Update 491 — Treasury Nominee Yellen
Would Face Vast, Daunting Policy issues
Yesterday, President-elect Biden announced plans to nominate former Federal Reserve Chair Janet Yellen, 74, for Secretary of the Treasury. Yellen is phenomenally well-qualified for the position, especially given the economic conditions she will confront. Admired and trusted by commentators, progressives, and moderates, Yellen has helped steer the nation through crises and now must again.
Even Wall Street is celebrating Biden’s choice, with the Dow hitting an all-time high right after the announcement. If confirmed, Yellen will become the first female Secretary of Treasury and will head a Department with a jurisdiction ranging from directing economic policy and monitoring the financial system to collecting tax revenue and debts.
Happy Thanksgiving to all…
Fed Chair Turned Treasury Secretary
Janet Louise Yellen hails from Brooklyn, New York. She received her Ph.D. in economics from Yale University in 1971 where she was the only woman in her class. She studied under future Nobel laureate Joseph Stiglitz, who called Yellen one of his brightest and most memorable students.
Following graduate school, Yellen taught at Harvard and the London School of Economics, separated by a two-year stint as an economist at the Fed Board of Governors. President Clinton hired Yellen to serve as Chair of the Council of Economic Advisors (CEA) at the beginning of 1997, and in 1999, Yellen was confirmed to the Fed Board.
While at the CEA, Yellen focused on gender pay inequality, determining that the Equal Pay Act of 1963 was necessary but insufficient to bridge the divide. At the Fed, Yellen voiced concerns about the housing market early and specifically noted the problems in Countrywide’s lending model. She served as Vice Chair of the Fed from 2010 to 2014, aggressively using the powers of the Fed to reduce unemployment while disproving worries about runaway inflation.
In 2014, she succeeded Ben Bernanke as Fed Chair, becoming the first woman to fill the role, where she would oversee consistent job growth and wage increases. She was replaced as Chair by Trump’s pick, Jerome Powell, in early 2018 and left the Fed to join Brookings rather than complete her ten-year term on the Board.
If confirmed by the Senate, Yellen will be the first person to have headed the Treasury, the Federal Reserve, and the White House Council of Economic Advisors.
Yellen on the Record
- Financial policy
Yellen’s selection bodes well for a Treasury committed to a progressive rebalancing of policy priorities. Yellen is a staunch defender of the Dodd-Frank Act. As Fed Chair, she assisted with the second half of the recovery from the 2008 recession, initiating bold expansionary policies that reduced unemployment. Under Ben Bernanke, the Fed initiated its first quantitative easing (QE) program, which Yellen extended under her tenure until ending the asset purchases in October 2014. Yellen continues to support QE as an essential component of the Fed’s toolkit to fight recessions.
During Yellen’s tenure as Fed Chair, the Financial Stability Oversight Council (FSOC) increased regulation of several big companies, labeling GE Capital, American International Group, MetLife, and Prudential as systemically important financial institutions (SIFI). These SIFIs were subjected to higher capital and disclosure requirements. And in 2018, one of Yellen’s last acts was slapping unprecedented penalties, including a demand to fire four board members and a temporary prohibition on asset growth, on Wells Fargo for defrauding consumers.
- Fiscal policy
During the pandemic, Yellen has been a supporter of increased fiscal support in the form of both state and local relief and increased unemployment benefits. At a July hearing before the Select Committee on the Coronavirus Crisis, Yellen and Ben Bernanke praised the CARES Act’s expanded unemployment insurance (UI) and the Paycheck Protection Program for helping workers and businesses survive the spring lockdowns. Yellen also pushed for an extension of the boosted UI benefits, tying it to either national or state unemployment rates so that future downturns wouldn’t depend on Congress.
Some progressives may be wary about Yellen’s statements on the federal deficit. In 2018, Yellen said that the current state of federal spending was unsustainable and that to fix it, she would raise taxes and cut retirement spending. Today, Yellen has abandoned these concerns. And progressive groups and politicians such as Sen. Elizabeth Warren, who was vying for Treasury Secretary, have praised Biden’s selection of Yellen.
Policy Challenges Ahead
As Treasury Secretary, Yellen will need to steer the U.S. economy out of the pandemic-induced recession and address rampant inequality. Below, we examine two issues that will demand Yellen’s attention early-on:
- Federal Reserve 13(3) Facilities: Back in March, the CARES Act appropriated $454 billion to backstop the Federal Reserve’s emergency lending facilities, keeping markets liquid and credit accessible. The programs worked well to save the largest corporations and Wall Street, but they failed when it came to helping main street businesses or state governments. These programs are slated to end on December 31 unless the Treasury and Fed agree to extend the facilities.
Over the weekend, Fed Chair Powell agreed to return the $196 billion backstopping the credit facilities and sunset the programs on December 31. Without congressional intervention, these programs will end and hundreds of billions in CARES Act funds will disappear from the Treasury Exchange Stabilization Fund (ESF) before Biden can take office. Biden may restart and reform these programs by instructing the Treasury to dip into the ESF’s remaining $84 billion to backstop the Fed’s facilities. Given the shaky performance of certain facilities, Yellen, if appointed, may pressure the Fed to change the facilities’ terms to increase their efficacy.
- Managing Systemic Risk: The Trump administration weakened FSOC and effectively dismantled its most powerful tool: the non-bank SIFI designation. Although the Treasury does not have direct responsibility for financial regulation, the Treasury Secretary chairs FSOC, which convenes the heads of financial agencies like the Fed and the SEC and can exert political influence over the direction of regulatory policy. Yellen, though she agreed to release insurance giant AIG from restrictive oversight in 2017, will likely reorient FSOC to address large systemic risks such as shadow banking and money market mutual funds. Yellen will also tighten banking regulation by strengthening stress testing and living will requirements for America’s largest banks.
- Tax Reform: Yellen has long been an opponent of the Trump administration’s 2017 tax legislation. In a 2018 Washington Post op-ed, she wrote that the bill “turned economic logic on its head. The economy was already at or close to full employment and did not need a boost.” Fortunately, Trump’s tax cuts left a great deal up to Treasury in terms of establishing a new taxing regime for multinational corporations. As Treasury Secretary, Yellen could revise these regulations, in effect raising taxes on some companies that operate abroad. In addition to raising taxes on America’s largest corporations, Yellen will help develop and advocate for Biden’s other tax reforms, including a tax hike on those making over $400,000 a year.
Ultimately, Biden’s selection of Janet Yellen as Treasury Secretary is an inspired one, obvious after the fact. Yellen was an able steward of the Fed when she served as Chair, and her advocacy during the pandemic and the recession is encouraging for those in favor of much needed relief for workers — particularly hazard pay left out of CARES — families, and state and local governments. Progressives and moderates can rest assured that Yellen’s term as Treasury Secretary will be a responsible and productive one, aimed at producing an economy that works for the many rather than mainly the few.