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Front-runners to replace Yellen have too much Wall Street in their past

  • A former Fed official says the top contenders to replace Federal Reserve chairperson Janet Yellen lack the professional economics experience the economy needs.
  • Kevin Warsh made his name at Morgan Stanley, where he rose to executive director.
  • Jerome Powell started as an investment banker and rose to partner at The Carlyle Group.
Federal Reserve Board Chairwoman Janet Yellen, testifying before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill on July 13, 2017, in Washington, D.C.
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Federal Reserve Board Chairwoman Janet Yellen, testifying before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill on July 13, 2017, in Washington, D.C.

It was a good run, Janet Yellen.

It's crucial that the Federal Reserve remain a nonpolitical and independent institution, and this begins with the selection of Fed chair. Both Ben Bernanke and current chair Janet Yellen have demonstrated that sound monetary policy that is credible and transparent can pull back the nation from the brink of economic disaster. That's why Trump's top contenders for the position, current Federal Reserve governor Jerome Powell and former governor Kevin Warsh, are poor choices. Both Powell and Warsh lack the formal training necessary to lead monetary policy in an increasingly complex global economy, and this could lead to the politicization of the Federal Open Market Committee (FOMC).

Powell, who is a lawyer by training, began his career as an investment banker and became a partner at The Carlyle Group before serving as Assistant Secretary of the Treasury in the G. W. Bush administration. His public statements and voting record on the FOMC have so far been consistent with Chair Yellen's agenda of normalizing monetary policy.

The younger Warsh rose through the ranks to become an executive director at Morgan Stanley and served on G. W. Bush's economic council prior to his tenure on the Board of Governors. Although Warsh was credited for linking Ben Bernanke with Wall Street executives during the onset of the financial crisis, he was also critical of Bernanke's leadership of the Fed in pursuing aggressive quantitative easing. Given that personal relationships are important in Trump's business decisions, the fact that Warsh's father-in-law, billionaire Ronald Lauder, is Trump's good friend is certainly a bonus for his chances.

"It is unlikely that someone with strong ties to Wall Street banking would be a staunch advocate of the necessary role the Federal Reserve has in supervising and regulating the banking system."

While investment bankers certainly have knowledge of how real-world financial markets operate, they lack the scholarly understanding of the larger picture of how those markets interact with monetary policy and connect Wall Street to the real economy. Such an understanding is an essential part of any central banker's skill set and — as was seen during Ben Bernanke's tenure — vital to steer the economy through major crises. The majority of the FOMC, including the chair, must continue to consist of professional economists who have the training, competence and expertise to implement monetary policy.

A major part of the Trump agenda is a comprehensive rolling back of regulations, including those that were put in place in the aftermath of the housing collapse. In a recent speech, Yellen herself warned of the consequences of forgetting the lessons of the financial crisis that led to the Great Recession. It is unlikely that someone with strong ties to Wall Street banking would be a staunch advocate of the necessary role the Federal Reserve has in supervising and regulating the banking system. This could open monetary policy to special interests that conflict with their regulatory function, leaving us vulnerable to another collapse in the financial system.

While Powell and Warsh are undoubtedly the top contenders for Fed chairman, the names of several professional economists have also been discussed. These include John Taylor , a highly regarded Stanford economist; Glenn Hubbard, dean of Columbia's business school and former chair of the White House CEA; and Marvin Goodfriend at Carnegie Mellon. Any of these economists would make superior choices, and their conservative perspectives would fit into typical Republican administrations.

However, it is questionable whether their hawkish view on price stability would conflict with Trump's desire to keep interest rates low for the foreseeable future. At best, they may only make the list to fill one of the other vacant seats on the FOMC.

Next to the president, the Fed chair is often called the second most powerful person in the country. The chair must never be pressured to place their loyalty to the president, Congress or special interest above the economic well-being of the country. This is what happened in the presidential election of 1972, and the result was nearly a decade of economic stagflation, marked by double-digit inflation and high unemployment rates not seen since the Great Depression.

To help ensure the future stability of America's financial systems, it is imperative the president choose a Fed chair that will maintain the impartiality of the Fed and prevent political impropriety from infiltrating the institution.

By Victor Li., associate professor of economics at the Villanova School of Business. Previously, Li worked with former Fed Chairman Ben Bernanke at Princeton University from 1998–2000 and at the Federal Reserve as a visiting scholar at the Federal Reserve Bank of St. Louis. He was a senior economist at the Federal Reserve Bank of Atlanta from 2000–2001.