Cardiff Garcia: Already-Strong Case for Yellen Strengthens Further
The very smart Cardiff Garcia joins Team Janet:
Already-strong case for Yellen strengthens further, and a word about the inanity of “market” preferences: With the exception of certain commentators who get paid ostensibly to act like inveterate morons, nobody has doubted Janet Yellen’s record of analytical prescience in the past decade. The examples presented by Bill McBride, and which date back more than eight years, along with the 2007 FOMC transcripts are enough to understand why. Not that Yellen can predict the twists and turns of the economy with perfect clarity--nobody can--but rather she has consistently shown a deep early understanding of the underlying pressures building in the economy and the scale of their potential consequences.
This particular plank of support for a Yellen candidacy was reinforced by the Wall Street Journal’s analysis on Monday of FOMC forecasts since 2009. It turns out that she has also been successful, more than any other FOMC member, at predicting the short-term trajectories of the major economic indicators. Obviously there’s no guarantee that this would continue, but at the very least this serves to further disprove one very peculiar notion given by Ezra Klein’s sources last week for preferring Larry Summers to Yellen--specifically the notion that “the market” trusts Summers more, because (we guess?) he’ll be a tough manly man on inflation while she’s a homeless-hugging San Francisco hippie female person who will let the US economy revert back to the hellspun apocalyptic landscape of the 1970s, ushering in another era of frozen wastelands and broken homes and shattered dreams.
The thing that annoys me most (besides whoever-it-was who told Ezra Klein that the President was on the point of choosing to nominate Larry when the President was not) are people who say: "Janet Yellen is wonderful, but…"
There is no "but".
Janet Yellen would be a wonderful choice for Fed Chair--one of five who I think are head-and-shoulders above other candidates in their triple qualifications for the job: the requisite experience, a modern marked-to-market view on the economy, and feeling the force of the dual mandate in their viscera.
Cardiff continues:
Perhaps we’re being harsh. But it’s strange to think that the fickle, idiosyncratic preferences of “the market” should be a determining factor…. The actual preferences of self-interested market participants should… be only a minor consideration. And in any event “the market” is a blobby amorphous concept…. Furthermore, there is no reason now to necessarily prefer someone with better perceived inflation hawk credentials. Much of the world is confronting powerful disinflationary forces, from the slowdown in emerging markets to demographic problems in the developed countries to the expected rise of automation-enabling technologies. Maybe that too will change, but this isn’t the 1970s, is the point.
Indeed, I would have said that at the moment there is value in appointing somebody with better perceived inflation dove credentials…
Cardiff:
Surely it should matter more that whoever is in charge have sound judgment and proven analytical chops. And given that Yellen was discussing housing as a bubble back in 2005, it’s not as if she’s afraid to signal warnings about frothy markets during relatively better times….
Meanwhile, another silly knock on Yellen… is that she won’t be as effective at knocking heads together on the FOMC if it’s needed. Look, we think that Summers’s aggressive personality has always been an exaggerated issue: if politics ain’t beanbag, neither is economic policymaking. But the other side of the same coin is this line of critique about Yellen. As if the world’s most important economic policymaker possessing diplomatic skills were a deficiency, or as if a quieter demeanor reflects weakness. But even if you do think this matters, well… it’s a crap line anyways…. Alan Blinder:
Fast forward to her days leading the San Francisco Fed, where she warned, as early as 2005, that the titanic real-estate market was heading for an iceberg. Ms. Yellen was frustrated that the Fed’s Board of Governors would not even issue regulatory guidance to curb disgraceful lending practices like piggyback loans that exceeded 100% of the house’s value, or loans with little or no documentation. When the board finally did so, she was dismayed at how weak the guidance was. She later told the Financial Crisis Inquiry Committee: “You could take it out and rip it up and throw it in the garbage can.” The guidance, she added, “wasn’t of any use” to the San Francisco Fed.
Feisty, but true. Had Washington listened to her, it would have cracked down on bad lending practices sooner, and the crisis would have been less devastating…. So much for the lack of toughness. See also Carola Binder….
The politics is unavoidable, of course. But we would just emphasise again that strictly on the merits, you hardly need to make an anti-Summers case to prefer Yellen. She is a uniquely stellar candidate for the gig, and that’s why she should get it.
And then comes the DeLong smack down:
Brad DeLong, whose views FT Alphaville always respects, makes a case for Summers on the basis that he “has an edge as the most creative thinker likely to successfully think outside the box should outside-the-box thinking be called for, and least likely to bind himself to an institutional consensus past its sell-by date.”
That could be right… but Yellen is no slouch here. The vignette related by Blinder is one example, and remember also that she threw down with Greenspan in the mid-1990s about the advantages of maintaining a positive inflation target rather than bringing it down to zero. She continues to be responsible for the evolution of communications policy in the Bernanke Fed, which has been imperfect but often inventive. And her recommended “optimal controls” approach to monetary policy is NGDP targeting in all but name only.
That’s not such a bad record of fighting for unpopular or creative ideas. So given the extent of her other advantages, we don’t think this argument is enough to give Summers the nod.
