Yellen: Another Woman — Thank Heaven — Takes on Wall Street

The new Fed chief is expected to be another in a long-line of tough female regulators who have boldly confronted a mostly male world.

President Barack Obama announces his nomination of economist Janet Yellen (L) as Federal Reserve chairman as current chairman Ben Bernanke listens in the State Dining Room of the White House in Washington, DC, on October 9, 2013.
National Journal
Michael Hirsh
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Michael Hirsh
Oct. 9, 2013, 11:38 a.m.

Most of the com­ment­ary about Janet Yel­len, Pres­id­ent Obama’s his­tor­ic choice to lead the Fed­er­al Re­serve, is fo­cused on her views about con­trolling in­fla­tion and un­em­ploy­ment, the Fed’s twin man­date. (And here, prom­isingly, the “dovish” Yel­len has said clearly that she is more con­cerned about un­em­ploy­ment, which is a huge prob­lem, than she is about in­fla­tion, which presently is not.)

But an­oth­er huge part of the Fed’s job, es­pe­cially since the 2008 fin­an­cial crisis, is re-reg­u­la­tion of the bank­ing sys­tem and Wall Street, where Yel­len will fin­ish the task that Ben Bernanke star­ted. And here, too, while her track re­cord is not quite as pro­nounced as it is on mon­et­ary policy, she is ex­pec­ted to be very ag­gress­ive in rein­ing in risky prac­tices. Yel­len, who is al­most cer­tain to be con­firmed by the Sen­ate, may turn out to be even bolder in her pre­scrip­tions than Bernanke or the Obama ad­min­is­tra­tion have been, ac­cord­ing to of­fi­cials who have watched Yel­len from the in­side of the Fed dur­ing her three years as vice chair­man.

For now, Wall Street is re­act­ing mostly fa­vor­ably to Yel­len’s long-an­ti­cip­ated ap­point­ment, thanks to her dovish views on in­fla­tion and the like­li­hood that she will not sup­port “taper­ing” off Bernanke’s quant­it­at­ive eas­ing pro­gram, so as to spike the eco­nomy’s still-tep­id growth and ease long-term un­em­ploy­ment.

But the bank­ing com­munity may not quite know what it is get­ting.

Yel­len’s views are con­sidered very close to those of Daniel Tarullo, a pro­gress­ive-lean­ing Fed gov­ernor and ex­pert on glob­al fin­an­cial reg­u­la­tion whom Bernanke has dep­u­tized to over­see new bank­ing and cap­it­al stand­ards. In her pub­lic re­marks, Yel­len has echoed Tarullo’s push for high­er cap­it­al stand­ards for “sys­tem­ic­ally im­port­ant” or too-big-to-fail banks, and his con­cerns about cur­tail­ing the un­stable short-term fund­ing sources of too-big-to-fail banks. Tarullo has been more ag­gress­ive than the Obama ad­min­is­tra­tion in pro­pos­ing “a set of com­ple­ment­ary policy meas­ures” that goes bey­ond the Dodd-Frank law. Among them: lim­it­ing the ex­pan­sion of big banks by re­strict­ing the fund­ing they get from sources oth­er than tra­di­tion­al fed­er­ally in­sured de­pos­its.

Yel­len, in an im­port­ant speech in Shang­hai, China in June, went bey­ond what Bernanke has said by ex­pli­citly en­dors­ing some of Tarullo’s ef­forts, say­ing, “I’m not con­vinced that the ex­ist­ing SI­FI [sys­tem­ic­ally im­port­ant fin­an­cial in­sti­tu­tions] reg­u­lat­ory work plan, which moves in the right dir­ec­tion, goes far enough.” She also spoke of do­ing much more, as Tarullo has, to con­strain the “shad­ow bank­ing” sec­tor that caused so much trouble in 2008, in­clud­ing broker-deal­ers and money mar­ket funds. Yel­len said “a ma­jor source of un­ad­dressed risk” is the hun­dreds of bil­lions of dol­lars of short-term se­cur­it­ies fin­an­cing used by these firms, adding: “Reg­u­lat­ory re­form mostly passed over these trans­ac­tions.”

Mi­chael Green­ber­ger, a former deputy dir­ect­or of the Com­mod­ity Fu­tures Trad­ing Com­mis­sion and a lead­ing voice for more trans­par­ent reg­u­la­tion of de­riv­at­ives and oth­er ar­cane Wall Street products, says that Yel­len backed his stand for a tough­er Dodd-Frank law than the Obama ad­min­is­tra­tion, Sen­ate, and House were ad­voc­at­ing back in 2010 — a time when a fierce fight raged over the his­tor­ic le­gis­la­tion to re­order the fin­an­cial sys­tem. “I told her about weak­nesses in the then ex­ist­ing Sen­ate draft bills and the House bill. She was clearly sym­path­et­ic to my con­cerns, which, in turn, were a re­flec­tion of pro­gress­ive le­gis­lat­ive ad­vocacy at that time,” Green­ber­ger said this week, re­call­ing a talk he and Yel­len had at the so-called Min­sky con­fer­ence in New York, where she gave the key­note ad­dress (note­worthy in it­self, giv­en that it is named for the late eco­nom­ist Hy­man Min­sky, who pres­ci­ently de­scribed how fin­an­cial mar­kets are in­her­ently un­stable). Adds Green­ber­ger: “The Obama Ad­min­is­tra­tion was not be­ing par­tic­u­larly help­ful about these sub­stant­ive con­cerns. Com­pared to the powers that be at that time on the Hill and at the White house, she was a breath of fresh air.”

Yel­len is thus likely to con­tin­ue a dis­tin­guished line of fe­male reg­u­lat­ors who have demon­strated a strik­ing de­gree of vis­ion, cour­age and in­teg­rity in tak­ing on one of the most chau­vin­ist­ic of in­dus­tries, Wall Street. Among her pre­de­cessors and peers: new Mas­sachu­setts Sen. Eliza­beth War­ren, who has used her po­s­i­tion on the Bank­ing Com­mit­tee to dress down Wall Street CEOs and the pro­sec­utors who have failed to go after them; Sheila Bair, the former chair­wo­man of the Fed­er­al De­pos­it In­sur­ance Corp. who angered then-Treas­ury Sec­ret­ary Tim Geithner by push­ing for harsh­er treat­ment of banks dur­ing Obama’s first term; re­tired reg­u­lat­or Brook­s­ley Born, who like Bair ran up against ac­cus­a­tions that she wasn’t a “team play­er” in the old boys’ club when she sought to rein in over-the-counter de­riv­at­ives trad­ing back in the 1990s; and most re­cently Mary Jo White, the no-non­sense head of the SEC who has warned she’s go­ing to crack down much harder on Wall Street fraud.

Yel­len, a former eco­nom­ist at the Uni­versity of Cali­for­nia at Berke­ley, has a not­able ped­i­gree of skep­ti­cism about Wall Street’s pro­cliv­it­ies: A stu­dent of arch-mar­ket-in­ter­ven­tion­ist James To­bin at Yale — who fam­ously pro­posed a tax on fin­an­cial trans­ac­tions — she is also the wife and writ­ing part­ner of George Aker­lof, who shared the 2001 No­bel Prize in eco­nom­ics with Joseph Stiglitz for work that showed how mar­kets can fail thanks to im­per­fect in­form­a­tion. As such, she is likely to be even tough­er than Bernanke, a former free-mar­keter and Re­pub­lic­an nom­in­ee who changed his views some­what after 2008 and has since turned the Fed in­to a ma­jor in­ter­ven­tion­ist force in the eco­nomy.

The late To­bin and Aker­lof fought ca­reer-long battles to make the case that fin­an­cial mar­kets work dif­fer­ently, and are more in­her­ently prone to fail­ure, than or­din­ary mar­kets in goods and ser­vices. Their work has ten­ded to back the pre­scrip­tion of John Maynard Keynes, as far back as the Bretton Woods con­fer­ence in 1944, that “noth­ing is more cer­tain than that the move­ment of cap­it­al funds must be reg­u­lated.” In a 2010 in­ter­view, Aker­lof said he “was al­ways apo­plect­ic” at the kind of rap­id de­reg­u­la­tion ad­voc­ated by Har­vard eco­nom­ist Larry Sum­mers, who al­most cer­tainly would have been nom­in­ated in Yel­len’s place had he not backed out last month — in par­tic­u­lar, the ab­rupt open­ing up of cap­it­al flows around the world, which has ar­gu­ably led to fin­an­cial bubbles in one eco­nomy after an­oth­er.

While Yel­len did not al­ways act on reg­u­la­tion when needed — claim­ing that as head of the San Fran­cisco Fed she had to wait on Wash­ing­ton’s guid­ance — the re­cord shows that she ap­peared to be some­what ahead of Bernanke in ap­pre­ci­at­ing the dangers of the se­cur­it­iz­a­tion-led hous­ing bubble. At the Fed’s June 2007 she warned that the fail­ing hous­ing sec­tor was the “600-pound gor­illa in the room.” That was only a month after Bernanke, in con­gres­sion­al testi­mony, said he saw only a “lim­ited im­pact of subprime mort­gages on “the broad­er hous­ing mar­ket.”

Yet Yel­len also offered up a re­fresh­ing mea culpa after the fin­an­cial col­lapse, telling the Fin­an­cial Crisis In­quiry Com­mis­sion in 2010 that she “did not see and did not ap­pre­ci­ate what the risks were with se­cur­it­iz­a­tion, the cred­it rat­ings agen­cies, the shad­ow bank­ing sys­tem, the S.I.V.’s [struc­tured in­vest­ment vehicles] — I didn’t see any of that com­ing un­til it happened.”

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