Interesting times ahead as Yellen assumes the controls

It is official, then. Janet Yellen is to become the first female ‘chairman’ of the US central bank next February and as such, she will be in a position to affect all our lives.

Interesting times ahead as Yellen assumes the controls

True, the Fed chairman’s utterances and decisions may be of less immediate impact than those of her eurozone counterpart in the ECB, but never underestimate the power of America’s money management when it comes to setting the tone and establishing a trend.

The US hegemonic age may be over. Commentators are fretting over America’s huge debt, the shutdown in government, and the prospect of a debt default that could send shockwaves across the world. However, it remains the pre-eminent global and economic power.

Little Ireland tends to sneeze when a US leader pulls out his or her hankie. We still look to Washington for leadership — increasingly, however, the focus is on the country’s top central banker rather than on its embattled president.

Yellen’s appointment as successor to Ben Bernanke is unusual in a number of respects.

First, her age. She is 67, has been around a long time, and built up a strong track record. Most of us are hanging up our hats for good at this age.

Second, she overcame competition from former US treasury secretary, Larry Summers, said to be the favoured choice of President Barack Obama.

However, Summers was said to be too close to Wall Street and had dirtied his bib when forced to resign from a top job at Harvard over comments viewed by many as sexist.

Yellen is unusual as a senior economist in her preparedness to declare her hand of cards. She prefers straight talk to the sort of circumlocution favoured by a well remembered predecessor, Alan Greenspan, a man whose reputation has imploded since his departure from office just before the financial crash.

Yellen has worked closely with Greenspan’s successor, Bernanke, to steady the ship as vice-chair of the Fed from 2010.

Bernanke earned the nickname of ‘helicopter Ben’ for his preparedness to flood the economy with liquidity in order to enable the economy avert a repeat of the Great Depression.

There are those who fear that Bernanke has been stoking up inflation.

Other commentators such as Paul Krugman have been critical of the Fed’s mid-summer decision — later retracted — to embark on ‘tapering’, that is, the gradual withdrawal from quantitative easing.

Bernanke’s announcement sparked a sell-off on a Wall Street that is addicted to low-interest ‘easy’ money.

Yellen’s fingerprints have been on Bernanke’s policies and she has acquired a reputation as a ‘dove’ when it comes to monetary policy.

On this basis, her appointment should be good news for a country like Ireland with a high level of combined public and private indebtedness.

However, one leading US commentator has gone as far as to suggest she is really more of a monetary hawk. Evan Soltas points to her previous period as a governor of the Fed — one of the dozen decision makers at the reserve — during the Clinton era.

Back in 1996, she was keen to tighten policy as unemployment fell towards 5%. She was outvoted. Unemployment fell to just 3.8% in 2000 without sparking inflation as she had feared. She had underestimated the impact on wages of globalisation.

To understand Yellen you have to examine her background. Born and bred in Brooklyn, the daughter of a teacher and doctor, she found her mentor at Yale when she studied for a doctorate in economics under future Nobel Prize winner, James Tobin.

Tobin is regarded by many as one of the finest economists of the 20th century, and is best known nowadays for proposing a tax on international financial transactions. Known as the Tobin tax, it was taken up by left-wing parties and movements in the wake of the financial crisis.

Forty years ago, he also pioneered the Green idea of using ‘Mew’, the Measure of Economic Welfare, as an alternative to gross national product. This would take into account matters such as environmental deterioration and the poor quality of life.

Tobin developed the concept of the ‘non-accelerating inflation rate of unemployment’ or Nairu, a concept Janet Yellen strongly favours.

The idea of a trade-off between inflation and joblessness is at the core of Yellen’s thinking. She belongs to the ‘do what it takes’ school when it comes to promoting recovery.

Unlike the ECB, the Fed is mandated to foster economic and employment growth as well as the maintenance of price stability.

Yellen has made it clear that she would tolerate an inflation rate of 2.5% — well ahead of the 2% target favoured by the Federal Reserve — if needs be.

But dove could quickly turn to hawk should price instability threaten to rear its head.

Yellen is married to George Akerlof, a Nobel Prize winner in economics. It was love at first sight, after they met in the canteen at the Fed back in 1977. They married a year later, before travelling to London to teach at the London School of Economics.

Akerlof — well regarded for his imaginative approaches to economics — later recalled that they faced cultural difficulties during their time in London, not least by virtue of the fact that his wife’s separate talents were not properly recognised by colleagues.

The pair produced a 1996 research paper which concluded that slashing benefits would not deter single women from having babies and Yellen was a strong backer of Bill Clinton’s scheme to boost education with tax incentives.

Yellen considers herself to be an exponent of ‘slow thinking’ — adopting a measured, considered approach to decision making.

Given the hectic world of global finance, and the near hysterical approach, on occasions, of some financial market players, some calm steerage of the regulatory ship could be just what is needed.

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