In Nicholas Lemann’s profile of Fed Chair Janet Yellen in this week’s “New Yorker,” Janet Yellen says she knew the housing market was dangerous before the financial crisis.
“In 2005 and 2006, [Yellen] began to be concerned that there was a dangerous bubble in in the housing markets,” Lemann writes.
From Lemann’s profile:
“‘I’m sorry that light bulbs didn’t go off in my head a couple of years before they really did, but there was no question,’ [Yellen] told me. ‘I was hearing stuff that was scary. And I wouldn’t have seen it in the data.’ Her business contacts told her that people were trying to give them money to invest without asking questions about what they were going to do with it. The connection she failed to make, however, was between the housing bubble and a full-on economic disaster: ‘I absolutely did not see it as something that could the financial system down.'”
Last year, when discussions about who would be next Chair of the Federal Reserve, some questioned Yellen’s inability to act on the housing bubble before the financial crisis.
And if she couldn’t see that bubble, her critics argued (and still do, of course), how would she be able to see a new asset bubble that might create a similarly devastating financial crisis?
Lemann’s profile — which is essential reading for Fed watchers and anybody interested in the current economic landscape — puts Yellen in unprecedented intellectual, political, and personal context.
Lemann discusses Yellen’s influences at length, writing that she is an “unrepentant Keynesian.”
Broadly speaking, Keynesian economic theory argues that governments, through spending, taxes, and interest rate control, can encourage stable economic growth and prevent crises.
(The process of delineating schools of economic thought is extremely tedious and if you think Congress can’t agree on anything, economists are worse. Way worse.)
Lemann also quotes Yellen as saying, “You can’t think about what is happening in the economy constructively, from a policy standpoint, unless you have some theoretical paradigm in mind.”
Yellen isn’t an elected official, but there is little debate that she is an important and influential political figure, and this candor regarding her intellectual framework is illuminating for anybody seeking insight into how the head of the Federal Reserve operates.
The personal details about Yellen are also fascinating: Yellen’s brother, John, is the director of the archeology program at the National Science Foundation; her husband, George Akerlof is also an economist and in 2003 said the Bush Administration was, “the worst government the U.S. has ever had.”
The entire profile is a great read, both for Yellen supporters and detractors.