serious about ending too big to fail, he would express in public his support for efforts to measure the subsidies that these financial institutions continue to receive. The Fed is perfectly capable of calculating and publishing numbers that would be informative regarding whether these subsidies are rising or failing.

As I mentioned here last week, in the early 2000s the Fed staff calculated the federal subsidies to Fannie Mae and Freddie Mac at around 40 basis points (I cited a 2003 paper and a 2004 speech by Alan Greenspan, then the Fed chairman). Why not do analogous calculations for today’s too-big-to-fail financial institutions? I understand that Mr. Powell is not in a position to tell the Fed staff what to do, but calling for more precise measurement and public reporting on subsidies is hardly expressing a radical thought.

Any excuse that such subsidies are hard to measure (which is what I hear from the industry, not from Mr. Powell) is inherently lame. In fact, it would be laughable if that were ever to come from the Fed. Is inflation or the “natural rate” of unemployment easy to measure? The Fed is in the business of filtering out noise and understanding fundamentals.

Of course, the Fed did a very bad job across almost all dimensions of its mandate before the crisis of 2008. That is exactly why its legitimacy is called into question. It is baffling that so many Fed insiders refuse to understand how another financial crisis, centered on unfettered too-big-to-fail financial companies, would undermine the fragile political consensus that currently supports central-bank independence.

Broader political momentum is most definitely shifting toward confronting the power of very large financial institutions. On Tuesday, I was chairman of an event on “too big to fail” at the Peterson Institute for International Economics with Sheila Bair; Senator Sherrod Brown, Democrat of Ohio; and Jon Huntsman, the former governor of Utah and Republican presidential candidate. (You can watch the video on the institute’s Web site.)

Senator Brown made a strong case, from the left, for constraining the size of very large banks. Mr. Huntsman made a convergent case, from a conservative perspective, for measuring and ending the subsidies these financial institutions receive to maximize economic growth. Ms. Bair provided the hands-on, detailed view about how to move our current rules decisively and appropriately in the right direction.

Yet on Wednesday, Attorney General Eric Holder acknowledged that some of the largest financial institutions may have become too big to prosecute. “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he said in testimony to the Senate Judiciary Committee, reported on thehill.com blog. “And I think that is a function of the fact that some of these institutions have become too large.”

Still, the Obama administration says it wants to promote women to positions of responsibility. Ms. Bair is not just the best woman for the job of supervision at the Fed; she is by far the best-qualified person. Is this White House serious about financial reform, or is it just paying lip service?

Article source: http://economix.blogs.nytimes.com/2013/03/07/filling-a-fed-vacuum-in-bank-supervision/?partner=rss&emc=rss

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Economic Scene: As Economy Sputters, a Timid Fed

March 30, 2011 by Leave a Comment

Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?

It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.

Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.

Higher oil prices, government layoffs, Japan’s devastation and Europe’s debt woes are all working against the recovery. Already, a prominent research firm founded by a former Fed governor, Macroeconomic Advisers, has downgraded its estimate of economic growth in the current quarter to a paltry 2.3 percent, from 4 percent. The Fed’s own forecasts, notes that former governor, Laurence Meyer, “have been incredibly optimistic.”

Why is this happening? Above all, blame our unbalanced approach to monetary policy.

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The result is a bias that can distort the Fed’s decision-making. Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany.

These warnings helped bring an end early last year to the Fed’s attempts to reduce long-term interest rates — even though the Fed’s own economic models said that it should be doing much more. We now know, of course, that the models were right and the hawks were wrong. Recoveries from financial crises are usually slow and uneven. Yet the hawks show no sign of grappling with their failed predictions.

It is true that the situation has become more complicated in the last couple of months. Some of the economic data has been encouraging, and inflation has picked up.

In particular, core inflation, which excludes volatile oil and food prices, has increased somewhat. (Overall inflation obviously matters more for household budgets, but core inflation matters more to the Fed, because it’s a better predictor of future inflation than inflation itself.) Over the last three months, the Fed’s preferred measure of core inflation has risen at annual rate of 1.4 percent, up from less than 1 percent last year.

Still, 1.4 percent remains low — considerably lower than the past decade’s average of 1.9 percent, the 1990s average of 2.2 percent or the 1980s average of 4.6 percent. Unemployment, on the other hand, remains high. By any standard, joblessness is a bigger problem than inflation.

There is also reason to think that inflation will fall in coming months. Rising oil prices alone aren’t enough to create an inflationary spiral. Workers also need to have enough leverage to demand substantial raises — which then forces companies to increase prices and, in turn, gives workers further reason to demand raises. In today’s economy, this chain of events is pretty hard to fathom.

Adam Posen, an American economist who’s now an official at the Bank of England, told The Guardian this week that he was so confident inflation in Britain would decline that he would resign if it did not. His analysis also applies to the United States. “Wages,” Mr. Posen said, “will be the dog that doesn’t bark.”

It’s still too soon to know what the Fed should do next. Its current plan is to let the program known as QE2 — for quantitative easing, round two — expire in June. The program started late last year, once the economy’s troubles were impossible to ignore, as an attempt to reduce long-term interest rates by buying Treasury bonds.

If the economic data improves and inflation does not drop, ending QE2 will be the right call. But if the economy continues to weaken, there will be a strong case for doing more. One option would be to buy both Treasury bonds and mortgage-backed bonds, as the Fed did during QE1, as a way to attack the double dip in the housing market.

The problem is that some Fed officials already seem to have made up their minds, regardless of the data. In their public remarks, officials continue to wring their hands about QE2 rather than prepare people for the possibility of QE3. Some hawks have gone so far as to suggest halting QE2 early.

Meanwhile, the recovery looks uncertain, and the job market remains weak. Even if job growth were to accelerate sharply in coming months, the economy would be years away from so-called full employment. But never mind that, the hawks say — rampant inflation is just around the corner.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

Article source: http://feeds.nytimes.com/click.phdo?i=fa50b7aed532e395de2e02130f50647c

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