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March 27, 2014

The Fed Transformed

“It is a small miracle that on February 1, Janet Yellen will become chair of the Federal Reserve. She is not just the first woman to head America’s central bank but the first labor economist. While the Fed is ordinarily obsessed with inflation, Yellen has given equal or greater emphasis to unemployment. Yellen represents a break with the Wall Street–friendly senior Obama economic officials who promoted their former colleague Larry Summers for chair. Had Summers gotten the post, the Fed and Treasury would both have been in the hands of the same old boys’ club that coddled the big banks before and after the financial collapse of 2008. That the job went instead to Yellen means the Fed will be an independent power center, and somewhat to the left of the administration. With a four-year term as chair, Yellen will serve at least two years into the next presidency as well.

“The transformation of the Fed since the economic collapse of 2008, however, is far broader than the person of Janet Yellen. The Fed is not only more radical than at any time in its history; as an engine of recovery, it is the only game in town. In the past, the Fed’s autonomy produced an institution protective of Wall Street. Never before in the Fed’s hundred-year history has its independence resulted in a central bank more committed to strict financial regulation and expansive monetary policy than the executive branch. Ironically, progressives who have long railed against the Fed’s insulation from politics are now cherishing it.”

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“What Bernanke has not supported, however, is a drastic transformation of the financial system. That will fall to Yellen. “You can think of Bernanke as the firefighter who managed to put the fire out,” says Dennis Kelleher, who heads the reform group Better Markets, “and Yellen as the building engineer who needs to redesign the structure so that it never happens again.” In some ways, the harder job will be Yellen’s, because of the mistaken perception that the crisis is over.”

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Read full The American Prospect article here.

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