New Fed Chair Had the Clearest Spectacles

The choice of Janet Yelled as the Federal Reserve Chair, accomplished over President Obama’s initial preference, is looking better every day.  A long, interesting article by Nathaniel Popper in the N Y Times biz pages is revealing.

As the world’s financial system stood on the verge of collapse in October 2008, Janet L. Yellen was not even a full voting member of the Federal Reserve’s policy-making committee, but she was not shy about admonishing her colleagues for not acting faster.

“We need to do much more and the sooner the better,” Ms. Yellen said at a two-day meeting in late October, after the Fed had helped bail out the banks. As president of the San Francisco regional Fed bank, Ms. Yellen attended all the meetings of the Federal Open Market Committee that year but had rotated out of the circle that actually voted on its actions.

After months in which some members of the Fed committee resisted taking steps to prop up the economy, Ms. Yellen lectured her colleagues: “Frankly, it is time for all hands on deck when it comes to our policy tools.”

Near the end of the article a suggestion of something even better for the future emerges.

As the new leader at the Fed, now the nation’s leading bank regulator, the skepticism Ms. Yellen displayed toward Wall Street that is revealed in the transcripts is likely to prove particularly important. Early in 2008, she pointed to a paper by the economist Raghuram Rajan, now the head of India’s central bank, about the danger of the structure of Wall Street bonuses.

“It seems to me that we have had an awful lot of booms and busts in which this type of incentive played a role,” she said.

Timothy F. Geithner, the president of the New York Fed at the time, pushed back against Ms. Yellen and the idea that overhauling bonuses was necessary. After the election of Barack Obama in November, Mr. Geithner rose to become secretary of the Treasury, and few changes were made to rules about bonuses.

Ms. Yellen might intend to approach the issue differently. Back in 2008 she said that proposals to alter bonuses “were not popular,” presumably referring to financial circles.

That didn’t scare her off.

“I think this is worth some thought,” she said.

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