Yellen’s Credentials to Lead the Fed

Franck Robichon/EPA (left); Yuri Gripas/Reuters Janet Yellen, vice chairwoman of the Federal Reserve, and Thomas Hoenig, a former Fed official who is vice chairman of the Federal Deposit Insurance Corporation.

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In the immediate aftermath of Lawrence Summers’s withdrawal from consideration as the next chief of the Federal Reserve, there was a great deal of chatter in Washington along the lines of “anyone but Yellen”; Janet Yellen is the current vice chairwoman. Some influential commentators seem determined to leave no stone unturned in the search for someone other than her to take over Ben Bernanke’s job when his term as chairman expires in early 2014.

This discussion is both misguided and distasteful. Not only is Ms. Yellen perfectly well qualified to lead the Fed, she might be the best qualified potential Fed chief ever. If Ms. Yellen were a man, we would not be having this conversation.

No other contender to lead the Fed stands even a remote chance of being confirmed. And if the White House really wants a smooth path to confirmation, the strategy is simple: propose Ms. Yellen as chairwoman and Thomas Hoenig as vice chairman.

The positive side of Mr. Summers’s putative candidacy is that the qualifications of Ms. Yellen have by now been reviewed extensively; for example, see this piece I wrote in July. She served on the Board of Governors of the Federal Reserve inn the 1990s and as head of President Clinton’s Council of Economic Advisers. Most importantly, perhaps, she was president of the Federal Reserve Bank of San Francisco from 2004 to 2010 and, from that position, had a close view of what went wrong in housing and finance.

Regional reserve banks tap into business networks with great insight into how the economy is operating, at a very detailed and local level. Not surprisingly, the experience of running these banks can shape or reinforce world views. The strongest voices for financial reform today include Richard Fisher, current head of the Federal Reserve Bank of Dallas, and Mr. Hoenig, the former head of the Federal Reserve Bank of Kansas City and now vice chairman of the Federal Deposit Insurance Corporation.

Mr. Hoenig is an independent who is well regarded on the right; his views on the financial system are also supported by many on the left. Packaging his nomination with Ms. Yellen’s would build bipartisan support. Ms. Yellen is thought to be relatively dovish on monetary policy, while Mr. Hoenig is regarded as relatively more concerned about the potential for inflation.

Confirming them as a team would retain roughly the existing balance on the 12-member Federal Open Market Committee (which sets monetary policy), while greatly strengthening pro-reform voices within the Board of Governors of the Federal Reserve System, which is in charge of systemic risk regulation (including many details of how banks operate) and which has no more than seven members and might soon be understrength.

In complete contrast to Ms. Yellen and Mr. Hoenig, Timothy Geithner - who was president of the Federal Reserve Bank of New York Fed from 2003 to 2009 and then served as Treasury secretary â€" seems to have developed a very different perspective on finance. Mr. Geithner, for example, takes seriously the idea that the events of 2007-8 were largely a liquidity crisis to which the United States should not overreact with structural change. Seen in long historical perspective, perhaps this is not a surprise; since the creation of the Federal Reserve Bank of New York in 1913, its senior executives have rarely seen the need for deep reform of Wall Street.

The issue with Mr. Summers was not particularly what he did in the 1990s or what he said in the 2000s - but rather what he believes today. Current attitudes are entirely sensible criteria for judging a candidate for any office. Mr. Summers was urged in recent weeks by some of his supporters to embrace a greater degree of financial reform, but he declined to do so â€" and consequently could not win confirmation.

Mr. Geithner would face at least as much opposition. And the same goes for other former officials who apparently remain comfortable with current financial-sector arrangements. (If any such people feel this characterization is unfair, I urge them to take to the op-ed pages and provide clarification.)

Ms. Yellen has a very different view from Mr. Geithner regarding what went wrong with finance and what needs to be done going forward. She will draw strong Congressional support for precisely this reason.

In his letter of withdrawal, Mr. Summers said, “This is a complex moment in our national life.” Actually, it seems pretty straightforward. The economy is struggling to recover from the aftermath of a huge financial crash, brought on by reckless behavior that was permitted by the male-dominated Federal Reserve Board of Governors and that made some of the men who ran large financial companies onto the rocks very rich.

Now Ms. Yellen wants to help clean up the continuing mess, but there is some resistance to the approach she is likely to take, which involves not necessarily being overly nice to very big banks. Think of the opposition encountered by Sheila Bair when she headed the Federal Deposit Insurance Corporation during the crisis, or the pushback against Elizabeth Warren when she ran the Congressional Oversight Panel for the Troubled Asset Relief Program.

Will Ms. Yellen be allowed the opportunity to help make the financial system safer and better able to serve the real economy? I certainly hope so.