The U.S. government is careening towards what might be an epic financial implosion, and Washington is gripped in yet another frenzy of high-drama. By contrast, the nomination of Janet Yellen to be the next chair of the Federal Reserve is anything but dramatic, and certainly more calming to frayed financial market nerves than Larry Summers would have been.
Beyond the glass ceiling implications of Yellen being the first woman to serve in that post, however, what should we make of this coming transition?
The prominence of the Fed has grown enormously over the last decades, starting with Paul Volcker, accelerating with Alan Greenspan, and continuing with Ben Bernanke. Perhaps because the Fed is independent and separate from party interests, it has acted as a steward of the financial system, and such attitudes are rare in the world of partisan politics. Critics -- and they are legion, vociferous, and mad as hell -- believe that the Fed is burdened with arrogance and has made precisely the wrong long-term decisions in a desperate attempt to stave off the crises that are an inevitable and healthy part of a free-market system. The Fed bankers themselves believe that they have kept the proverbial lights on in the face of political malfeasance and waves of global change. Yellen will do nothing to heal that split, and given her background is likely to see it widen.
Yellen has served as the Federal Reserve's vice-chairman since 2010, was a governor of the bank during the Clinton administration, served as Clinton's chair of the Council of Economic Advisers, and began her career as a staff member of the bank's research division in the 1970s. She worked her way through the ranks at the Fed, and would be the first head of the bank to have a resume largely built on serving that institution. She has impeccable academic credentials, with a Ph.D. in economics from Yale and a brief stint as a professor at Harvard. She is married to the Nobel Prize-winning economist George Akerlof, and has spent many years focused on employment, wages, and labor patterns.
Though she has accumulated respect within the worlds of academia and banking, she is not without critics -- hardly surprising given a multi-decade career in the upper echelons of policymaking. Indeed, it would be more surprising if she had no critics. Some have questioned her managerial style, while others have praised it, making it all but impossible to parse unless you know her.
The most telling criticism came during her confirmation hearings to be vice-chair. Because she was president of the San Francisco Fed during the housing bubble, some senators, including Republican Richard Shelby of Alabama, questioned how she could have allowed such egregious lending standards and loose credit. Yet, as a recent story in Bloomberg noted, in 2007, she was one of the first inside voices on the committee to express serious concern that housing prices were overinflated and heading for a fall with serous ripple effects throughout the economy.
Assuming she is confirmed, and that seems to be an extremely safe assumption, she will face a situation every bit as unenviable as the one that confronted her predecessor Ben Bernanke when he took the job. The best response so far to her nomination came from a tweet by former Obama speechwriter Jon Lovett, who quipped, "We finally get a woman to chair the Fed and what happens? Bunch of men try to destroy the monetary system before she can even start the job."
Yellen would not assume the position until January 2014, and by then, the drama over the debt ceiling and levels of funding for the U.S. government will have been resolved, one way or another. It's certainly in the realm of the conceivable that the morass over the debt will lead to sharply higher interest rates, and that would be an added item to an already full plate for Yellen. While she will likely not have to clean up the mess of a default or delay of U.S debt obligations, she will still confront an array of choices that revolve around when to taper Fed purchases of government bonds, how aggressive the bank should be as a lender last resort, and what to do if worst fears come to pass and the U.S government proves unable to prioritize payments in order to pay interests on its outstanding bonds.