Yellen In Line to Head Fed, But How Will She Lead?

Economists Bill Black and Greg Palast discuss Fed Chair nominee Janet Yellen’s record, pointing to her support of the repeal of Glass-Steagall as an indication of how she’ll work with Wall Street.

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Story Transcript

JESSICA DESVARIEUX, TRNN PRODUCER: On Thursday, November 14, the Senate Banking Committee heard the testimony of the Federal Reserve chair nominee Janet Yellen.

Often described as the Fed’s number two, Yellen has worked within the Federal Reserve for 36 years. Her extensive resume includes being the chair of President Clinton’s Council of Economic Advisers. She was also the president of the Federal Reserve Bank of San Francisco, and later became the vice chair of the Fed.

With minimal opposition from the Senate, it looks like she’ll soon be adding another accomplishment to the list–becoming the first female Fed chair in U.S. history.

JANET YELLEN, FEDERAL RESERVE CHAIR NOMINEE: I strongly believe that monetary policy is most effective when the public understands what the Fed is trying to do and how it plans to do it.

DESVARIEUX: But what does Yellen plan to do? That’s what Massachusetts Democrat Elizabeth Warren wanted to know, especially about reining in too-big-to-fail banks.

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SEN. ELIZABETH WARREN (D-MA): So I want to focus on the Fed’s regulatory and supervisory responsibilities to keep the big banks in check. Now, I’m concerned that those responsibilities just aren’t a top priority for the board of governors. Earlier this year, the Fed and the OCC reached a settlement with 13 mortgage servicers that had engaged in a long list of illegal foreclosure activities, and the settlement was for over $9 billion. It directly affected more than 4 million families. But the Fed’s board of governors never voted on whether to accept the settlement. Instead, this decision was just left to the staff.

Now, the Fed has smart, hard-working staff, but the board of governors would never delegate critical monetary policy to them. And yet even now, after the biggest financial crisis in generations, the board seems all too willing to delegate critical regulatory and supervisory decisions. So I think we need to make reining in the banks a top priority for the board.

So I know the board meets regularly to discuss monetary policy. Do you think the board should have regular meetings on supervisory and regulatory issues as well, making it clear that both of those are important to the Fed?

YELLEN: Well, Senator, I absolutely believe that our supervisory responsibilities are critical, and they’re just as important as monetary policy, and we need to take them just as seriously and devote just as much time and attention to them as we do to monetary policy.

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DESVARIEUX: Senator Warren and many others, like Yellen’s former professor Nobel laureate Joseph Stiglitz, support her nomination. Pro-business groups have also come out in support of Yellen to head the soon-to-be 100-year-old institution, founded in 1913. The Federal Reserve Act created the central bank. One of reasons that makes it different from other central banks is that it includes bankers on the regional boards. For example, JPMorgan Chase CEO Jamie Dimon served on the regional board of the New York Fed.

Economist Bill Black says he supports Yellen but knows that her nomination is no home run for those looking to regulate Wall Street.

BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: She’s been the most effective predictor of any of the Federal Reserve folks. She’s been the one quite properly focused on unemployment, the one who’s predicted quite correctly that inflation would remain trivial, which it has. So those are the reasons that–and the fact that she’s not hostile, actively hostile to regulation–that people have supported Janet Yellen. And I assert certainly have.

But, no, no one sees her as a likely scourge of the bank frauds through really aggressive regulation, supervision, examination, enforcement, and criminal referrals.

DESVARIEUX: Upon closer examination of Yellen’s record, we also see a Yellen who has supported trade policies like NAFTA, cuts to Social Security, and the repeal of the Glass-Steagal Act.

GREG PALAST, FORENSIC ECONOMIST AND INVESTIGATIVE REPORTER: Summers pushed for the idea of eliminating the Glass-Steagall Act, which prevented commercial banks and investment banks from raiding your piggy bank and going to Vegas with the money. Unfortunately, Yellen went along with that idea. Yellen has got along with most of the new globalization order.

The real question for Yellen is: look, there were 4 million foreclosures. Two million families lost their homes to foreclosure in the last couple of years while she was deputy chairwoman of the Federal Reserve Board. And why didn’t she take stronger action? In other words, the Republicans are saying, oh, look, you know, she’s too aggressive, you know, all she cares about is unemployment. Well, you know what? Maybe she didn’t care enough.

DESVARIEUX: Now, under the Dodd-Frank Act, the Federal Reserve is also a regulatory agency. Democratic Oregon senator Jeff Merkley questioned Yellen about her role in completing the Volcker rule, which would keep commercial banking in its own sphere.

YELLEN: We’re trying to be faithful to the intent of this rule, which is to eliminate short-term financial speculation in institutions that enjoy the protection of the safety net. The devil here is in the details. The rule does permit appropriate hedging in market-making activities, and we’re trying to devise a rule that will permit those activities but absolutely be faithful to the intent that Congress had here.

DESVARIEUX: On the Republican side, Yellen was mostly questioned about controlling inflation.

Bill Black warns that this line of questioning is completely off the mark, since it’s not inflation but deflation that the Fed should be most concerned about.

BLACK: Inflation is controlled, has been controlled. The problem is that inflation is too low. And economists of nearly every persuasion understand this. Very conservative entities, including the German central bank and the International Monetary Fund, have been warning that inflation is too low. The numbers just came out as we’re talking on GDP in Europe, and the numbers are terrible. There’s a real risk that Europe will soon sink back into recession because of this deflation going on. And so this is a big thing [snip] by a few conservative Democrats, by a bunch of Wall Street people, but mostly by conservative Republicans. They hope the that U.S. will inflict even greater austerity on the economy and that the U.S. economy will slip back into recession, which would, of course, make the next election a field day for the Republicans.

DESVARIEUX: Some republicans have come out against Yellen. Republican Texas senator Ted Cruz and Kentucky Senator Rand Paul vowed to hold up her confirmation.

PALAST: You know, in the case of Rand Paul, you know, he preferred Milton Friedman for the post of Federal Reserve chief. And The Wall Street Journal reminded him that Friedman had been dead a few years. I know that because I was a student of Friedman.

There is a belief among the Republicans, who have a very poor understanding of economics, and some of the moderate Democrats, who have even a poorer understanding of economics, they think that if you print a lot of money, that automatically prices go up. You know, it’s some real simple formula that if you double the money supply, prices double tomorrow. And they’re always scaring us about the 1920 hyperinflation Germany, when you needed it to, you know, take a barrel full of currency to buy a loaf of bread.

Well, it was actually Milton Friedman, my professor, who came up with the monetarist theory that one way that you stop a depression is by printing more money. And as long as the economy is–as long as there’s a lot of unemployment in the economy, that is, the economy’Us not at its maximum capacity, you’re not going to see prices rise. We have increased the money supply in America by over $4 trillion in the last few years, and prices are barely above dead flat.

So, first of all, they’re attacking Yellen on the basis of a theory that they do not understand.

DESVARIEUX: Yellen made clear during the hearing that the Fed’s near 2 percent inflation was in order and that she would keep her predecessor’s economic stimulus in place, an expected move for most on Wall Street, who look at Yellen as a continuation of Bernanke’s policies. In a CNBC poll, 50 percent of traders and bankers said that they wanted Yellen as the next chair.

After getting Wall Street’s blessing, by next week she’ll likely be confirmed.

For The Real News Network, Jessica Desvarieux, Washington.

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DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.