Is the next Federal Reserve chairman/chairwoman going to be Lawrence Summers, Janet Yellen, or an unknown wildcard? (As a note, “unknown” is a relative word here given that the next Federal Reserve chairman will be well-vetted and generally known to everyone who follows monetary policy closely; the chosen applicant simply might not be known in the political world and therefore “unknown”). The investment banking world continues to be interested, more so than normal, in the ramifications of this highly politicized decision by the Obama administration. And, no doubt, speculation will continue until the initial name is announced in late September/early October.
On Friday, the Wall Street Journal released an article on the evolving nature of Ms. Yellen’s stance related to regulation. In her own words, Ms. Yellen has evolved “from a slightly ‘docile’ regional bank regulator into a proponent of hard and clear rules designed to make banks less risky … This experience [of the financial crisis] has strongly inclined [her] toward tougher standards and built-in rules that will kick into effect automatically when things like this [2007 to 2009 financial crisis] happen that make tightening up a less discretionary matter.” Because Dr. Yellen will likely be more difficult to deal with when it comes to regulation, this post briefly reviews the differences between Summers and Yellen on financial regulation.
Ms. Yellen’s executive regulatory experience stems from her time as head of the San Francisco Federal Reserve district from 2004 to 2010, before she took office as the Vice Chair of the Board of Governors. During this time she had numerous opportunities for herself and her staff to look into the financials of such giants as Countrywide Financial Corporation and Wells Fargo. Not surprisingly, the executive Ms. Yellen acted more like a banking bureaucrat than a leader in the making. During her tenure she made what came across as various half-hearted attempts at shoring up what would later become weak balance sheets of member banks. Her excuse for more talk than action is that she “lacked authority.” Of course, given that hindsight is 20/20, the consensus-building Ms. Yellen now appears more zealous and determined in her desire to stringently regulate banks.
In contrast to Ms. Yellen’s regulate-‘em mindset, Mr. Summers is a well-known advocate for financial deregulation in many areas, including over-the-counter derivatives, the Volker rule, and the 90’s deregulation decisions. Interestingly, Ms. Yellen was involved in a number of the aforementioned decisions, although most reports indicate a very passive attitude on the subjects.
With implementation of Dodd-Frank largely incomplete, the next Federal Reserve chairman will have considerable influence on impending financial regulation. The Obama administration and the U.S. Senate should think very carefully about whether they prefer a regulation-filled banking system or whether they want a system that celebrates risk and the benefits stemming therefrom.
The decision matters not only on a domestic front. On a long-term view, the appointment may affect whether the United States continues as the world’s financial capital or instead moves towards an older, stale financial system.
Overall, Ms. Yellen continues to be a front-runner for the head of the Federal Reserve, with the consequences of such an appointment likely to be a more regulated central bank, which will have long-term consequences on U.S. financial competitiveness.