Foorohar: Yellen for America

The one person in Washington who can get anything done these days will very likely be confirmed in the next few weeks: Janet Yellen, the presumptive new chair of the Federal Reserve. Yellen is the Fed vice chair nominated by President Obama to succeed Ben Bernanke. She has been breezing through the confirmation process and is on track to head up what is now the most powerful political institution in America–at least when measured by its impact on jobs and the economy.

In fact, you could say the Federal Reserve has become far more important than the President or Congress as the shepherd of the U.S. economy. Washington gridlock has made it impossible for either the Executive or the Legislative Branch to play that role. “Government is not really capable at the moment, and Congress is anxious to disagree about anything. So the Fed is left with an opportunity to do something useful,” says Carnegie Mellon professor Allan Meltzer, the world’s foremost historian of the central bank.

The fed has already done plenty with its unique stimulus program of quantitative easing, or QE, the $85 billion-a-month purchase of bonds and mortgage-backed assets that started pumping cash into the system in 2008. One of the reasons that the money dump has continued for so long is fiscal headwinds, which is Fedspeak for job-destroying partisan politics. Bernanke and now Yellen may not be empowered to craft a real fiscal policy–that is, a federal budget with taxing and spending calibrated to help the economy–but they figure that the least they can do is prop up stock and home prices. A new report on the implications of QE by the McKinsey Global Institute estimates that “unconventional monetary policies,” including asset buying and low interest rates, have shaved a whole percentage point off the unemployment rate and prevented a deflationary spiral in the U.S. economy.

They have also increased the risk of market bubbles–something Yellen says she’s watching closely, though she still believes the “benefits exceed the costs.” Yet even if we don’t hear a big pop, many critics believe that the QE program has outlived its usefulness. “We don’t have a monetary problem,” says Meltzer. “There’s plenty of cash in the system.” Rather, we have a real-economy-growth problem.

The limitations of monetary stimulus may help explain why the Fed appears to be moving into interesting new areas of policymaking. While the central bank’s easy-money policies have enriched the top quarter of American households, which hold most of the country’s stock assets, they have done much less for the rest, people who continue to struggle with flat wages and higher than normal unemployment. “If you don’t have a house or stock, you don’t benefit as much” from QE, at least directly, says Boston Fed president Eric Rosengren.

The need to do more to bolster the real economy is one reason Rosengren has taken the unprecedented step of partnering with a national philanthropic collective, Living Cities, to launch a grant competition among midsize cities in Massachusetts, including old Rust Belt towns like Lowell and Pittsfield. The goal is to find the smartest ways to improve the economic health and well-being of lower-income citizens. (The efforts were praised in an April speech by Bernanke as a model for other Fed leaders across the country.) Rosengren lauds the entrepreneurial energy of the large immigrant population in many of these cities and notes that nearly half the grant score will be based on “collaborative” government–quite a message to send to a polarized Washington.

The idea of a Fed president’s speaking out so explicitly on political issues, from community development to immigration, is new–and Rosengren isn’t the only one doing it. Recently New York Fed president William C. Dudley gave a talk about the too-big-to-fail problem in banking in which he not only made policy prescriptions for how to clean up the financial system but also offered pointed opinions about the culture of banking. Dudley noted a “problem evident within some large financial institutions–the apparent lack of respect for law, regulation and the public trust … Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.” Rarely, if ever, has a Fed leader spoken so frankly about the financial industry. It underscored yet another area in which Congress and the President have failed to lead: the reregulation of the industry in the wake of the financial crisis. If the Fed wants to take on that task, I say more power to it.