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It Takes a Woman to Do a Man’s Job
Author(s): Andrew Sheng
Date: Oct 23, 2013
Theme(s): China, Finance & Macroeconomics
Publications: Opinions & Speeches
Janet Yellen’s nomination could make her the first woman to assume the chairmanship of
the U.S. Federal Reserve, a position long held by men. President Andrew Sheng explores
the issues that she will face and the possible changes she could bring.
In Chinese history, a woman’s ascension to power is either a sign of profound change or dramatic
crisis. Janet Yellen’s nomination to assume chairmanship of the U.S. Fed is a sign of changing times.
Note that, if the U.S. Congress approves of her nomination, both the Fed and the SEC will be headed
by women. After all, Christine Lagarde, Head of the IMF, has said that if Lehman Brothers had been a
bit more Lehman Sisters, we would not have had the same degree of tragedy!
In essence, we need women to clean up man-made messes.
The difference here is not that Yellen is taking over during the crisis, but that she is faced with the
task of withdrawing the medicine for the crisis. She inherits an intoxicated punch bowl, with a central
bank that needs to unwind massive quantitative easing (QE).
I have no doubt that in terms of IQ, EQ and experience, Janet Yellen is imminently qualified to be the
captain of the world’s leading central bank. As former President of the San Francisco Fed, she
understands not only the issues of an open, innovative West Coast economy, but also the dynamic
Pacific Rim countries that account for 55 per cent of world GDP and 44 per cent of world trade.
The APEC economies, being large users of the dollar for trade and largest dollar holders in their
foreign exchange reserves, have high hopes that the new Fed Chairman will protect the value of their
dollar holdings.
What is the scorecard that Yellen has inherited?
QE3 is committed to buying US$85 billion worth of long-term Treasury paper, including US$40 billion
of mortgage-backed paper, per month as long as is necessary. Furthermore, since December 2012,
the Fed has said it intends to hold the federal funds rate near zero at least until unemployment has
declined below 6.5 per cent. As far as I know, there is no theoretically proven causal effect on low
interest rates reversing the level of unemployment. Even current Chairman Ben Bernanke has
admitted that “We don’t have tools that are strong enough to solve the unemployment problem.”
Despite this, the purpose of QE is to tell Congress that the Fed stands fully behind the economy,
buying time for the real structural reforms to be undertaken by the politicians.
But that is exactly the unfortunate dilemma of modern central banking. By stepping forward with a
printing solution in a policy vacuum, central banks gave their politicians the perfect excuse not to take
the tough medicine of structural reforms. As former European Commissioner Jean-Claude Juncker
honestly admitted, “We heads of government all know what to do, we just don’t know how to get
reelected when we do it.”
We all recognize that unconventional times needed unconventional tools. The Fed can be
congratulated for taking decisive action in 2008 to prevent a financial meltdown. But applying a
stimulant during a heart attack does not mean that you should apply it forever.
There are several good reasons why aggressive and prolonged easing can lead to negative results.
First, by spraying everyone with liquidity, it is the banks and those able to borrow cheaply that benefit
more than those who cannot access finance. This is a distributional issue which has huge political
ramifications that will haunt future central bank independence.
Second, the low interest rates actually erode the income of pension funds and life insurance
companies, thus worsening the net wealth of the retirees. Another distributional issue that explains
why Republicans also do not like QE.
Third, prolonged low interest rates and high liquidity renewed incentives for a “search for yield” and
another round of speculation and leveraging. Large carry trade capital flows rushed into emerging
markets, and there was a huge gush out in May when Ben Bernanke started hinting about tapering
QE. The latest IMF Global Financial Stability Report has warned, “After a prolonged period of strong
portfolio inflows, emerging markets are facing a transition to more volatile external conditions and
higher risk premiums. Some need to address financial and macroeconomic vulnerabilities and bolster
resilience.”
Fourth, QE and low interest rates are atrophying market discipline. Central bank balance sheets are
triple what they were before 2007. They have become front line intermediaries in areas such as the
mortgage market and money markets. Indeed, governments with debt over 100 per cent of GDP are
completely reliant on low interest rates to sustain their budget debt servicing at a reasonable level.
Even the august Bank for International Settlements has warned, “Unusually accommodative and
protracted monetary conditions can delay the necessary balance sheet repair and misallocate
resources.”
The financial markets and the governments are very happy that Yellen said in April that she is
persuaded that “the policy rate should, under present conditions, be held ‘lower for longer’ than
conventional policy rules imply,” implying that she is a monetary dove. But what may be needed in the
near future is tough action to ensure that the U.S. and the rest of the world do not enter into a period
of stagflation – slow growth, high unemployment and inflation. Now that’s a real test of central
banking skills.
Good luck, Janet. We all wish you well.
An earlier version of this article appeared on The China Post, 15 October 2013