Janet Yellen's Triple Mandate: Jobs, Inflation, and Wall Street

The new choice to lead the Federal Reserve could be another in a long line of tough female regulators who have boldly confronted a mostly male world.
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Reuters

Most of the commentary about Janet Yellen, President Obama's historic choice to lead the Federal Reserve, is focused on her views about controlling inflation and unemployment, the Fed's twin mandate. (And here, promisingly, the "dovish" Yellen has said clearly that she is more concerned about unemployment, which is a huge problem, than she is about inflation, which presently is not.)

But another huge part of the Fed's job, especially since the 2008 financial crisis, is re-regulation of the banking system and Wall Street, where Yellen will finish the task that Ben Bernanke started. And here, too, while her track record is not quite as pronounced as it is on monetary policy, she is expected to be very aggressive in reining in risky practices. Yellen, who is almost certain to be confirmed by the Senate, may turn out to be even bolder in her prescriptions than Bernanke or the Obama administration have been, according to officials who have watched Yellen from the inside of the Fed during her three years as vice chairman.

For now, Wall Street is reacting mostly favorably to Yellen's long-anticipated appointment, thanks to her dovish views on inflation and the likelihood that she will not support "tapering" off Bernanke's quantitative easing program, so as to spike the economy's still-tepid growth and ease long-term unemployment.

But the banking community may not quite know what it is getting.

Yellen's views are considered very close to those of Daniel Tarullo, a progressive-leaning Fed governor and expert on global financial regulation whom Bernanke has deputized to oversee new banking and capital standards. In her public remarks, Yellen has echoed Tarullo's push for higher capital standards for "systemically important" or too-big-to-fail banks, and his concerns about curtailing the unstable short-term funding sources of too-big-to-fail banks. Tarullo has been more aggressive than the Obama administration in proposing "a set of complementary policy measures" that goes beyond the Dodd-Frank law. Among them: limiting the expansion of big banks by restricting the funding they get from sources other than traditional federally insured deposits.

Yellen, in an important speech in Shanghai, China in June, went beyond what Bernanke has said by explicitly endorsing some of Tarullo's efforts, saying, "I'm not convinced that the existing SIFI [systemically important financial institutions] regulatory work plan, which moves in the right direction, goes far enough." She also spoke of doing much more, as Tarullo has, to constrain the "shadow banking" sector that caused so much trouble in 2008, including broker-dealers and money market funds. Yellen said "a major source of unaddressed risk" is the hundreds of billions of dollars of short-term securities financing used by these firms, adding: "Regulatory reform mostly passed over these transactions."

Michael Greenberger, a former deputy director of the Commodity Futures Trading Commission and a leading voice for more transparent regulation of derivatives and other arcane Wall Street products, says that Yellen backed his stand for a tougher Dodd-Frank law than the Obama administration, Senate, and House were advocating back in 2010—a time when a fierce fight raged over the historic legislation to reorder the financial system. "I told her about weaknesses in the then existing Senate draft bills and the House bill. She was clearly sympathetic to my concerns, which, in turn, were a reflection of progressive legislative advocacy at that time," Greenberger said this week, recalling a talk he and Yellen had at the so-called Minsky conference in New York, where she gave the keynote address (noteworthy in itself, given that it is named for the late economist Hyman Minsky, who presciently described how financial markets are inherently unstable). Adds Greenberger: "The Obama Administration was not being particularly helpful about these substantive concerns. Compared to the powers that be at that time on the Hill and at the White house, she was a breath of fresh air."

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Michael Hirsh is chief correspondent for National Journal.

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