How Yellen won the Fed

Helen Avery
Published on:

Washington is a town where lobbying counts. More than 500 economists grouped together to spur the nomination that will make Janet Yellen the first woman to chair the Federal Reserve. Heidi Hartmann, who started the campaign, explains why Yellen is the best choice.

Janet Yellen was always expected to take over from Ben Bernanke as chair of the Federal Reserve – by economists, that is. She held the Fed vice-chair role, had an unblemished career as an economist and as chair of the San Francisco Federal Reserve. She had made the right calls about the credit crisis, served in the Clinton and Obama administrations and had dedicated her life to US economics.

Then in July, as Bernanke’s departure grew closer, Larry Summers suddenly emerged as a frontrunner for the position. While Yellen may have been the favourite among her peers, outside of economist circles it was Summers’ name that was more familiar. He had been in both the Clinton and Obama administrations, deputy secretary of the Treasury, president of Harvard, a managing partner at top hedge fund DE Shaw, and latterly a columnist. Yellen, on the other hand, was far less glamorous and, therefore, less prominent within the financial media. Summers as a potential next Fed chair was garnering far more public attention, and economists were beginning to panic.

The result was an entirely unprecedented move by the reserved and generally quiet and unassuming economist community. They rallied to Yellen’s aid, co-signing a letter backing her over Summers as nominee for Bernanke’s replacement.

Yellen graduated from Brown and went on to receive a PhD in economics from Yale University where she became known on campus for her meticulous note taking. Her deciphering of Nobel prize winning economist and professor James Tobin’s lectures became known as the ‘Yellen notes’ and served as an unofficial guidebook by Tobin and his students for many years after she left.

Heidi Hartmann was one student who benefitted from the Yellen notes at Yale. When it looked like Larry Summers was going to be nominated to fill Bernanke’s position Hartmann, president of the Institute for Women’s Policy Research, called other economists to see what could be done. "It was not that Larry isn’t brilliant as an economist – he is. But Yellen was the better person for the role. Over his career Larry had several times made off-the-cuff remarks and that was the biggest concern. Given the markets react so violently to the Fed chair’s words, you don’t want someone in that role who can be misinterpreted," says Hartmann.

Hartmann is referring to several blunders by Summers. As president of Harvard University back in 2005, speaking at a conference on diversity, Summers proposed that the shortage of women in certain fields of industry was associated with their lesser mathematical ability.

While he did offer that this was up for debate and pointed to empirical evidence to back his hypothesis, his comments were seen as insensitive and were interpreted as sexism. That, and the ambiguity around financial conflicts of interest due to his influence in the Treasury, resulted in him having to step down as president after receiving a vote of no-confidence from the Harvard faculty board. Summers was also seen as having too much of a foot in the financial community to be impartial as a Fed chair. He had been strongly opposed to regulating derivatives in spite of being advised by his peers to do so. There was some concern among the economist community that Summers would have this headstrong attitude as Fed chair instead of being able to listen to and consider all sides before making decisions.

It was a surprise therefore to economists when Summers became the favourite for the post.

Says Hartmann: "Most of us [economists] had assumed Yellen would be the successor all along. She was in the vice-chair position, and continuity was going to be important after Bernanke left."

It was Hartmann that launched the rally to support Yellen. Hartmann, a serious scholar and known as a renegade dedicated to disrupting the "male-dominated policy discussions in Washington" admits she didn’t know where to begin. "I certainly didn’t have the connections into the White House or much influence within the economic community," she says. But she began to test the waters by speaking to friends of Yellen and to economists like Christina Romer who had been in the Obama administration as well as to other economists who had been in the Clinton and Obama administrations with both Summers and Yellen to find out what they thought.

"One thing was clear: as an economist you don’t say bad things about other economists. But it also became apparent that many felt that the Yellen versus Summers debate had become politicized and the media had made it into a gender and a political battle. Reasoning had been taken out of the equation. It was never really clear whether Summers was Obama’s favourite, but it certainly felt like the media was focusing on Summers and Yellen was being forgotten," says Hartmann.