With Ben Bernanke's retirement coming, Washington has been discussing who President Obama might pick to be the next chair of the Federal Reserve. After months of deliberation, it seems President Obama may have settled on a front-runner. In true Federal Reserve fashion, of course, most Americans don't know much about her.
In August 1946, shortly after the paroxysm of World War II and the Great Depression, an infant girl was born in Brooklyn to a schoolteacher married to a doctor. Growing up, she was an "overachiever" who excelled in math and served as the student newspaper's editor-in-chief. Her classmates exclaimed she was "smartest person in the class — it wasn’t even close." Deservingly accepted into Brown, she picked economics as her major. A quiet liberal, she was concerned about unemployment and wanted to do something about it. After later obtaining her Ph.D. at Yale, she alternated between teaching and government service.
That is someone who could have been my role model, if I knew about her life earlier.
But even the brilliant mind could not always tell the future. In 2005, over two years before the Great Recession, she wrote, "high price-to-rent ratio for housing remains unexplained" and "the housing sector represents a risk," giving a modicum of foresight in looming housing problems. Yet, she continued that a bubble collapse "could be large enough to feel like a good-sized bump in the road ... the economy would likely to be able to absorb the shock." Of course, when the bubble finally burst, it was not a "bump in the road," but a conflagration that wiped out a whole swath of American wealth and jobs. Underestimating the problem, she was hesitant to take action, writing, "In answer to ... whether monetary policy is the best tool to deflate a house-price bubble ... arguments against trying to deflate a bubble outweigh those in favor," arguing that a monetary tightening could affect other sectors.
Nevertheless, in 2007, her mind was further unsettled about the housing market gone awry. At that point, as we know now, the recession was already approaching, but most commentators were in denial. As late as in 2008 Herman Cain was claiming there was no recession. She wrote that the "possibilities of a credit crunch ... and of the economy slipping into recession seem all too real." Too real, indeed, but by then, few were listening. It was too late.
This economist, known to be attentive towards unemployment since her youth, who felt signs of a hurricane but thought it would be a routine thunderstorm, must have lived through the anguish when the recession showed its unrelenting force. But Janet Yellen now has the chance to help steer the economy back on track, as she is now the the front-runner to be nominated to head the Federal Reserve.
Unlike how some of Yellen's supporters portray her, she is not Cassandra, the lone prognosticator of doom (though she should get credit for seeing it coming before Bernanke and most others came close). She is, however, an honest and conscientious scholar not afraid of admitting and correcting mistakes or voicing her opinions. A Fed governor who eats with lower-level staff in the cafeteria, Yellen worked hard towards increasing the transparency of an institution whose opaqueness has provoked conspiracy theories.
In 2010, Yellen offered a mea culpa for the crisis, saying, "I didn’t see any of that coming until it happened.” Earlier in 2009, she proclaimed that the Fed should have ended the housing bubble by raising interest rates. If nominated as Fed chairwoman, she is likely to be watchful of bubbles down the road due to this painful lesson learned, which is encouraging.
Among those in the Fed, Yellen has been uniquely an expert in labor economics and would bring a strong emphasis on reviving jobs. This would re-position the Fed back to its double mandate to control both inflation and unemployment. There are worries that Yellen is unconcerned with inflation and would expand money supply excessively. However, as her 2009 remarks show, she has become more vigilant on bubbles and willing to elevate rates. In addition, in 1996 she clashed with Alan Greenspan, arguing for a contractionary policy to stem inflation. She even suggested the Fed to be able to issue its own debt to facilitate rate increases. Overall, Yellen would pursue a balanced policy to make sure neither inflation nor unemployment goes unchecked.
Yellen's honesty, sincerity, and scholarly seriousness contrast with the economist who was competing for the job until dropping out this month, Larry Summers. Summers, who engineered financial deregulation under Clinton and permitted rampant Wall Street abuses, expressed no remorse for his course of action, despite the fact that Clinton himself said he should not have listened to Summers.
For the above reasons, Yellen would be a good choice to lead the Fed despite her shortcomings. She may not get everything right, as humans are fallible, but her attitude and qualities will enable her to be a good leader in steering America's monetary policy.