How Yellen won the Fed
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.
|President Obama announces Janet Yellen’s nomination to chair the Federal Reserve on October 9
By September Hartmann felt she had enough encouragement from other economists to make a move. With the help of Joyce Jacobsen, dean of Social Sciences and Andrews Professor of Economics at Wesleyan University, Hartmann drafted a letter to President Obama highlighting why Yellen was the right person for the job. In expected economist style the letter was far from wordy, simply highlighting Yellen’s strengths. Hartmann then circulated the letter among economists, giving them a week to co-sign.
Says Hartmann: "There were 400 names of economists that Joyce and I had on our list, US economists both male and female, Republican and Democrat. And we made sure to first get the support of leading economists like Princeton’s Alan Blinder, Nobel laureate Joseph Stiglitz and Berkeley’s Laura Tyson and Christina Romer."
Within 24 hours the letter had more than 250 signatures, and within 48 hours the private email had become public.
On September 15, five days after the letter began its circulation, there were 475 signatures and Summers announced he was removing himself from the nomination process, making it a one-horse race for Yellen.
There is little doubt that the combined rallying of economists led to Summers dropping out, yet Hartmann is humble.
"The letter didn’t reach the President until the 18th – we had given all economists a whole week to decide whether to sign up and we wanted to honour that. So we can’t claim that the letter led to Larry dropping out as he did so before the letter was sent. But I think the vociferous backing of Yellen among the economist community certainly helped hone the president’s focus. Academic economists are not known to sign their names up to causes. And then to have a group from across the ideological spectrum come together and agree on a suitable replacement to Bernanke and be public with that – I think that had some an impact."
What caused so many economists to rally together this time? The final letter had 505 signatures. Hartmann believes it is because economists are feeling some responsibility for the state of the US economy. "I don’t think the economic profession, and obviously I am included in this, is feeling very good about not noticing the bubble and letting the country go into tailspin. At this juncture we just want to make sure we put our best foot forward. I can’t make people sign a letter, yet they did."
Yellen’s experience and credentials as an economist are laid out in the letter and are reason enough for many to get behind her. She has a strong commitment to full employment and has covered the topic at length. The letter makes the point: ‘Yellen demonstrates a clear and nuanced understanding of labor markets, including why they do not always generate enough jobs. As our weak recovery enters its fifth year of slow economic growth, a continued commitment to expanding jobs through appropriate policy is a must for the next FRB (Federal Reserve Board) chair.’
Her dedication to full employment and monetary policy easing draws some criticism from those who fear she will lose control over inflation. Her advocates, however, point out that inflation has not been the concern it was thought to be and that those with tight monetary policy who have overlooked unemployment through fear of inflationary pressures have been proved incorrect.
But there is also a realization among economists and politicians that the role of Fed chair is not only about being knowledgeable. The 505 signees agreed: "Dr. Yellen is willing to hear multiple points of view and to bring many voices into the policymaking arena. She is not beholden to a single interest group, nor to a single industry. There is less and less room in modern public policymaking, especially at the FRB, for a single leader to dominate discussion. Modern policymaking, in a world filled with uncertainties and complexities, must proceed through cooperation and consensus, led by effective leaders. Dr. Yellen has demonstrated the ability to hear all points of view and then act effectively at the FRB."
Hartmann says this was a key point. "We have to start getting people on the same page rather than having constant economic debate in the press and disagreement of opinion. It makes the Federal Reserve less transparent and more unpredictable, which is not good for the economy. "
Hartmann says Yellen’s methodical nature that was evident back in her Yale note-taking days, will hopefully mean that she listens to different views, and brings back rules and guidelines about when to intervene and when and how to make decisions.
Yellen’s position is not yet confirmed. She faces a vetting from a banking panel of Democrats and Republicans before the Senate votes on her role. There would likely be an uprising by the newly vocal economists if Yellen were not appointed, however. In the closing lines of the letter they say: ‘In our opinion, [Yellen] is the best possible leader for the Federal Reserve Board at this critical time in our nation’s history.’