Janet Yellen the Right choice for the Fed

By: Bloomberg

Former President Bush top economist and current Chairman of the Economics department at Harvard University, Greg Mankiw joined Bloomberg Television’s Erik Schatzker and Scarlet Fu on “Market Makers” today and said he agreed with Republicans who say that as long as we pay off interest, we won’t be in a default.

Mankiw on whether Janet Yellen is the right choice:

“I think so. I think she is a great choice. I’m not a great fan of a lot of President Obama’s decisions, but this one I’m a fan of. Janet is a very smart economist. She’s very much mainstream, lots of Central Bank experience, and most important, she is a consensus builder. She’s not going to go her own way. She will look to her committee; she’s going to look to her staff and try to find a point of view a lot of people can sign onto. That’s good thing.”

On how Yellen’s policymaking and her behavior differs from Bernanke’s:

“I don’t think a lot. I think they’re quite close. She might be a little more dovish instinctually then Ben Bernanke is, but Ben has been quite aggressive on things like quantitative easing. Janet has been on board with that and maybe should have done more in terms of forward guidance. But she is basically very similar and they come from a similar intellectual tradition. Mainstream monetary economics. There is nothing crazy coming out of a Yellen Fed.

On whether he agrees that Yellen focuses too much on labor statistics and will wait until they turn ushering in more inflation than we might otherwise like:

“That’s always a concern. The Fed has a dual mandate. It’s supposed to think of both inflation and employment. Lately, inflation has not been a problem so they have been focused on the employment problem. The question is when things change, whether she will change appropriately. That’s a big question. I see no reason to think she wouldn’t change. She has been committed to the two percent inflation target and hasn’t been open to suggestion that inflation should rise about that. I expect her to be true to her word and when inflation looks like it’s going to be a problem, she will respond accordingly.”

On whether Yellen was a natural appointment:

“From a communication standpoint, this is a very natural appointment. Because she has been a vice chair on the Fed and in line with current policy. This is a seamless transition as you can possibly imagine. She has been there and has been right on Ben Bernanke’s side.

On whether not knowing much about Yellen’s views on regulation is a big risk:

“I think she will develop those views. My guess is she did not come with strong priors on this but they are developing. She will probably be more in favor of stronger regulations than Alan Greenspan was. That’s totally appropriate given what we have known over the past few years. Her husband, George Akerlof, is a very prominent economist and has written about the savings and loan crisis. To the extent they are one mind. They’d bring a lot of work together. One suspect Janet will have a more skeptical toward financial institutions than others might.”

On whether it is possible that the default deniers in Washington might be right:

“I don’t think we really know and anybody who says they know for sure what would happen, I think it’s a little misleading because I don’t think any of us do know. One thing we should be clear about, what bondholders care about is what bondholders are paid. If we do see the debt limit, the sensible thing to do is to prioritize debt service above all else and say the first thing we are going to do about the tax revenue we are getting is finance our bonds and if we can make a convincing case as the priority, then not passing the debt limit should not be catastrophic for the bond market.”

On whether he agrees with the President’s case yesterday that prioritization would erode the credit worthiness of the U.S. much like keeping up with your credit card bills while walking away from your mortgage:

“I don’t buy that, becasue all the credit card company cares about is if you pay your bills, not your mortgage. If you make a serious commitment, the credit card company will be happy. Similarly, the President needs to make a commitment that even if we don’t pass a debt limit increase that the debt service will continue. That will be a failure of his Treasury Department if they don’t make that clear.”

On whether us not meeting our other obligations is a default:

“It’s not a default on the debt. Maybe a default by Medicare reimbursements but it’s not a default on the debt. What the debt holders care about is how the United States treats it debt. The bond market has not been very worried about this, they know even that bad scenario that people will be held harmless, that would be the sensible thing for the Obama Administration to do.

On whether people in the Treasury Dept. who think discussion of prioritization is a little too academic:

“I’m not so sure they are right. And they can’t know because we haven’t been in this scenario before. We have not gone down this road. I hope we don’t. My guess is we won’t. This is a high-stakes game of chicken and when two cars are hurting against each other, you don’t know of one is going to swerve off this path. My guess is they will. I hope we don’t actually test this out but even if we do, I don’t think anybody knows for sure how it’s going to end.”

On whether there is room between now and Oct. 17th to deal with Medicare and Social Security:

“Not in its entirety. We are not going to have a grand bargain. I don’t think Paul Ryan thinks we can. But I think there are things that are on the table if could be talked about more easily like raising the retirement age, changing the index, chained CPI, but that stuff is on the table and it has been talked about. If the President got behind that, and that would be fairly easy to pass, but the President’s view now is pass something without any amendments or attachments or I won’t sign it. That’s not a recipe for compromise.”

bloomberg.com

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