The next Federal Reserve Chairwoman

. . . would of course be the first Federal Reserve Chairwoman.  But the word on the street is that San Francisco Federal Reserve Bank President Janet Yellen is said to be on the very short list of possible Fed Chair nominees, along with Larry Summers and a Ben Bernanke re-appointment.

Yellen is an intriguing possibility.  Hands-on experience as S.F. Fed president (including a seat right now on the Federal Open Market Committee, the Fed’s policy-making group), stints on the Fed Board of Governors and as chair of the Council of Economic Advisers during the Clinton Administration, longtime tenured economics professor at Berkeley. I’ve read a few of her papers on macro theory and policy, and she writes unusually well for an economist.  (Her review article on efficiency-wage theories of unemployment was probably the clearest thing I read in my entire first year of grad school.) And for what it’s worth, she’ll have good advice at the breakfast table: she’s married to economics Nobel laureate George Akerlof. (Democrats are big on the whole “two for the price of one” concept, no?)

Both Akerlof and Yellen seem to be more liberal than conservative (Akerlof once wrote a compelling paper titled “The Case Against Conservative Macroeconomics”), but talk of her as an “inflation dove” seems to be overblown. Ever since Paul Volcker came to town in 1979, the Fed has been very, very vigilant about inflation (in the general price level, that is, not in the stock or housing markets). To paraphrase Michael Dukakis, the real distinction is not about hawkishness or dovishness, but about competence.  She has said that deflation is a greater concern right now than inflation, but that’s right on target in this deflationary recession. When recovery begins, she and the rest of the Fed will go back to focusing on inflation.

I had not heard Yellen’s name mentioned as a Fed candidate before this week, but apparently that just means I don’t read enough.

Economist Barkley Rosser talks up her 1990s work at the Fed and the CEA and the job she’s done at the S.F. Fed. But he has no clear favorite between Yellen and Bernanke and says both are worthy candidates.

The ever-quotable Willem Buiter, who knew her as a Ph.D. student at Yale, says she’d be infinitely preferable to Summers and decidedly preferable to Bernanke:

‘Janet Yellen is an outstanding monetary and macroeconomist.  I have known this for a long time, because when I came to Yale as a PhD student in 1971, we all passed our Comprehensive Examinations (Comps) in macroeconomics thanks to the “Yellen notes,” the wonderful collection of “augmented” lecture notes from James Tobin’s lectures, created by Janet Yellen as Tobin’s teaching assistant.  She was a professor at Berkeley for many years, a member of the Board of Governors of the Federal Reserve System from 1994 to 1997 and chair of the President’s Council of Economic Advisors from 1997 till 1999.  Her abilities as a regulator and supervisor have not, as far as I know, been tested.  These are, of course, at least as important for a chairman of the Fed as his or her command of the conventional monetary policy tools.  Her ability to stand up to the populists in the Congress and the relentless lobbying efforts of Wall Street and the rest of the financial establishment are also unknown.  But at least we can hope.

‘With Ben Bernanke we know what we would get.  An eminent monetary economist with a pretty good record managing interest rates, quantitative easing and credit easing from the perspective of mitigating the immediate financial crisis and the contraction that followed it; a dreadful regulator/supervisor who “did not see it coming” at all; a fully-signed up contributor to the biggest explosion of moral hazard in US financial history; and the man who allowed the Fed to be turned into an off-budget, off-balance sheet subsidiary of the US Treasury.

‘In the field of regulation and supervision, I prefer untried and untested to tried, tested and failed.’

(Buiter’s hilariously scabrous comments on Summers, including “the long-term perspective and attention span of a fruit fly,” are too long to reprint, but you can read them here.)

Mind you, none of this is a prediction.  The betting markets at Intrade expect Bernanke to be reappointed:  as of this writing, the bid price on “Bernanke futures” is 77 cents on the dollar, Yellen futures are 13 cents, and Summers futures are 10 cents. But reports are that Obama is taking his time in choosing the next Fed chair, so things could easily change.


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