A Force at the Fed

Vice Chair and Haas Prof. Janet Yellen Leads in Extraordinary Times

By Russ Mitchell


The Great Depression left a strong impression on young Janet Yellen. She often heard stories at dinnertime about the hardships suffered during the worst chapter in U.S. economic history while she was growing up in 1950s working-class Brooklyn.


“My mother and father were pretty traumatized by the Depression,” Yellen says. Her father, a doctor, struggled for years to make a decent income in a community with so many out of work and without insurance. “I remember thinking, this is something our country should never live through again.”

 

Decades later, now vice chair of the Federal Reserve Board, Yellen is one of the nation’s leaders responsible for making sure it doesn’t happen again. Helping steer the economy through its worst stretch since the 1930s, she casts one of 12 votes on the Fed’s Federal Open Market Committee, which sets monetary policy. Yet her influence goes well beyond her single vote. With her powerful intellect; ability to absorb, interpret, and communicate complicated data; and engaging manner that often wins people over through well-crafted ideas, Yellen has emerged as a key figure in the quest for the nation’s economic recovery.

“She is an intellectual leader on that committee,” Fed Chair Ben Bernanke told Berkeley-Haas magazine. “She’s very persuasive and effective.”


Because of her intellectual leadership in the field of economics, her dedication to teaching for more than two decades at Haas, and her service to the country at the Federal Reserve, the Haas School is honoring Yellen this fall as its 2012 Business Leader of the Year.


Learning from Students


Yellen recalls being good at math as a kid. Her mother, a teacher, had an unusual (for the time) interest in finance, which rubbed off. Those influences led  Yellen to study macroeconomics at Brown and then Yale. She then worked at the Fed, Harvard, and the London of School of Economics early in her career, but she credits her 26 years as a professor at Haas for honing her leadership skills.


 “Business students are very oriented to playing a role in the real world and accomplishing something, not training themselves to be scholars and contribute to the literature,” she says. “Teaching in that kind of environment has focused me much more on the real world, how pieces of the theory I know can be applied to real-world situations.


The situation Yellen is dealing with now is quite serious. Although the worst of the financial crisis seems behind us, the economy remains stuck with high unemployment and mired in slow growth. Two rounds of “quantitative easing” by the Fed—basically buying longer-term Treasury and agency bonds to lower longer-term interest rates and thereby induce business investment and consumer spending—have helped keep the economy from worsening but haven’t sparked a resurgence. In September, the Fed embarked on a third round of quantitative easing that involves buying large quantities of bonds, with a focus on mortgage-backed securities, until the jobs market improves.

 

“This is by far the most serious financial crisis since the Great Depression,” Yellen says during a recent trip home to Berkeley from Washington, D.C. “It’s unprecedented that so many countries have gotten to this point where we’re using non-traditional policy options.”


Short-term interest rates have been near zero for years, she notes. “This happened for a while during the Great Depression, but long-term Treasury rates, which we’re trying to push down, have hit the lowest levels. In U.S. economic history, that’s extraordinary.” Basically, low long-term rates indicate a lack of appetite for investments that produce growth—and jobs.


The situation has become so discouraging that many Fed policymakers, even some seen as “hawks,” agree more actions may need to be taken, according to the Wall Street Journal and other financial publications. Fed hawks tend to worry more about inflation risks; doves tend to worry more about subpar employment. Thus, in any given situation, a hawk might support a tighter monetary policy than a dove. The financial media consider Yellen a dove.


Keynesian Marriage


She is, in fact, an unabashed Keynesian. John Maynard Keynes, the famous Depression-era economist, argued private-sector markets aren’t always efficient and at times government must intervene. When the economy contracts and unemployment rises high, modern-day Keynesians would ease monetary policy by lowering interest rates and ease fiscal policy by raising spending or cutting taxes.


Even Yellen’s marriage can be traced to Keynesian roots. She met her husband, UC Berkeley economist and Nobel Laureate George Akerlof, at a late 1970s economics seminar in Washington, D.C. “We liked each other immediately,” Akerlof recalls in an autobiography. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics.”


Yellen confirms the mind-meld. “We both come at (economics) from a Keynesian tradition,” she says. “While admirers of capitalism, we also to a certain extent believe it has limitations that require government intervention in markets to make them work.”

 

While other Fed members have different views on levels of government intervention, Yellen says too much is made of a hawk-dove division. “We are a highly apolitical group,” she says.


Still, there are differences of opinion. The Fed has two goals: maximize employment and maintain price stability. Get too easy with credit and money creation, and inflation becomes a big risk. “There are a lot of views around the table, and about the ability and appropriateness of policy,” she says. “We debate things very actively. It’s good that there are diversities of view because I think a problem for institutions in general is groupthink.”


“She is very highly regarded by everybody around the table, and her views are listened to very closely,” says Bernanke.

 

Haas Professor James Wilcox knows why. Wilcox was close to Yellen during her years at the business school and remains a friend. Her thinking, he says, is rigorous, but in the face of facts, there’s nothing stubborn about her: “It’s not that she doesn’t have opinions; she often has strongly held opinions. But when she has a train of logic, she follows it to where the logic leads her and accepts the results, no matter what her personal views might be.”


Credible and Transparent


“Credibility” is a word that’s been applied to Yellen throughout her career. Along with Bernanke, she’s made increased credibility a priority at the Fed. As CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010, she pushed for more transparency in Fed deliberations and for publicly clarifying its policy framework. While former Fed Chair Alan Greenspan resisted establishing a formal Fed inflation target, both Yellen and Bernanke pushed for the move during the 2000s. In a 2006 paper, Yellen said such a move “could further enhance the credibility of the Fed and…not only for controlling inflation but for stabilizing employment and output.”


Yellen was sworn in as the Fed’s vice chair in October 2010 after being nominated by President Barack Obama and confirmed by the U.S. Senate. In January of this year, the Fed took the historic step of establishing a formal numerical inflation objective for the first time. Some liberal commentators like Nobel Laureate and New York Times columnist Paul Krugman push for higher inflation. Yet Yellen, who takes the Fed mandate of price stability as seriously as the one to maximize employment, clings like a hawk to the 2% target.


“In government institutions and in teaching you need to inspire confidence,” Yellen says. “To achieve credibility, you have to very clearly explain what you are doing and why. The same principles apply to businesses. The trust institutions have in the marketplace, the confidence customers and suppliers and workers and employees have, are very important to a business’s effectiveness.”

 

While she admits the Fed and the economics profession in general need to take some blame for the financial crisis—“we weren’t as diligent or insightful about the threats that were developing as we could have been”—a failure of business leadership also needs to be acknowledged. “It really was a shock that the managers of some of the world’s largest financial institutions really seemed not to have a grasp of what they were doing.”

 

If business schools are partly to blame for business leadership failure, Yellen does not include Haas among them. “The typical student at Haas learns about the importance of leadership in fostering the kind of organizational culture that creates a sense of identity and shared mission, that creates a commitment to wanting to achieve the goals of the organization. I think a lot of that was missing in some of these financial institutions.”


Yellen’s Fed appointment lasts 14 years, so she’s not thinking about next career moves. At some point, though, she and her husband want to make Berkeley their main home again, and she’d like to form a new relationship to Haas. “It’s a wonderful university,” she says, “a terrific business school, a terrific economics department, the place is beautiful, the weather is gorgeous, the people are lovely, and the students are excellent.” 

 

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