The future leadership of the Federal Reserve, at a time when
the Fed has indicated an inclination to change policy and lessen quantitative
easing
, is uncertain with the anticipated retirement of Chairman Ben Bernanke
at the end of this year.  At the center
of the debate is whether President Obama should pick Lawrence
Summers
or Janet
Yellen
, the two front-runners, to replace Bernanke.  The topic has been surprisingly controversial
and received significant play in the mainstream press fueled in no small part
by the spotlight the contenders shine on gender issues.  Lawrence Summers, ended his term as Harvard’s
president amid controversy for his remarks
attributing the gap between male and female advancement in hard sciences to
inherent differences between the sexes. 
(The legacy of his presidency was also marred by a billion
dollar endowment loss
due to poor investments under his leadership.)  Janet Yellen is not just a counter point to
Summers; she serves as her own figurehead in this debate.  If appointed, Yellen would be the first
female to lead the Federal Reserve, an important milestone for women. It could
also be a potentially important litmus test for the Obama administration, which
has come under scrutiny for the absence of women in top leadership positions,
especially in economic issues.

Of course, the heart of the differences between the two
stands not on gender alone, but on substance. 
While both Summers
and Yellen have
incredible CV’s combining academic, regulatory and policy-focused credentials,
I categorize the differences that will make a distinction between them as
foresight, process and balance.  (In full
disclosure, in August I signed on to a letter in support for Janet Yellen as
one of many business law professors who favor her candidacy.  That letter is available here 
Download Fed Nomination Letter final.)

On the foresight issue, Janet Yellen, in her role as the
President of the San Francisco Federal Reserve Bank, expressed concern for the
housing bubble and its impact on price stability as early as 2005.  Lawrence Summers, on the other hand, supported
the repeal of the Glass-Steagall Act and the Commodity Futures Modernization
Act while also touting the role and continued deregulation of derivatives—all
considered contributing factors to the Great Recession, as it is now called. 

Process speaks to how the Fed Chair will be appointed and
how the Chair will operate in the position. 
Without having personally worked with either, Janet Yellen is believed
to be collaborative and open-minded in her decision-making process drawing comparisons
between her style and that of current, and highly regarded, Chairman Ben Bernanke.  More than 200 economics professors (the
number is now reportedly 350) signed an open
letter
 to President Obama lauding
her leadership style and praising her for being “willing to hear multiple
points of view and to bring many voices into the policy making arena.”   Summers’ reputation,
on the other hand, is one of confrontation. 
While Summers is rumored to be the top Obama contender, the uncertainty
surrounding the Syria vote and the lack of unity behind Summers as a candidate
among the Democratic ranks means that limited
political capital
may tip the scales in favor of Yellen as the less
controversial candidate, at least among Democratic lawmakers.

 

Balance.  A main
function of the Board of Governors of the Federal Reserve System is to set
monetary policy, which is done, in part, through the Federal Open
Market Committee or FOMC
, comprised of 7 of the Governors and 5 of the 12
Reserve Bank presidents.  The FOMC
influences monetary policy through interest rates, which it sets directly
through the discount rates and can also impact through the buying and selling
of government securities.  These actions
can result in a higher (tightened monetary supply) or lower (eased monetary
supply) interest rates.  The current
composition of the Board or Governors is about to undergo a dramatic change
with the anticipated retirement of Chairman Bernanke and 3 other female
Governors:   Elizabeth Duke, Sarah Raskin
and Sandra Pianalto.  If Summers is
selected as the new Chair, it is speculated that Janet Yellen would resign from
the Board of Governors creating significant turnover, a power vacuum, a loss of
institutional knowledge, and an absence of women at the head of monetary
policy.  Additionally, in a brilliant
little diagram provided by the folks at Chart
of the Day
, the loss of these particular Governors would mean that the
economic policy of the Fed would be tipped away from its current dovish
tendencies of lower interest rates towards a more hawkish inclination.

Fed FOMC Policy Chart

As an aside, a new favorite past-time since the birth of my
son in July has been watching re-runs of The West Wing
during those late feedings or hours when I am awake, but brain-dead.  Of the many political scenarios that play
out, one involves the unexpected
death of the Federal Reserve Chairman and a public dispute over who should be
named the successor
.  Sound
familiar? 

 -Anne Tucker

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Photo of Benjamin P. Edwards Benjamin P. Edwards

Benjamin Edwards joined the faculty of the William S. Boyd School of Law in 2017. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection.

Prior to teaching, Professor Edwards practiced as a securities litigator in the New…

Benjamin Edwards joined the faculty of the William S. Boyd School of Law in 2017. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection.

Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis. Read More