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Case for Yellen as Fed chair

By Ezra Klein
The Washington Post

Larry Summers is out for Federal Reserve chairman. That probably means Janet Yellen is in.

There are two reasons why one might think Yellen wouldn’t be named to Fed chair. One is that President Barack Obama or his key advisers think she would do a bad job. The other is that they feel that nominating her would be a dangerous capitulation – it would show they could be pushed around by liberal Democrats.

But the line from the White House has never been that Yellen is a bad choice. In fact, they’ve been at pains to say she’s absolutely terrific – an incredible candidate who they’d be thrilled to name if there wasn’t, remarkably, an even more incredible candidate in Summers.

As for the idea that it would be bad “optics” to shatter a glass ceiling and appoint the insanely qualified, widely respected vice chair of the Fed – that’s the kind of Washington nuttiness this White House prides itself in being above.

The case against Summers has been overblown. He’s both much more concerned with the poor and middle class, and much less interested in deregulation, than his critics gave him credit for. The White House favored him, in part, because they thought he’d be more effective at fighting unemployment and regulating Wall Street than Yellen. Their progressive critics, of course, disagreed.

But amid the heated back-and-forth over Summers, the strength of the case for Yellen has been obscured. At times, she’s been made out to be an anybody-but-Summers candidate. She’s not. Here are five reasons why.

1. She’d be the most qualified Fed chair in memory. Ben Bernanke had three years on the Fed’s Board of Governors when he was named chairman. Paul Volcker had four years leading the Federal Reserve Bank of New York before he got the call. Alan Greenspan had never worked at the Fed at all.

On sheer Fed experience, Yellen blows them out of the water. She led the Federal Reserve Bank of San Francisco from 2004 to 2010 and has been vice chair of the Fed since then. So she’s served across multiple chairmen, in multiple positions, during good economic times and during the depths of the financial crisis. Experience isn’t everything, of course, but it matters – particularly when the Fed is in such uncharted waters.

2. She got the big calls right. The Fed’s job, put simply, is to predict the path of the economy and put in place the right policies to keep employment high and inflation low. In 2006 and 2007 – and in 2010 and 2011 – the Fed got that job of prediction wrong. It didn’t see the financial crisis coming, and it didn’t see the slow recovery.

Yellen was an exception. If you go back to the Fed’s December 2007 transcripts you’ll find Yellen voicing prescient pessimism. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned. In ensuing years, Yellen pushed for the Fed to do more to combat an employment problem that she didn’t see abating – advice that Bernanke and the rest of the Federal Open Market Committee eventually followed.

3. We still need someone who cares about unemployment. The economy added 169,000 jobs in August – which if sustained would mean we’ll close the jobs gap sometime in 2023. We also learned that we’d added 74,000 fewer jobs than we thought in June and July. The share of adults who are in the labor force is also at a scary low.

We need a Fed chair who is serious about combating unemployment, rather than one itching to get the Fed back to its traditional role as a technocratic inflation fighter. In recent years, Yellen has been the Fed’s strongest and most persistent voice in favor of doing more to fight unemployment. Appointing her would be a signal to the markets – and everyone else – that the Fed isn’t simply going to accept the status quo as America’s new normal.

4. She’s a consensus pick – at least outside the White House. This Fed process has been a debacle. The Obama White House has let Summers and Yellen twist in the wind for months now. For various reasons, the race has rattled Wall Street, alienated key parts of the monetary policy community and infuriated many congressional Democrats – along with other key White House allies, like labor.

Yellen, however, is favored by all of those groups. That means the Obama administration can end this with a pick most everyone is happy with.

5. It’s time to shatter the glass ceiling. As former FDIC chairwoman Sheila Bair wrote: “There is one segment of our federal government that has yet to break the glass ceiling. It is the segment most directly involved in overseeing the nation’s financial markets and the big financial institutions that dominate them. The Secretary of the Treasury, the Chairman of the Federal Reserve Board, and the two big bank regulators . . . have never had females at their helms.”

These things matter. One consequence that has been on sharp display during this process is that because everyone who has served in these positions has been male, people end up with a lot of stereotypically male qualities in their assumptions of what it takes to effectively run these organizations.

The choice of Federal Reserve chair can’t and shouldn’t be based on gender. But as is often the case with these things, in order to even be considered for the post, Yellen has had to amass much more experience, and much broader support, than previous male nominees have required. So this is a moment where the candidate with the most experience and the most support would also be a historic, glass-ceiling-shattering choice. That’s quite an added benefit.

Klein is a columnist at The Washington Post.
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