They say timing is everything, and that surely was the case when Larry Summers took his name out of the running as Federal Reserve chairman. Even if unintended, his withdrawal came on the five-year anniversary of Lehman Brothers Holdings Inc.’s bankruptcy, and just a few days before the central bank is expected to begin to pull back from the most unconventional -- and controversial -- of its emergency measures.
The timing serves as a useful reminder that the next Fed chairman should expect an economic crisis of some sort. If history is a guide, another recession may arrive in the next two to three years -- before the economy has recovered from the last one. President Barack Obama should find someone who will look to Ben S. Bernanke, whose term ends in January, as a role model.
Bernanke’s post-crisis ingenuity helped transform the Fed from staid traditionalism to creative pragmatism -- without sacrificing independence, credibility or accountability. Bernanke’s Fed redefined the role of the modern central bank. If Obama won’t or can’t persuade Bernanke to stay another five years -- which seems unlikely -- he should choose Janet Yellen, the Fed’s vice chairman and Bernanke acolyte.
Obama may believe that most of the anti-Summers criticism was unfair. He is, moreover, said to be sufficiently chapped at the way his former economic adviser was treated by his own party that he is considering someone other than Yellen.
He should get over his pique. That he finds himself in this situation is not the fault of Yellen, who didn’t lobby publicly or privately for the job (Summers did both, even if by proxy) and who was always neck-and-neck with Summers in the core areas that matter most, or should: She has a strong grasp of monetary policy’s powers and limits, understands the need to balance the dual roles of inflation fighting and full employment, and fully accepts the need for the Fed to be a tougher bank regulator.
In short, she would be a superior, even historic, choice as the first woman to lead the Fed. Were we somehow able to erase the memories of the last three months, the consensus would be overwhelming. Yellen has 15 years of experience at the Fed. What’s more, she has displayed enough independence to disabuse those who suggest she would be a tool of the 20 Senate Democrats who supported her over Summers.
The Fed’s most immediate challenge is gradually pulling back from its bond-buying program, known as quantitative easing. It created a muddle in July when it tried to articulate an exit strategy that only succeeded in driving up yields. At this week’s meeting of policy makers, Yellen, as the architect of the Fed’s communication strategy and a natural consensus-seeker, will have a chance to show she can win agreement on a clear and convincing statement of future intentions -- one that clarifies more than confuses.
The central bank is more than a chairman and a roomful of meek followers. The other Fed governors are more assertive than ever, and financial markets hang on their every word. Yellen wouldn’t be the kind of Fed chairman who, as some feared Summers would be, would try to silence opposing voices.
This would be a welcome development. One of the biggest lessons of the last crisis was the unwillingness of almost everyone in officialdom -- in Congress, at the Fed, among regulators and in the White House -- to heed the warnings of dissenters about the dangerous rise in home prices and overborrowing by banks and homeowners.
If Yellen lacks anything, it is hands-on management of a crisis like the one that brought the global economy to its knees in 2008. She was, however, at Bernanke’s side as he maneuvered the U.S. away from the precipice. She couldn’t have a better teacher.
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