In my opinion, Stephen Mnuchin, Donald Trump’s treasury secretary, had weak credentials for the position. He often seemed ill-prepared to discuss policy issues, particularly early in his tenure. The Wall Street Journal editorial page predicted that would be the case in December 2016, describing him as an “underwhelming” nominee who was a “newcomer to political or policy debates.”
In contrast, current secretary Janet Yellen had decades of qualifying experience with many of the significant issues of domestic and international economic and financial policy. But as we look back on her long career, has she been on the right side of these policy discussions?
In his new book Yellen, Jon Hilsenrath, a senior writer for the Wall Street Journal, describes Yellen’s views, her professional work, and her contributions to public policy over the past five decades. This is his first book.
Yellen is two biographies in one, as her husband, Nobel economics laureate George Akerlof, is also the focus of alternating and combined early chapters. Wouldn’t you know it: Yellen endured sexism to become the first female Fed chair and treasury secretary in U.S. history and her husband’s accomplishments consume much of her biography. Hilsenrath also explains that the economist power couple are so nerdy that they named their son after economist Robert Solow, “Akerlof’s MIT mentor.” The later chapters give biographical information on their son Robert, who also chose a career as an economist.
From Brooklyn to the Fed and Berkeley / Yellen’s early years were spent in Brooklyn, an existence Hilsenrath describes thus: “The Yellen family wasn’t rich, but they lived well…. On Sundays they dressed nicely and had a fancy meal out in Brooklyn or Manhattan…. They took [transatlantic] boat cruises for vacation and hired a housekeeper.” Her father Julius, a doctor, told the family stories of his patients and “the Great Depression and the suffering it had imposed on people Ruth [Yellen’s mother] and Julius knew when they were young.”
Yellen graduated from Brown University’s Pembroke College with a degree in economics, which included a course on central banking. This was during the 1960s, a period when scholars like Milton Friedman “were coming to realize at the time that the Fed had worsened and prolonged the Great Depression.” A youthful Yellen thought, “If I ever have a chance at public service, a Fed post would be a worthwhile thing to do.”
She gravitated not to Friedman’s free market philosophy, but to the work of Yale’s James Tobin, a former adviser to John F. Kennedy. That led her to choose Yale for her doctoral degree in economics. Tobin’s draw was his opinion that “economics was important because it had the potential to make the lives of people better.” He was an adherent to Keynesianism.
Yellen’s doctoral work and her first academic position at Harvard were framed in the contemporary debates of the efficacy of government intervention during a time of steadily increasing inflation:
Economic developments were outrunning Tobin’s views about how the economy actually worked. The inflation that had started creeping up during the mid-1960s was running rampant by the 1970s, and the government didn’t seem to know how to stop it…. The idea of government intervention in the economy was falling out of fashion. Part of the problem was that the government had pumped so much money into the system in the booming 1960s…. All of that money spurred demand for goods and services, driving the price of those goods and services higher: in a nutshell, creating inflation.
Yellen was in the audience for a debate at Yale between Tobin and Friedman. According to Hilsenrath, that
placed Yellen right in the middle of a debate about the role of government in the economy. Friedman defined that debate and Yellen and Akerlof became central players in a counterattack against the Chicago view that Friedman represented…. By the 1970s Friedman had become a household name. He appeared on the cover of Time Magazine in 1969 and won a Nobel Prize in 1976…. As inflation soared during the 1970s, Chicago theories about the futility of government interference in the economy seemed to prove all too true.
By 1977, Yellen had landed in a position to play a role in this debate as a staff economist at the Federal Reserve, which is where she met Akerlof. By 1980, just before Ronald Reagan entered the White House and started a 12-year Republican reign over the executive branch, Yellen settled in as an academic at the University of California, Berkeley.
Greenspan’s Fed (1986–2006) / In the early years of Bill Clinton’s presidency, Yellen was appointed as a member of the Fed’s Board of Governors along with vice chairman Alan Blinder. The pair pushed back against the then-well-entrenched chairman, Alan Greenspan, as “a new breed on the Fed board, which for years had been populated mostly by bankers, bureaucrats and Wall Street analysts.” Greenspan’s approach to managing the board’s deliberations “rubbed Yellen the wrong way.”
Clinton secured reelection and, according to Hilsenrath, he “accomplished this in part by accepting Milton Friedman’s ideas about the power of markets and the limits of government involvement in the economy.” Yellen later shifted to chair Clinton’s Council of Economic Advisers. The economy was calm, but she was repulsed by the “political game. It was stressful and made her uncomfortable,” and she was more comfortable in the role of “pragmatic non-partisan.”
By the time the Clinton administration ended, Yellen had returned to Berkeley. Hilsenrath provides some examples of what he calls Yellen’s “prescient observation[s]” and analysis. These examples of speeches include a string of warnings, albeit very general, she made during 2001 about the “dark side of tech innovations … which tend to raise income inequality”; of her worries regarding “sophisticated risk management strategies … to monitor and manage exposure [that] have the potential to destabilize financial markets,” such as value at risk programs; and her prediction that “she suspected that large budget deficits … were very likely to return.”
Bernanke’s Fed (2006–2014) / Yellen returned to the Fed from 2004 to 2010 as president of the Federal Reserve Bank of San Francisco (FRBSF), closer to the pragmatic, non-partisan role she relished. The FRBSF had direct supervisory and regulatory authority over troubled Countrywide Financial, an aggressive California-based mortgage lender whose collapse was one of the key events of the financial crisis.
Hilsenrath gives Yellen a pass on oversight of Countrywide, blaming “a jury-rigged bank regulatory system,” arguing that “there were limits to how much Yellen could do.… Fed supervisors in Washington, not Yellen or her staff in San Francisco, were in charge of bank oversight.” He instead blames Greenspan. But Hilsenrath does a poor job of supporting his arguments; the Reserve Banks examine banks and holding companies, and as he details in Yellen, they can impose limitations on the institutions’ operations.
Countrywide was able to migrate away from the Fed’s oversight in late 2006, but it was too late as the bank collapsed shortly thereafter in the midst of a run on deposits. (See “Run, Run, Run,” Cato Policy Analysis no. 747, April 2014.) Bank of America acquired Countrywide’s rotting corpse and came to regret it, requiring its own bailout in 2009 and struggling with the acquisition for a decade. The Countrywide collapse provided Yellen with insight that she shared at Fed policy meetings. But as Hilsenrath summarizes from her testimony before the Financial Crisis Inquiry Commission, “She hadn’t put the pieces of the puzzle together fast enough to stop it.” In Yellen’s own words: “I’m sorry. I wish I had but I didn’t.”
Yellen supported Bernanke’s bailout, low interest rate, and quantitative easing efforts in response to the financial crisis and Great Recession: “Like Bernanke, in a time of crisis she believed the imperative was to act boldly…. As for quantitative easing, the risks and unknowns were enormous…. Yellen wanted Bernanke to double down on everything.”
As a reward for her loyalty to the program during the crisis, Yellen became vice-chair of the Fed from 2010 to 2014, after Donald Kohn, Bernanke’s previous second-in-command, stepped aside. During her tenure, “Bernanke and Yellen were remaking modern central banking…. Secrecy was counterproductive. It was better to state goals clearly and explain your thinking.”
Yellen’s Fed (2014–2018) / The competition to succeed Bernanke as Fed chair came down to Harvard economist and former Clinton adviser Larry Summers, who was considered for the job when Bernanke’s previous term came up in 2010, and Yellen. They shared an ideology that “the government had a role to play in managing business cycles and other economic problems.” President Barack Obama was leaning toward Summers for the job, but “Summers lacked support in the progressive wing of the Democratic Party in the Senate.” Yellen got the nod.
Her four-year term focused on normalization. Writes Hilsenrath: “Her job was to move the Fed back toward some state of normalcy…. Yellen was as ready to do this job as anyone who preceded her. She had served the institution at almost every level possible.”
Her tenure was relatively uneventful: “After years supporting a policy of high-stakes risk-taking, the Fed’s methodical new leader chose the most boring policy possible. She did nearly nothing at all.” In 2015, interest rates were raised for the first time since 2008. President Donald Trump did not nominate her to a second term.
Treasury secretary / Even though Yellen was not involved in the workings of the Biden campaign, the president-elect, at the urging of Sen. Elizabeth Warren (D–MA), asked her to take on the job of treasury secretary. Initially Yellen “told him she wasn’t interested. She enjoyed her quieter life…. She was seventy-four years old,” according to Hilsenrath.
She acquiesced after discussing it with her husband and son. Her comments in her confirmation hearing set the tone for the new administration: “The best thing we can do is act big.”
The United States is now dealing with the consequences of that view. Looking back, it was reckless to cast aside concerns about inflation for a fiscal spending spree accommodated by loose monetary policy. Biden demanded quick passage of the American Rescue Plan, which Hilsenrath describes as “more money on top of the trillions already borrowed and spent by [President Trump]…. One problem was that the breadth of the program meant that many individuals who didn’t need the money would get it anyway.”
Yellen was uncomfortable with the swiftness of the process of putting the package together, but “she had little choice but to support it. Act big was her implicit and unavoidable endorsement,” Hilsenrath writes. She stumbled further as a member of team transitory as the evidence grew of building inflation. Hilsenrath describes the alternative and correct prediction of the economist who she beat out for the chairmanship of the Fed: “Watching all this from a distance, Lawrence Summers saw a recipe for disaster…. These are the least responsible fiscal macroeconomic policies we’ve had in the last 40 years, he said.” In 2022 Yellen had to sheepishly apologize, stating in an interview with CNN’s Wolf Blitzer, “I think I was wrong then about the path that inflation would take.”
Conclusion / Hilsenrath gives a balanced view of Yellen’s life, recognizing her achievements but also presenting issues where in hindsight her assessments and predictions were just plain wrong. Her push for central bank transparency on monetary policy and work to normalize policy during her term as chair were achievements. On the other hand, by her own admission, she was unable to do anything timely to limit the damage during the Countrywide debacle.
Her biggest failures have been as an economic forecaster. (See “Of Hedgehogs, Foxes, and Superforecasters,” Fall 2016.) Her New Keynesian views about massive stimulus combined with loose money and her “act big” rhetoric and arguments that inflation risk was not a serious concern were big errors. Even as I draft this review in late 2022, Yellen is confidently predicting that inflation will get back to a normal level by year-end 2023. In late 2021, she made the same projection for year-end 2022. We’ll see if she’s right this time.
I believe it was a mistake for her to accept the treasury secretary role, as her legacy would have been stronger without the damage her reputation has suffered since joining the Biden administration. Hilsenrath’s well-researched book makes that conclusion clear.
