Economics

Of all the 78 US Treasury secretaries since Alexander Hamilton first took up the office in 1789, few have faced an in-tray piled quite so high as the one that will greet the first woman in the job: Janet Yellen.The choice of the Brooklyn-born doctor’s daughter to succeed Steve Mnuchin was a statement of intent by president-elect Joe Biden. Where many of her predecessors have been scions of Wall Street, Yellen’s background is in economics and public policy, and she has made it clear that her priorities are with Americans struggling to get by rather than with investment bankers. “There is a huge amount of suffering out there,” she said in September as she urged Congress to agree a new stimulus package.Yellen’s expressed desire for tighter financial regulation did not, however, stop Wall Street from joining the applause for her nomination. In part, that was due to the fact that, having been the first woman to be in charge of America’s central bank, she is seen as a seasoned pro. Donald Trump declined to give her a second term as chair of the Federal Reserve in 2018 not because she was doing a bad job, but because she was a Democrat appointed by Barack Obama.More importantly, though, Wall Street sees Yellen as a Treasury secretary who will push hard for expansionary policies aimed at boosting growth, profits and share prices. Nothing in her record suggests that the financiers are wrong.American economists are often divided into two camps: “freshwater” economists who believe in the primacy of market forces and whose spiritual home is the University of Chicago in landlocked Illinois; and “saltwater” economists, who emanate from the universities on the Atlantic and Pacific seaboards and admire the teachings of John Maynard Keynes.Yellen is a Keynesian to her fingertips: she warned against an over-hasty removal of stimulus during the financial crisis of a decade ago; she insisted that the Fed pay as much attention to unemployment as to inflation when she was its chair; and she believes the state has a duty to tackle poverty and inequality.Mohamed El-Erian, once chief executive of the investment management firm Pimco but now president of Queens’ College, Cambridge, said: “The appointment was probably one of the most well-received in the history of the US Treasury, and for good reason. Economists, lawmakers and market participants rightly see her as highly qualified, having lots of relevant experience and coming to the job with a deep understanding of both domestic and international issues. The policy portfolio she inherits will require an agile mix of traditional and out-of-the-box thinking.”Top of the to-do list will be a new package of support for a US economy struggling with three interlinked problems: a pandemic, high levels of unemployment, and the imminent expiry of financial support for laid-off workers.The jobless total has come down since surging to levels not seen since the Great Depression in the first wave of infections in the spring, but remains troublingly high for a country with, by western standards, a limited welfare safety net. What’s more, the latest data on Friday showed the rate of job creation slowing.Biden wants Congress to pass a “robust” stimulus package, and the chances of that happening will be greatly improved if the Democrats seize control of the Senate by winning the two vacant seats in Georgia next month. If not, as Mark Sobel of the Omfif thinktank says, Biden will be dealing with a “stingy” Republican Senate leader, Mitch McConnell.The appointment was probably one of the most well received in the history of the US Treasury“Yellen will help negotiate and provide intellectual backing, making the case that now is the time to spend and that with low debt service costs, America should not fret in the near-term about rising debt,” Sobel says.Getting an emergency package of stimulus through Congress will only be the start of the legislative battle, because Biden also wants to spend more on upgrading America’s crumbling infrastructure and on tackling global heating.Yellen’s scope for fiscal action (tax and spending measures) may be limited by gridlock in Congress, in which case the White House will require the Fed to provide more stimulus and a good working relationship between Yellen and the man who succeeded her as head of the central bank, Jerome Powell.While sorting out the labour market and boosting living standards will be the biggest challenge, Yellen will also devote time to other policy issues. She has the executive power to toughen up what she sees as too-weak financial regulation without Congress’s say so; she will adopt a less hostile – if still robust – approach towards China; and she will seek to reassert US leadership on the global stage, pursuing a multilateralist rather than a go-it-alone approach.In all, Yellen can be expected to act as if Trump’s four years in office never happened. The message will be that the grownups are back in charge.Six central bankers who shaped the future of their economiesBen Bernanke Chair of the US Federal Reserve between 2006 and 2014, Bernanke was credited with preventing a deep recession following the 2008 financial crisis. A student of the 1930s Great Depression, he vowed to rescue the banking system and maintain the flow of funds to prevent a wave of foreclosures and mass unemployment.His determination contrasted with the Bank of England, which hesitated before rescuing Northern Rock. However, Bernanke, a former Princeton professor, played down the threat from the US sub-prime mortgage scandal during the first two years of his tenure, which he has admitted made the crisis, when it came, much worse.Karl Otto Pöhl Often dubbed a father of the euro, Pöhl was appointed president of the German Bundesbank from 1980 to 1991 by his friend and mentor, chancellor Helmut Schmidt. A colourful, English-speaking former economics journalist, he came to prominence after the conservative Helmut Kohl surprised many and reappointed him. He famously warned Kohl against rushing ahead with German unification based on a one-to-one valuation of the east German mark with its West German equivalent, fearing the collapse of the east’s uncompetitive export industries. He said the same about the implementation of the euro. Kohl ignored him. East Germany’s industrial base collapsed. After the 2008 financial crisis, southern Europe erupted in riots, with protesters blaming the euro for their ills.Mario Draghi If Pöhl laid the foundation stones for the euro, Draghi prevented the currency from toppling over. In 2012, after campaigns in several member states to quit the euro – notably in Greece and Italy – triggered panic in financial markets, he said the single currency was “irreversible” and famously pledged to do “whatever it takes” to save it.As president of the European Central Bank from 2011 to 2019, which absorbed most of the powers from 19 member states’ central banks on its creation in 1999, he drew a line under the destabilising debate about the currency’s future. After he stepped down, the Nobel prize-winning economist Paul Krugman described him as “[arguably] the greatest central banker of modern times”.Mark Carney Carney was governor of the Bank of England from 2013 to March this year. He was appointed by the chancellor at the time, George Osborne, who courted him for a year and called the former Goldman Sachs banker and head of Canada’s central bank “the outstanding central banker of his generation”. Yet within a year, he was likened to an “unreliable boyfriend” who failed to match his promises with action. This followed a series of overly optimistic forecasts that led many to prepare for an increase in interest rates that never came. Carney, more polished and dapper than his contemporaries, recovered much of his reputation in 2016 when he was dubbed “the only adult in the room” following the Brexit referendum. While parliament went into shock and No 10 was consumed by the resignation of David Cameron, Carney toured the TV and radio stations, calming fraying nerves.Raghuram Rajan The Chicago Booth economics professor is often described as one of the few economists to predict the financial crisis. In a speech in 2005 to the world’s top central bankers he explained that an explosion of borrowing made financial markets more dangerous. At the time he was chief economist at the International Monetary Fund, so he might have expected his warning that “it’s possible these developments are creating a greater (albeit still small) probability of a catastrophic meltdown” would be taken seriously. It wasn’t.He took over as governor of India’s central bank in 2013 after warning that the country was suffering from hubris, adding that “growth can never be taken for granted” and that “self-delusion is the first step towards disaster”. The rupee, which tumbled 12% against the dollar in the three months before his arrival, stabilised. By the time he left in 2016, price inflation had fallen from almost 10% to below 4% and a series of banking reforms were in place.Christine Lagarde As president of the European Central Bank since last year, Lagarde has shown she is a would-be central bank hero. Shifting the dial at an institution covering 19 countries is never easy, but the former boss of the IMF has embarked on a campaign for greater transparency in a break from the traditionally closeted bank’s decision-making, and for unemployment and inequality to be as much of a yardstick for the ECB as inflation. She has also matched Carney in the drive to make central bank lending more climate-friendly, with green bonds that only allow loans to businesses that are environmentally friendly. PI More