August 6, 2013 – Andrew S. Ross of the San Francisco Chronicle reports:
In this corner we have Janet Yellen, former UC Berkeley professor, former CEO of the San Francisco Federal Reserve Bank and current Vice Chair of the Board of Governors of the Federal Reserve System in Washington.
In the other corner, we have Lawrence Summers, former president of Harvard University, former U.S. Treasury Secretary, former director of President Obama’s National Economic Council and currently a board member of San Francisco companies Square and Lending Club and an adviser to venture capital firm Andreessen Horowitz in Menlo Park.
These are the chief contenders to replace Ben Bernanke as chair of the Federal Reserve, America’s central bank and the most powerful institution in the world of global finance. The contest has become a ringside spectacle for economists, pundits, politicians and activists. The outcome may determine whether there will be even a smidgen of accountability for the misery wrought on tens of millions of Americans at the hands of the financially induced Great Recession.”
As head of the San Francisco Federal Reserve Bank, which oversees bank holding companies and some smaller regional banks in nine Western states, Yellen had begun ringing alarm bells when the housing market in her region was in full-throated roar, warning the Fed board in 2005 of the growing use – “and maybe this is true nationwide” – of piggyback loans and other risky mortgages with “loan-to-value ratios going up to 125 percent,” and the potential threat they posed to Fannie Mae and Freddie Mac, which were taken over by the government three years later.
Few on the Fed board took her seriously, ultimately issuing weak-kneed “guidance” aimed at limiting the practices. “You could take it and rip it up and throw it in the garbage can,” she testified to the Financial Crisis Inquiry Commission in 2010.
Did she foresee of the extent of the catastrophe to come? No.
“I did not see and did not appreciate what the risks were with securitization, the credit rating agencies, the shadow banking system,” Yellen told the commission. But she’s learned plenty, including from her experience helping to oversee the winding down and selling off of a number of banks in her region, including Washington Mutual, whose failure was the biggest in U.S. banking history.
Her judgment has been pretty strong since. She was right, in 2009, when she said economic recovery “will be frustratingly slow.” As one of the Fed’s “doves,” she has correctly identified unemployment, rather than fears of inflation, as needing to be the Fed’s chief concern, and she has strongly supported Bernanke’s easy money “quantitative easing” policy.
Summers and deregulation: Summers also spoke at the Financial Crisis Inquiry Commission, but, as a concession to senior Obama administration executives, only in private. The commission’s chairman, former California Treasurer Phil Angelides, would not disclose details of Summers’ testimony, but said it showed “an inability to recognize mistakes he had made in the run-up to the crisis, and how the movement he was part of did enormous damage to the country.”
A vocal proponent of financial deregulation – including the elimination of the Glass-Steagall Act while Treasury secretary in the Clinton administration – Summers rode roughshod over anyone who didn’t see things his way.
Rewarding Summers would be another example of a reward for failing upward, at the expense of an awful lot of people.
“Look, Larry Summers has given a lot of good service to this country,” said Angelides. “He has a very deep economic background, but he’s been part of the Washington-Wall Street revolving door – and part of the group that helped cause so much damage. Yellen wasn’t.
“There’s never been more of a time when we’ve needed a fresh look and a fresh start.”
Read the full article here.