Frontrunner For Fed Chair Saw Financial Crisis Coming

Now that Larry Summers has withdrawn his name from consideration to lead the Federal Reserve, Janet Yellen, Vice Chair of the Fed, has emerged as the frontrunner. For more on Yellen and her career, Audie Cornish talks with Alan Blinder, a professor of economics at Princeton University.

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AUDIE CORNISH, HOST:

Over the last few months, Larry Summers was considered President Obama's first choice to lead the Federal Reserve until Sunday, when the former Treasury secretary withdrew his name for consideration, bowing to pressure from congressional lawmakers who opposed him. Now the front-runner for the next Federal Reserve chairman is a woman, Janet Yellen.

Yellen is already vice chair of the Fed. She might not have the high profile of Summers but she has her share of supporters for the top job, including Professor Alan Blinder. He's an economics professor at Princeton University, a former vice chairman of the Federal Reserve and a close friend of Janet Yellen.

Professor Blinder, welcome to the program.

ALAN BLINDER: Oh, nice to be with you. Thanks.

CORNISH: Some of the liberal lawmakers in particular who opposed Larry Summers support Yellen. And why do you think that is? What are some of their arguments?

BLINDER: Well, I think there was concern in some quarters about the differences on monetary policy, where Janet Yellen was essentially a cinch to continue more or less the Bernanke policies, and people didn't quite know about Summers and some were worried about that.

CORNISH: Let's talk about that a little bit more. As you mentioned, Janet Yellen has been closely allied with the current Fed chair, Ben Bernanke. And is that true? I mean is she really kind of a continuation of his ideas and policy? Where do they actually differ?

BLINDER: Well, it's a good question. I mean no two people are exactly alike. And maybe, but not to my knowledge, Ben Bernanke and Janet Yellen - inside the secrecy of the Federal Reserve board room - have differed. But I don't think so. I think they are very much like-minded and have been supporting virtually identical policies down the line, except, I guess, the one thing I can think of is she was quicker, I believe than even Ben Bernanke - who was quicker than most - to realize that this financial mess was going to drag down the whole economy.

CORNISH: You've written actually that she saw and spoke out about some of the warning signs leading into 2007-2008. What did you mean? How?

BLINDER: Yes. First, if you go back to kind of 2005-ish, plus or minus, period, she was sending out warnings from California where some of the worst things were happening about the shenanigans in the mortgage business, and trying to get the board of governors in Washington to take this more seriously and do something about it, which they didn't do.

Then when the financial crisis really started to get fired up, she was a very early voice that this wasn't just going to be a financial - a set of financial ructions. This was a clear and present danger to the health of the whole economy.

CORNISH: So, the Fed essentially has two mandates, two missions here: combating unemployment and also controlling inflation. Help us understand Janet Yellen and her general economic approach when it comes to tackling these things.

BLINDER: I think the main controversy in central banking circles is between those who think the Fed really shouldn't have a dual mandate, it should just concentrate on inflation, and those who think it should take its legal mandate, given to it by Congress, very seriously. Janet Yellen, like Ben Bernanke, fall in the second camp: strong supporters of the dual mandate.

If you believe that and you look at how the Fed has been doing - or the U.S. economy, I should say has been doing in recent years, it's been doing wonderfully well on inflation. And it's been doing miserably on unemployment. So if you believe in both, you're going to be concentrating on bringing unemployment down now. And that's Janet Yellen's attitude.

CORNISH: Alan Blinder, keeping in mind that you know Janet Yellen, but you've also obviously been a vice chair of the Federal Reserve and you kind of know what it takes to do these jobs. And I was surprised to hear so much conversation about temperament. Is that something that matters? Is that something that's coming up because it's a woman, right? And we tend to describe women in these ways. But we want to talk about kind of what kind of guy Larry Summers was.

BLINDER: Well, I don't think it was because the obvious alternative to Summers was a woman. The Federal Reserve is organized to operate on consensus. And Ben Bernanke, who's a very mild-mannered inclusive sort of person who will just try to talk gently and by force of intellect persuade you to this point of view, if he can, has done quite well at holding the committee together. Janet Yellen has that sort of temperament. And, you know, I think a number of people thought that Larry Summers doesn't.

CORNISH: Professor Alan Blinder, thank you so much for speaking with us.

BLINDER: My pleasure.

CORNISH: Professor Alan Blinder, former vice chair of the Federal Reserve under the Clinton administration and currently a professor of economics at Princeton University.

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