Janet Yellen seals fate as reigning champion of Wall Street regulation
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Last Friday, before a conference of central bankers in Jackson Hole, Wyo., Federal Reserve Chairman Janet Yellen likely sealed her fate as she delivered a defense of the regulations enacted by the Obama administration following the financial crisis. Contrary to the rhetoric of the Trump administration, Yellen argued that enactment of the much-derided Dodd-Frank Act of 2010 made the global financial system safer and facilitated the recovery of the global economy. President Trump will likely not reappoint Yellen as Fed chairman when her term ends in February of next year.

Since the financial crisis, the Fed has served as a convenient target for much of what ails the country. Both Ben Bernanke and Yellen have received more than their fair share of criticism. As an avid Fed watcher and researcher on Fed policy, I believe that the nation’s central bank has done a stellar job of helping bring the global financial system back from the brink of the financial crisis. While economic growth is currently less than robust, the U.S. economy is growing and we are nearing full employment.

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The Dow Jones Industrial Average has rebounded from a low of 6,443 points in March 2009 to the lofty level of nearly 22,000 points today. In the depths of the financial crisis, had you suggested that in less than 10 years, the Dow would stand at a level nearly three times higher, you would have been roundly ridiculed. In fact, the common narrative at the time was the possibility that we would all be hunter-gatherers.

 

President Trump’s pronouncement that Dodd-Frank is a “disaster” simply is not borne out by the facts. As with any broad and sweeping legislation, Dodd-Frank does have provisions that may serve to stifle economic growth. However, the enactment of higher capital requirements and required annual stress tests have definitely helped the economy and have made the global financial system much safer. We would be well served take some advice from Voltaire and not let the perfect be the enemy of the good when it comes to repealing the major provisions of Dodd-Frank.

If you follow the money, it would seem that a substantially freer regulatory environment is highly unlikely. A recent Financial Times report showed that insider selling by U.S. bank executives has greatly exceeded insider buying this year. If bank executives truly believed that regulations would be loosened, they would not be selling their own shares at such a high pace.

A Bloomberg survey of economists found that National Economic Council director Gary Cohn is the betting favorite to replace Yellen as Fed chairman. Ironically, Yellen came in second in that poll taken prior to her speech at Jackson Hole. When you factor in that Cohn publicly criticized the commander-in-chief’s remarks in response to the violence in Charlottesville, it is far from certain that Cohn is or will be in President Trump’s good graces. February indeed is a long way off and the White House roster will likely undergo more lineup changes than a Yankee-Red Sox extra-inning game.

Unlike most other appointed positions, the power of the Fed chairman is substantial. One need look no further back than on Sept. 8, 2013, when global equity markets were spiraling downward because of a confluence of economic data that were below expectations. The markets quickly reversed course in a matter of minutes when Fed Chairman Ben Bernanke announced a delay in the Fed’s planned curtailment of its monthly injection of money. The Fed chairman has been described as the second most powerful person in the world, second only to the U.S. president. Some would argue that this understates the power of the position.

The appointment of Cohn, the former president and chief operating officer of Goldman Sachs, would represent a radical departure from previous appointments. Fed chairmen typically are academic economists. The most recent Fed chairman to come from a corporate background was William Miller, who served under President Jimmy Carter and failed to act on checking inflation. His tenure is widely derided as the worst in Fed history. It seems likely that the most unconventional U.S. president would deviate from the norm when it comes to selecting the nation’s leading central banker.

Robert R. Johnson, Ph.D., CFA, is president and chief executive officer of the American College of Financial Services. He is co-author of Strategic Value Investing, Invest with the Fed, and Investment Banking for Dummies.


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