by Joseph E. Stiglizt, The New York Times, September 6, 2013
The controversy over the choice of the next head of the Federal
Reserve has become unusually heated. The country is fortunate to have an
enormously qualified candidate: the Fed’s current vice chairwoman,
Janet L. Yellen. There is concern that the president might turn to
another candidate, Lawrence H. Summers. Since I have worked closely with
both of these individuals for more than three decades, both inside and
outside of government, I have perhaps a distinct perspective.
But why, one might ask, is this a matter for a column usually devoted
to understanding the growing divide between rich and poor in the United
States and around the world? The reason is simple: What the Fed does
has as much to do with the growth of inequality as virtually anything
else. The good news is that both of the leading candidates talk as if
they care about inequality. The bad news is that the policies that have
been pushed by one of the candidates, Mr. Summers, have much to do with
the woes faced by the middle and the bottom.
The Fed has responsibilities both in regulation and macroeconomic
management. Regulatory failures were at the core of America’s crisis. As
a Treasury Department official during the Clinton administration, Mr.
Summers supported banking deregulation, including the repeal of the
Glass-Steagall Act, which was pivotal in America’s financial crisis. His
great “achievement” as secretary of the Treasury, from 1999 to 2001,
was passage of the law that ensured that derivatives would not be
regulated — a decision that helped blow up the financial markets.
(Warren E. Buffett was right to call these derivatives “financial
weapons of mass financial destruction.” Some of those who were
responsible for these key policy mistakes have admitted the fundamental
“flaws” in their analyses. Mr. Summers, to my knowledge, has not.)
Regulatory failures have been at the center of previous crises as
well. At Treasury in the 1990s, Mr. Summers encouraged countries to
quickly liberalize their capital markets, to allow capital to flow in
and out without restrictions — indeed insisted that they do so — against
the advice of the White House Council of Economic Advisers (which I led
from 1995 to 1997), and this more than anything else led to the Asian
financial crisis. Few policies or actions have greater culpability for
that Asian crisis and the global financial crisis of 2008 than the
deregulatory policies that Mr. Summers advocated.
Supporters of Mr. Summers argue that he is exceptionally qualified to
manage crises — and that, while we hope that there won’t be a crisis in
the next four years, prudence requires someone who excels at those
critical moments. To be fair, Mr. Summers has been involved in several
crises. What matters, however, is not just “being there” during a
crisis, but showing good judgment in its management. Even more important
is a commitment to taking actions to make another crisis less likely —
in sharp contrast to measures that almost ensure the inevitability of
another one.
Mr. Summers’s conduct and judgment in the crises was as flawed as his
lack of commitment in that regard. In both Asia and the United States,
he seemed to me to underestimate the severity of the downturns, and with
forecasts that were so off, it was not a surprise that the policies
were inappropriate. The performance of those in the Treasury who were
responsible for managing the Asian crisis was, to say the least,
disappointing — converting downturns into recessions and recessions into
depressions. So, too, while the banking system was saved, and the
United States avoided another depression, those responsible for managing
the 2008 crisis cannot be credited with creating a robust, inclusive
recovery. Botched efforts at mortgage restructuring, a failure to
restore the flow of credit to small and medium-size enterprises, and the
mishandling of the bailouts have all been well documented — as were the
failure to foresee the severity of the economic collapse.
These issues are important to anyone concerned with inequality for
four reasons. First, crises and how they are managed are real creators
of poverty and inequality. Just look at what havoc this crisis wrought:
median wealth fell by 40 percent, those in the middle still have not
seen their incomes recover to pre-crisis levels, and those in the upper 1
percent enjoyed all the fruits of the recovery (and then some). It is
ordinary workers who have suffered most: they are the ones who face high
unemployment, who see their wages cut, and who bear the brunt of
cutbacks in public services as a result of the budget austerity. They
are the ones who lost their homes in the millions. The Obama
administration could have done more, far more, to help homeowners, and
to help localities maintain public services (for instance, through the
kind of revenue sharing with states and localities that I urged at the
beginning of the crisis).
Second, deregulation contributed to the financialization of the
economy. It distorted our economy. It provided greater scope for those
who manipulate the rules of the game for their benefit. As James K.
Galbraith has forcefully argued, as we look around the world, bloated
and underregulated financial sectors are closely linked with greater
inequality. Those, like Britain, that emulated America’s deregulation
have seen inequality soar, too.
Third, the most invidious aspect of this deregulation-induced
inequality is that associated with the abusive practices of the
financial sector — which prospers at the expense of ordinary Americans,
through predatory lending, market manipulation, abusive credit card
practices or taking advantage of its monopoly power in the payments
system. The Fed has enormous powers to prevent these abuses, and even
more since the passage of the Dodd-Frank Act of 2010. Yet the central
bank has repeatedly failed at this, systematically focusing on
strengthening the banks’ balance sheets, at the expense of ordinary
Americans.
Fourth, it is not only the case that America’s financial sector did
what it shouldn’t have done, but it also didn’t do what it was supposed
to do. Even today, there is a dearth of loans to small and medium-size
enterprises. Good regulation would shift banks away from speculation and
market manipulation, back to what should be their core business: making
loans.
Whoever succeeds Ben S. Bernanke as the Fed’s leader will have to
make repeated judgment calls about when to raise or lower interest
rates, the levers of monetary policy.
Two elements enter into these judgments. The first is forecasting.
Wrong forecasts lead to wrong policies. Without a good sense of
direction of where the economy is going, one can’t take appropriate
policies. Ms. Yellen has a superb record in forecasting where the
economy is going — the best, according to The Wall Street Journal, of
anyone at the Fed. As I noted earlier, Mr. Summers’s leaves something to
be desired.
Ms. Yellen’s superlative performance should not come as a surprise.
Janet Yellen, whom I taught at Yale, was one of the best students I have
had, in 47 seven years of teaching at Columbia, Princeton, Stanford,
Yale, M.I.T. and Oxford. She is an economist of great intellect, with a
strong ability to forge consensus, and she has proved her mettle as
chairwoman of the President’s Council of Economic Advisers (she
succeeded me in that role), as president of the Federal Reserve Bank of
San Francisco, from 2004 to 2010, and in her current role, as the Fed’s
No. 2.
Ms. Yellen brings to bear an understanding not just of financial
markets and monetary policy, but also of labor markets — which is
essential at a time when unemployment and wage stagnation are primary
concerns.
The second element of Fed policy making is risk assessment: if one
steps on the brakes too hard, one risks excessively high unemployment;
too gently, one risks inflation. Ms. Yellen has shown herself to be not
only excellent in forecasting, but balanced. Legitimate questions have
been raised: Would Mr. Summers, with his close connections with Wall
Street, reflect financiers’ single-minded focus on inflation, and be
more worried about the effects on bond prices than on ordinary
Americans? In the past, central banks have focused excessively on
inflation. Indeed, this single-minded focus, with little regard to
financial stability, not only has contributed to the crisis, but as I
argued in my book “Freefall,” it has also contributed to the declining
share of total income that is earned by ordinary workers.
Though the willingness to take actions to prevent crises, and good
judgments in a crisis, are undoubtedly critical in the choice of the
next Fed chair, there are other important considerations. The Fed is a
large organization that has to be managed — and Ms. Yellen demonstrated
her management skills at the San Francisco Fed. One has to obtain
consensus among a diverse group of strong-minded individuals, some more
worried about inflation, some more worried about unemployment. One needs
someone who knows how to build consensus, not someone who excels in
bullying, who knows how to listen to and respect the views of others.
When I was chairman of Economic Policy Committee of the Organization for
Economic Cooperation and Development, I saw how effectively Ms. Yellen
represented the United States, and the respect in which she was held. In
the ensuing years, she has gained in stature, and today has the
enormous respect of central bank governors around the world. She has the
stature, wisdom and gravitas one should expect of the leader of the
Fed.
Finally, the Fed is an enormously important institution, but
regrettably, its conduct in the years before Ms. Yellen took up her role
in Washington — both its failures in dealing with the bubble and
certain aspects of its conduct in the immediate aftermath of the crisis
(like the lack of transparency) — has undermined confidence in it. It is
important that Mr. Obama’s nominee not be — or even be seen to be —
acting at the behest of financial markets. That person cannot be someone
who can be tainted even by an accusation of conflict of interest, which
is inevitable with the “revolving door” that has too often been
associated with the regulation of this sector. Nor should it be someone
who suffers from “cognitive capture” by Wall Street. At the same time,
the person has to have the confidence of the financial markets, and a
deep understanding of those markets. Ms. Yellen has managed to do this —
an impressive achievement in its own right.
One might say that the country is fortunate to have two candidates
who, as the Harvard economist Kenneth S. Rogoff, a former chief
economist at the International Monetary Fund, writes, are “brilliant
scholars with extensive experience in public service.” But brilliance is
not the only determinant of performance. Values, judgment and
personality matter, too.
The choices have seldom been so stark, the stakes so large. No wonder
that the choice of the Fed leader has stirred such emotion. Ms. Yellen
has a truly impressive record in each of the jobs she has undertaken.
The country has before it one candidate who played a pivotal role in
creating the economic problems that we confront today, and another
candidate of enormous stature, experience and judgment.
http://opinionator.blogs.nytimes.com/2013/09/06/why-janet-yellen-not-larry-summers-should-lead-the-fed
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