Pick Janet Yellen to Lead a Fed A-Team
Recent news reports suggest the White House may be thinking of dropping Janet Yellen as its preferred candidate to become the next chairman of the Federal Reserve. This would be a big mistake. The best possible team would be Yellen as Fed chief, along with two strong vice chairmen.
The person we want as the next head of the Fed Board of Governors must be willing to think outside the box in the manner of Marriner Eccles, (who as chairman from 1934 to 1946 helped shape the institution for the modern world), demonstrate the collegiality of Ben Bernanke (known for encouraging constructive debate) and possess the healthy skepticism of Wall Street of Paul Volcker (who recently referred to the slow pace of financial reform as “disastrous”). Ideally, of course, this person should be able to know when it's time to step on the monetary brakes, regardless of the impact on his or her standing in opinion polls (that would be Volcker again).
Of all the plausible candidates, Yellen stands above the crowd. As vice chairman since 2010, she has shown good judgment on monetary matters and her regulatory instincts seem sound. She has a great deal of policymaking experience, including stints at the Council of Economic Advisers and as president of the San Francisco Fed from 2004 to 2010. She has a strong grip on what makes for healthy economic growth. She gets on well with colleagues.
But the Fed can no longer be a one-person show: The aftermath of the Alan Greenspan era surely taught us that. The Dodd-Frank Act added a second vice chairman position, responsible for supervision, and it is essential that both vice posts be filled by people with skills and perspectives that complement Yellen's.
The existing vice chairmanship should go to Richard Fisher, president of the Dallas Fed. Fisher has expressed concern about monetary policy becoming too easy -- and history teaches that central banks neglect inflation at their peril and ours. Fisher will help Yellen see when a less accommodative monetary policy is needed -- and when the banks are getting out of hand.
The new vice chairman position should go to Fed Governor Dan Tarullo, if he wants the job. He has been a de facto overseer of financial reform and compliance, particularly by systemically important institutions, but the statute calls for someone to have the formal position (why the White House has failed to implement the law has long been unclear). If Tarullo isn't available, then Tom Hoenig, the vice chairman of the Federal Deposit Insurance Corp., should be picked. No one has a better understanding of our financial system: His recent work on the shortcomings of the Basel III approach to bank equity capital is nothing short of brilliant.
Bear in mind that monetary policy isn't set by a single person, nor would it be solely determined by the three people I propose. Decisions on interest rates and other matters are in the hands of the 12 voting members of the Federal Open Market Committee (the Board of Governors plus regional Fed presidents, voting on a rotating basis, though the New York Fed president has a permanent vote). The balance on that committee would remain roughly unchanged under my proposal.
Regulatory policy, however, is made by the seven governors of the Federal Reserve System. Promoting Yellen and bringing in Fisher and Hoenig would tilt the balance of that opinion further in the direction of limiting or phasing out the implicit, unfair and dangerous subsidies received by the largest U.S. banks.
A few words on the other much-discussed possibilities: Larry Summers was vetted in 2012 for the job of World Bank president, another high-profile and sensitive role. In fact, he was the definite front-runner until the White House abruptly changed course. Whatever reasons led the administration to drop him from contention for that job would presumably also be considerations for the Fed chairmanship.
Of course, the White House could still take Yellen out of contention -- there are a number of talented former vice chairmen who are reported to want the top job. Former Treasury Secretary and New York Fed President Tim Geithner could also reenter the ring. But these candidates would face awkward questions about what they were thinking during the long, reckless expansion of credit under Greenspan.
No one else has Yellen’s skills and the right kind of experience (thorough knowledge of the Federal Reserve, without the taint of the Greenspan years). Yellen should be hired and given the best possible team.
(Simon Johnson is a Bloomberg View columnist. Follow him on Twitter.)