The Hand on the Lever

Yellen prides herself on being more in touch with the real world of the economy than most economists are. “I always had...
Yellen prides herself on being more in touch with the real world of the economy than most economists are. “I always had an aspiration to be involved in public policy,” she says.Photograph by Sofia Sanchez & Mauro Mongiello

In April, two months after Janet Yellen took over as chair of the Federal Reserve Board, she went to New York to make her first speech to the financial industry. In a Times Square hotel ballroom, Yellen, a small woman with a helmet of white hair, sat on a three-tier dais, looking out over a hundred tables of paying guests. She was visually amplified by two Jumbotron screens, and read scripted remarks about her “expectation that the achievement of our economic objectives will likely require low real interest rates for some time.” It’s one of the institution’s central rituals for the chair to drop deliberately bland hints about the future direction of interest rates, and for the markets instantly to respond, as if on command of an omnipotent genie. In this case, the movement was upward. For Yellen, the speech was the equivalent of an incoming President’s reassuring State of the Union address.

This was not Yellen’s first full-dress official appearance. She had gone to Chicago a few weeks earlier, to speak at a conference for neighborhood-revitalization organizations—not the venue a new Fed chair would ordinarily choose for a maiden speech. Yellen was sending a signal. As she put it that day, “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” More than five years after the financial crisis, historically high numbers of Americans are still out of the labor force, working part time when they’d rather be full time, or unemployed for more than six months. Yellen spoke mainly about unemployment, and told the stories of three blue-collar Chicagoans, two black, one white, who had lost their jobs in the recession. Her staff had found these people for her, and she had spoken to them on the phone before her speech. Two of the three—from Chicago’s desperately poor West Side—had criminal records.

The Federal Reserve Board celebrated its centennial last year. Its main activity has been to try to keep the economy of the United States healthy by making adjustments in interest rates, while also maintaining an atmosphere of dignified, scholastic, uncommunicative grandeur—it’s the Skull and Bones of American governance. Yellen is notable not only for being the first female Fed chair but also for being the most liberal since Marriner Eccles, who held the job during the Roosevelt and Truman Administrations. Ordinarily, the Fed’s role is to engender a sense of calm in the eternally jittery financial markets, not to crusade against urban poverty. The day after Yellen’s speech in Chicago, I visited her at the Fed’s headquarters, in Washington, in a classically inspired stone building with oversized bronze double doors facing Constitution Avenue. Sixty-seven years old, she has hazel eyes, sharp features, and an informal manner. She speaks with a distinct trace of old Brooklyn: “goyd” for guide, “wount” for wouldn’t. She recalled how she had decided where to make her first speech.

“I felt I wanted to talk about the Fed’s mission, and I wanted to do so in understandable terms,” she said. “And to emphasize that unemployment is part of our mission. The recession has taken a particularly heavy toll on those who have less education and income—middle-income and low-income families—and the Fed’s concern with the job market is a theme I’ve wanted to get across. Why are we doing all these things that are in the newspapers all the time? I was trying to explain that we’re doing this to help American families who are struggling in the aftermath of the Great Recession. I wanted to be completely clear and straightforward about what I’m talking about. Examples serve a very valuable role in making something that would seem abstract and general very down to earth. It’s pretty rare to just talk to people who are having a tough time in the economy, to hear their individual stories.”

Economic misfortune for ordinary people, and its connection to the financial system, has been on Yellen’s mind for most of her life. She was born in 1946, in the Bay Ridge section of Brooklyn. Her father, who had grown up on the Lower East Side, the son of immigrants from Poland, was a family doctor who had to go to medical school abroad because of the Jewish quotas that American medical schools maintained at the time; her mother, who grew up in Brooklyn, was an elementary-school teacher. “When I was very young, my father had an accident,” Yellen told me. “He fell down a flight of stairs, fractured his skull, and lost sight in one eye. In those days, family doctors went out on house calls. My father visited patients in their homes—and so that he could continue his practice my mother became his chauffeur. That continued for a good part of my life. My parents were born in 1906 and 1907. I think the experience of the Depression greatly influenced the way they thought about the world.” Her mother, she said, also managed the family finances and kept an eye on the stock market, and she thought some of that had rubbed off on her.

Yellen graduated, as valedictorian, from Fort Hamilton High School in Bay Ridge, in 1963—toward the end of the era of undimmed postwar optimism about the future of the United States, and in particular about the glorious potential of government. She went to Brown University, thinking she would pursue math or science (her only sibling, John Yellen, is the director of the archeology program at the National Science Foundation), but she wound up majoring in economics, which she talks about as if it were one of the helping professions. “What I really liked about economics was that it provided a rigorous, analytical way of thinking about issues that have great impact on people’s lives,” Yellen told me. “Economics is a subject that really relates to core aspects of human well-being, and there’s a methodology for thinking about these things. This was a very appealing combination to me. Market systems are capable of massive breakdowns that can result in long, devastating periods of high unemployment. And I felt that economists had really learned something about how to address that.”

“For now, I want you to stay off siege ladders.”

In her senior year, Yellen attended a talk by James Tobin, an economist at Yale who had served in John F. Kennedy’s White House. Tobin spoke about the “life-cycle model of consumption”—a theory about how much people spend and save at different stages of life, and what that means for the management of the economy. She was so entranced that she applied to graduate school at Yale so that she could study with him. “Tobin was a person who really impressed me, because he had a passion for social justice and for public policy,” she said. She noted that economists are sometimes legitimately criticized for engaging in abstract mathematics without caring much about its ramifications. “But for Tobin it was always something that was about making the lives of people better.”

In 1971, Yellen took a job as an assistant professor in the Harvard economics department. Like most junior faculty members at Harvard in those days, she did not get tenure, and when she was looking for the next step in her career she spent a year working at the Fed in Washington. She met her future husband there—George Akerlof, an economist at the University of California at Berkeley, who also had a temporary job at the Fed. They married at the end of the year and have been frequent professional collaborators ever since. (Their only child, Robert Akerlof, is an economist on the faculty of the University of Warwick, in England.) Akerlof and Yellen moved to England and taught at the London School of Economics for two years, then moved to Berkeley, where he returned to the faculty of the economics department and she joined the business school. She stopped teaching at Berkeley in 2004 and Akerlof retired in 2008. Akerlof, a 2001 Nobel Prize winner in economics, now does research at the International Monetary Fund, a few blocks away from Yellen’s office. His current interest is something he calls “identity economics,” which is the study of how people’s conceptions of who they are, including race, gender, and ethnicity, can shape their lives and decisions more than standard economic incentives.

When Akerlof was eleven, his father, a research chemist at Princeton, lost his job. The family’s experience with unemployment left a deep impression on him. Both Yellen and Akerlof are known among their colleagues for being cautious. During an earlier period when Yellen was in government, Akerlof moved to Washington with her but flew home to teach his courses, lest Berkeley eliminate his job. Yellen timed her initial government jobs in Washington—first as a governor of the Federal Reserve Board, then as chair of the White House Council of Economic Advisers—partly with an eye to the five-year limit that Berkeley had given her for how long she could be away and retain her professorship. “Both of us, separately and together, really, really care about unemployment,” Akerlof told me. When jobs are unavailable for someone looking for work, as he put it, “you’re seriously in the soup. You’re in the soup in two ways. One, you have insufficient savings. Two, for a very significant portion of the unemployed, that’s what they do all day. You’re sitting at home, feeling bad about yourself. You’re not fulfilling what you think you should be doing. We feel very seriously about all this.”

The Federal Reserve Board makes policy in Washington, which quickly turns into direct operations in the financial markets. Those operations, by one of the biggest players in the world, occur at the headquarters of the Federal Reserve Bank of New York, a few blocks north of Wall Street. In a conference room on the first floor, at the height of the financial crisis in September, 2008, the chair of the Fed, Ben Bernanke, Secretary of the Treasury Henry Paulson, and Timothy Geithner, the president of the New York Fed, ran a desperate weekend-long round-the-clock emergency rescue operation aimed at preventing a collapse of the global economy. There are half a million gold bars stored in the New York Fed’s basement—a quaint vestige of a financial system that hasn’t existed for decades—but the real manifestation of the power of the institution is what goes on in the Operations Room, a vast, anonymous space on an upper floor of the building populated by employees sitting at computer screens. (For security reasons, the Fed asked me not to say which floor.) Imagine the trading floor in a movie about Wall Street, except that the people at the desks look like graduate students, dress business casual, and work in library-like silence.

There are a few seminar-size rooms off the main floor. In one, on the spring morning I visited, there were five very serious-looking people. They were buying, in daily quantities small enough for the financial markets to digest, long-term U.S. government bonds amounting to thirty billion dollars every month. In the next room were seven people, buying mortgage-backed securities (twenty-five billion dollars every month). Can a spectacle so lacking in the indicia of importance—no pageantry, no emotions, not even any speaking—really be the beating heart of capitalism?

Since the financial crisis, the people working in those two small rooms, carrying out orders from Washington, have displaced China as the dominant buyers of American government debt. They have driven down the value of the dollar, infuriating exporting nations such as Brazil and India. They have kept interest rates low enough to give enormous advantages to debtors, from homeowners to hedge-fund managers and private-equity barons, at the expense of people who depend on the interest from their life savings. They have conferred significant government subsidies on the biggest banks, thus reawakening an unpredictable, bipartisan note of incipient populist rage, which has sounded intermittently in American politics for two centuries. By keeping interest rates low, they are helping to push stock prices higher. Any indication that they might buy fewer assets causes tangible anxiety in the stock market.

In 2008, when the insolvency of Bear Stearns and Lehman Brothers set off the financial crisis, the Fed became intimately involved in the affairs of nearly every big financial entity in the United States. In its traditional role as steward of the over-all economy, the Fed initially did what it was bred to do in a downturn: lower interest rates to invigorate the economy. Within a few weeks, interest rates had dropped to near zero, but the country still seemed to be spiralling toward another Great Depression. The Fed had to find another way to goose the economy. President George W. Bush had appointed Ben Bernanke Fed chair in 2006. During Bernanke’s early years there, he told me, “I wrote a lot of thoughtful speeches.” Now, under intense time pressure, he had to come up with a new, extreme policy that was well outside the Fed’s experience.

“Hey, you’re the one who wanted a three-way.”

As a last-ditch means of energizing the economy, the Fed began acquiring mortgage-backed securities and other assets from troubled financial companies, so that they would not be dragged under; the Fed could afford to hold on to these assets until they regained economic value, and the banks couldn’t. (The Fed created a series of new entities called Maiden Lane, which acquired about thirty billion dollars of Bear Stearns’s assets, and, later, nearly fifty billion dollars of assets related to American International Group, or A.I.G., the giant insurance company that was then at the brink of failure.) In early 2009, the Fed began buying large quantities of financial instruments every month, as an additional means of stimulating the economy; these asset purchases eventually rose to eighty-five billion dollars a month. Before the crisis, the Fed owned more than nine hundred billion dollars in assets; by the end of last year, it owned more than four trillion dollars. The Bank of England followed with a similar program. A year ago, Bernanke, then winding up his second four-year term as chair, laid out a plan under which in the future, if the economy continued to improve, the Fed would begin scaling back its unusual purchases. He described it to me as throttling back an airplane, but investors were so spooked by Bernanke’s even mentioning it as a possibility that the Dow Jones average plummeted more than five hundred and fifty points in two days. Alan Greenspan, who served for nineteen years as the Fed’s chair before Bernanke, told me, “We are going through a period with no precedent in American history.”

There is an old saw that the Fed chair is the second most powerful person in government. In the aftermath of the financial crisis, that may actually be an understatement. Most people familiar with the job believe that Yellen’s most daunting task will be to figure out how to return the Fed to something like its normal role without causing the economy to blow up again. But her own view of her mission has another element that she speaks about in a way that indicates it is at least as important to her: to help bring to an end, once and for all, a dark period in economics that began decades before the financial crisis.

Economic management sounds technical, but it also has the quality of a powerful fable—like “Animal Farm,” with a happier ending. The founding patriarch was John Maynard Keynes, Yellen’s hero. Keynes was a member of the Bloomsbury group. His published work would not pass muster with a tenure committee in a contemporary economics department; there are few formulas in “The General Theory of Employment, Interest and Money.” But he came up with what might be the most successful liberal idea of the past century: that central governments, through spending, taxes, and manipulating interest rates, could prevent the periodic economic disasters that had characterized modern capitalism. He published “The General Theory” in 1936, deep into the Great Depression. By the nineteen-sixties, when Yellen was in graduate school, Keynes’s followers had established their primacy both in the leading economics departments and in the economic policymaking offices in government. In these venues, at least, it’s not an exaggeration to say that the prevailing view was that if Keynes had published the “General Theory” ten years earlier the mass unemployment of the Great Depression might have been avoided—along with the nearly incalculable carnage of the Second World War. And, at the time when Yellen was entering the profession, it looked as if, thanks to the development of modern economic policymaking, we were safe from future economically generated human catastrophes. Carrying on this project would be her life’s work.

Then, in 1967, the year Yellen graduated from college, Milton Friedman, a professor in the University of Chicago economics department, in a speech at an annual economists’ convention in Washington, signalled an end to the unquestioned primacy of Keynesian economics. Friedman declared that the government cannot affect the rate of unemployment for more than very short periods, which contradicted most economists’ view that government could prevent very high unemployment permanently. Friedman also later argued that inflation and unemployment could rise in tandem—something Keynesians saw as conceptually impossible, because they believed that higher inflation caused lower unemployment, and vice versa, and it was government’s job to strike the perfect balance between these two conflicting forces.

Friedman did not propose dispensing with Keynes. He’s usually credited with inventing the phrase, which Richard Nixon adopted, “We are all Keynesians now.” But in 1976 Robert Lucas, another professor in the market-oriented, government-skeptical University of Chicago economics department, launched a frontal assault on Keynesian economics, in the form of a formula-filled article titled “Econometric Policy Evaluation: A Critique.” Lucas declared that government economic policy could not control the rates of inflation and unemployment for any length of time. Prices and wages would always set their own levels in the marketplace. In this view, which gathered a flock of adherents, Keynes became a figure of merely historic interest; the whole idea of wise liberal economists steering the economy away from disaster was seen as a fantasy. It didn’t help the Keynesians that both inflation and unemployment were rising, so the government’s ability to manage the economy effectively wasn’t immediately obvious. New classical economics had arrived, and it began to gain primacy in government, in economics departments, and in textbooks.

A decades-long battle was joined, between “freshwater economists,” at inland departments like Chicago’s, and “saltwater economists,” at Berkeley, Yale, and M.I.T. Yellen deplored the caricature of Keynesian economics, and it’s not too much to say that she has devoted her career, in universities and in government, to setting things right. New classical economics, she told me, “was the starting point for a rightward shift in economics that went against the idea that monetary policy can improve macroeconomic outcomes.” Lucas and his followers, she said, believe that markets function well on their own and that the effect of Keynesian economic policy can only be harmful. “In this framework, monetary policy is not even benign—it’s perverse. This reasoning takes Keynesian economics and completely stands it on its head. It suggests that all monetary policy does is affect the economy—adversely—by fooling people. This is as radical a shift as can be imagined.”

Back in the nineteen-thirties, Keynes blew apart the classical economic tradition, which held that unemployment was a self-correcting problem, because firms would simply cut their workers’ wages to the point that there would be more jobs, at lower pay. In the Depression, that did not happen—because high unemployment kept demand for employers’ goods low, and because companies tend to lay people off rather than save money by cutting everyone’s pay. Yellen proposed the case of a factory owner, when the unemployment rate is ten per cent, who sees a line of job applicants outside his factory gates: “O.K., so what does standard new classical economics say? You should cut the wages of everybody who works for you. Because there are all the people standing outside the factory gates, and they have the same skill set as the people who work for you. You should at least be willing, according to this view, if not to hire them, to say to your own workers, ‘If you don’t take a pay cut, I’m going to replace you with them.’ But one goes around, actually talks to firms, and you’ll find that no firm would do that.”

Yellen, who prides herself on being more in touch with the real world of the economy than most economists are, and Akerlof have published a series of papers on why labor markets don’t automatically work according to the laws of supply and demand. They believe that people’s economic behavior is not mechanically rational, and that government—specifically the Fed—can often manage the economy in ways that produce happier results than the markets would achieve on their own. As Ben Bernanke, who unhesitatingly called himself a “neo-Keynesian,” put it when I spoke with him, “Because wages and prices do not adjust quickly enough to keep the economy at full employment all the time, sometimes monetary and fiscal policies are needed to avoid long periods of unemployment.”

In Yellen’s professional partnership with Akerlof, she has been the one more drawn to government. “When I started studying economics, I always had an aspiration to be involved in public policy,” she said. “I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this. We can help to make the world a better place. That’s where I was coming from. And so the notion of having the opportunity to serve in a high-level public-policy position, especially the Fed—this was really very attractive to me. It was something I couldn’t say no to, as long as my family was willing to support me.” After her Clinton Administration jobs as a Fed governor and as chair of the Council of Economic Advisers, she returned to the Berkeley faculty. In 2004, she became president of the Fed’s San Francisco bank, and then, in 2010, vice-chair of the Board of Governors, in Washington.

I asked Akerlof why he had never held a government job. Gesturing at his ancient sweater, his unruly hair, and his battered hiking boots, he said, “Isn’t it obvious?” In his academic work, he has written papers with provocative titles such as “The Market for Lemons” and “Looting: The Economic Underworld of Bankruptcy for Profit.” When they wrote together, one Berkeley colleague told me, “one of Janet’s roles was to be the reality check.” In 2003, Akerlof gave an interview to Der Spiegel, in which he said of the Bush Administration, “I think this is the worst government the U.S. has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy. This is not normal government policy. Now is the time for people to engage in civil disobedience.” (Bush had cut taxes and created big government deficits, an unpardonable sin to a Keynesian, because those are powerful tools that need to be kept honed and ready for use during recessions, to stimulate demand.) Yellen would never be so impolitic, but she is no less passionate about the liberal tradition in economics. Now she has the chance to prove that her side has been right all along. For that to happen, of course, her policies have to work.

The financial crisis and the ensuing recession represented a significant, if indirect, victory for the Keynesians. The economists’ wars over the past few decades have been mainly about monetary policy; regulation of the financial system was of distinctly secondary interest to both sides. But the freshwater economists, with their abiding faith in markets, were less inclined to regulate the financial industry than the saltwater economists were. When the crisis made it obvious that finance has been severely underregulated, it was the anti-Keynesians who were discredited. The Keynesians were accidental beneficiaries. “New Keynesian economics did not predict the crisis,” Bernanke said. “The crisis came from causes not captured by the new Keynesian models used at the Fed, such as excessive risk-taking in financial markets and failures of financial regulation and supervision. We had to figure out how to incorporate the effects of the crisis in our models.”

In the nineteen-nineties, when Yellen was in the White House, she was neither a strong voice in favor of late-Clintonian financial deregulation nor a strong voice against it. Other federal officials, such as Brooksley Born, the head of the Commodity Futures Trading Commission, earned prophetic status by issuing warnings about deregulation, but Yellen did not. Still, one could say that the failures of financial deregulation got Yellen her job. “If you’re looking for a kind of thinking that did have practical applications and has been blown out of the water by the financial crisis, this is a good area to concentrate on,” Yellen told me. A note of sarcasm crept into her voice. “People who believe that financial markets are fully efficient, financial firms are always well managed—these are people who know what they’re doing, they understand about risk, they’re sophisticated. But the financial crisis really diminished the prestige of those who think that financial markets are always efficient and work extremely well.” The Keynesian tradition, she said, and the line of research known as “behavioral finance” have “come out of this crisis with greatly enhanced prestige in academia, and in institutions like this.”

During and after the financial crisis, with the economy careering downward and unemployment rising, the public was understandably focussed on avoiding immediate disaster. But offstage was an equally urgent matter: the government would now be regulating the financial system more rigorously, and the question of who in government would be in control was resolved dramatically in the Fed’s favor.

The Fed is the most powerful of the financial regulatory agencies, commissions, and councils in Washington, and is the subject of intermittent resentment by the others. Over the years, highly visible Fed chairs—Paul Volcker, Greenspan, Bernanke—built their public reputations on how they managed interest rates. None of them were known as financial regulators. Greenspan was openly skeptical of regulation, believing that the self-preservative instinct of financial firms would keep them from putting themselves at risk. (During the crisis he apologized.)

“Why Waldo?”

Officially, before the crisis, the Fed’s supervision of large financial companies was mostly limited to bank holding companies. Countrywide, the mortgage company that went under in 2008, chose to conduct its mortgage business through a “thrift institution,” so it fell under the purview of the Office of Thrift Supervision, an agency so notoriously lenient that it was abolished after the crisis. When the crisis arrived, the Fed had two powerful additional weapons in its arsenal: money and a previously obscure provision of the Federal Reserve Act called Section 13(3), which permitted it to lend money to pretty much anybody it wanted during “unusual and exigent circumstances.” When Bear Stearns was collapsing, Maiden Lane, funded by the Fed, spent billions to buy some of the soured assets that had got the company into trouble, making the transaction far less risky for the bank that acquired the remains of Bear Stearns, JPMorgan Chase. In the days after Lehman Brothers filed for bankruptcy, that September, the Fed backed a hundred and thirty-eight billion dollars of advances that JPMorgan made to Lehman’s broker affiliate—advances that allowed the affiliate to settle trades, preventing a potential implosion in the financial markets. And, again through Maiden Lane, it shelled out more billions to purchase derivatives and securities from A.I.G., because its failure would have brought down other financial institutions with it.

When Bank of America considered walking away from a deal to acquire Merrill Lynch—another move that would have shaken the markets—the Fed and the Treasury Department worked together to save the transaction, and afterward the Fed bailed out Bank of America. Throughout the most tenuous months of the financial crisis, the Fed made billions of dollars of loans to financial institutions, including insurers and foreign banks—the peak outstanding balance was $1.2 trillion on December 5, 2008, according to Bloomberg News. The Fed did not require banks to report these loans, presumably fearful of what public disclosure might do to markets. And the Fed arranged a number of emergency facilities through which troubled lenders could get cash by pledging assets that no one else would touch.

Last fall, a report by the Government Accountability Office* confirmed that the very biggest banks got significantly more special help from the Fed during the crisis than other banks did. All this amounted to a subsidy, conferred in order to keep the big banks from going under. Senator David Vitter, a Republican from Louisiana, who requested the report, told me that he estimates the total amount of the Fed’s subsidy to big banks during the crisis at eighty-three billion dollars. This money is not recoverable, because the subsidy was in the form of low interest rates, not in the taking over of assets that the Fed could later resell.

The price the Fed paid for its largesse was the widespread accusation that it has informally conferred “too big to fail” status on the largest financial institutions, but it also won significant political spoils. The two largest surviving investment banks, Goldman Sachs and Morgan Stanley, had operated without the Fed’s supervision, but in the heat of the crisis their capital-markets funding dried up, and they had no choice but to convert—“at the point of a sword,” as one former Fed official put it to me—into bank holding companies to get access to the Fed’s especially favorable loans. This meant that the Fed had supervisory power over all six of the largest surviving American financial institutions: Morgan, Goldman, Chase, Citi, Bank of America, and Wells Fargo.

In the protracted negotiations over the details of the Dodd-Frank law, which Congress passed in 2010, the Fed also did very well for itself. Senator Chris Dodd, Democrat of Connecticut, feeling that the crisis proved the Fed had failed as a regulator, had wanted to strip it of its supervisory authority, but the Fed wound up with a much bigger budget and more staff to supervise banks, and a host of new powers. The Fed now requires banks to undergo “stress tests” and to produce “living wills”—in which they put together plans both for recovering from a crisis and for going out of business, without creating or exacerbating financial turmoil. These measures were meant to reduce the risk that banks will fail, and to insure that, if they do, they won’t take the entire system down with them. The Fed can also raise banks’ capital requirements. It got supervisory power over “systemically important financial institutions,” including some that aren’t banks but are judged capable of taking down the financial system—a new category that so far includes G.E. Capital, Prudential, and A.I.G., with several more big financial companies likely to follow. It got the power to share supervision, with the Commodity Futures Trading Commission, of eight “financial market utilities”—trading markets such as the Chicago Mercantile Exchange. Dodd-Frank also has a “Hotel California” provision (“You can check out anytime you like, but you can never leave”), which says that any large bank that received special help from the Fed during the crisis would remain forever under Fed supervision. The one significant battle the Fed lost was over Section 13(3): the Fed can no longer rescue specific financial institutions like A.I.G. without congressional approval.

As a result of the Fed’s decision to give the largest firms special help rather than to let them fail, these firms are now more dominant in the financial system than they were before. Dodd-Frank regulated them more heavily, but it did not address their size. The crisis placed financial power in the United States in fewer hands, and gave a government institution that stands at a remove from democratic politics more power to supervise those giant organizations. It’s a contest of titans. According to the Government Accountability Office report, each of the four biggest banks in the country contains more than two thousand legally distinct entities.

After the crisis, it became clear that Keynes’s followers were not, in their moment of triumph, as unified as you might think. For the sake of continuity, President Obama had appointed Bernanke, a Republican, to a second four-year term as Fed chair. Four years later, in the summer of 2013, Obama said that Bernanke had been in the job “longer than he wanted,” a gracious way of saying that he would not get a third term. The world of Keynesians who had worked together in the Clinton Administration then began an uncharacteristically public battle over who would succeed Bernanke. The two leading candidates were Lawrence Summers, the former Treasury Secretary, and Yellen. Stanley Fischer, an African-born American citizen who at the time was the president of the Bank of Israel, was a long-shot third possibility. (Yellen recently appointed Fischer as vice-chair of the Fed.)

Summers was widely reported to be Obama’s first choice, but he was also far more controversial than Yellen. The scion of an economics royal family (both of his parents have brothers who won the Nobel Prize in Economic Science), he got tenure at Harvard at the age of twenty-eight and became its president at forty-six. He is spectacularly abrupt, and polarizing; his presidency of Harvard, a job that requires keeping many constituencies happy, ended unhappily after only five years. Summers had a reputation for being one of the prime architects of financial deregulation in the Clinton Administration, and for being generally close to Wall Street.

Yellen doesn’t leave footprints; Summers does. In 1998, in a key White House meeting of Brooksley Born, Summers, and other top Administration economic policymakers, Born made an impassioned case for regulating the proliferating new types of financial derivatives, and Summers rudely dismissed the idea. A 2009 “Frontline” documentary quoted one of Born’s associates as saying that Summers had told her that if she got her way, “you’re going to cause the worst financial crisis since the end of World War II,” and “Stop, right away. No more.” Timothy Geithner, then the Assistant Treasury Secretary for International Affairs, writes in his new memoir, “The air was thick with warnings that Born’s ideas would create financial chaos.” Yellen, then chair of the Council of Economic Advisers, was at the meeting, too, but she was both more skeptical of the financial markets and more discreet than Summers, so she didn’t say much. At an annual summer retreat for central bankers in Jackson Hole in 2005, when the economist Raghuram Rajan, who now chairs India’s central bank, warned about risks that derivatives posed to the financial system, Summers mocked his concern as “slightly Luddite.”

Last summer, Senator Sherrod Brown, a Democrat from Ohio, released a letter co-signed by twenty senators—one independent and nineteen Democrats, including the freshman senator Elizabeth Warren, from Massachusetts, Summers’s home state—saying that they believed Janet Yellen would make an excellent Fed chair. Its subtext was that all the signers, whose votes the Administration would likely need to get the new Fed chair confirmed, were prepared to vote against Summers.

Members of Congress had not forgotten the enormous anger about the recession that swept the country. Some of it was directed at Wall Street, some of it at the financial deregulation of the preceding twenty-five years (at the time, it was hardly noticed), and a great deal of it at the Fed: a mysterious institution originally conceived by a group of bankers, which was now using its power to bail out the biggest bankers with taxpayer dollars, despite their recklessness, rather than help ordinary Americans who were struggling desperately. “I get it,” William Dudley, the president of the New York Fed, told me. “I get why people are upset. I understand why people think, Was justice done? Savers are getting less than pennies on the dollar. There does seem to be some fundamental unfairness. To save the financial system, we had to save individual entities. That was unfortunate. We want to be in a situation where we can allow firms to fail.”

The anti-Fed sentiment was neither liberal nor conservative. Sarah Palin and Ron and Rand Paul are anti-Fed, and so is Senator Bernie Sanders, of Vermont, a self-described democratic socialist. Dave Brat, the underdog who beat the House majority leader, Eric Cantor, in a Republican primary by running to the right of him, made attacking Wall Street one of the major themes of his campaign, and called for an audit of the Fed. In 2011 and 2012, members of the Bay Area Occupy movement camped out in front of Yellen’s former office at the San Francisco Fed. During the negotiations over Dodd-Frank, the ranking Republican on the Senate Banking Committee, Richard Shelby, of Alabama, a Democrat-turned-Republican from a state with a long populist tradition, and a passionate Fed critic, walked out, leaving a freshman senator from Tennessee, Bob Corker, to take his place as the lead Republican negotiator. “There was a point in time,” Corker told me, “probably 2009, 2010, when I’d go home, and if we did a town-hall meeting, it was an outpouring. It was ‘the Fed, the Fed, the Fed.’ It was everything from people who were concerned about the debasing of the currency, to the idea that it wasn’t audited, to the idea that it was opaque, to conspiracy theories.” In the early stages of the 2012 Presidential campaign, Rick Perry, the governor of Texas, another Democrat-turned-Republican with deep roots in Southern populism, told an audience, referring to Bernanke, “I dunno what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”

“You won’t get me to say the letter was about Summers,” Sherrod Brown told me. But he did say that “Wall Street has too much political power and too much economic power,” and that his conversations with Yellen left him assured that she understood that. A litmus test for Brown and his allies is whether a government economic policymaker is willing to admit that the leading banks have been too big to fail, because the government showed during the crisis that it would bail the banks out if they took on too much risk. (Dodd-Frank was supposed to solve this problem by committing the government to policies that would make bank bailouts unnecessary in the future; another General Accountability Office report, due out later this month, is expected to conclude that, as of now, the biggest banks are still too big to fail—meaning that, in a crisis brought on by their excessively risky behavior, the Fed would still be able and willing to perform a rescue for giant financial institutions.) In her public speeches, Yellen has used the phrase “too big to fail,” but treated it as a concern the Fed knows it must address, rather than as a description of reality. Yet Brown told me that in a private conversation she had used the phrase in a less carefully distanced way.

While Brown was organizing the letter, two prominent economists who are close to Yellen—Alan Blinder, the Princeton economist and a former Fed governor, and Joseph Stiglitz, a former head of the Council of Economic Advisers who taught Yellen at Yale and is now at Columbia—campaigned ardently on her behalf. Yellen’s supporters spoke to prominent economists, including Republicans, and to Brown and other members of the banking committee. Stiglitz also wrote a Times Op-Ed piece saying why he thought Summers should not be Fed chair. Stiglitz told me, “Where was the soul of the Democratic Party? Was it about making the world safe for Goldman Sachs?”

“Oh well, what does a jester know?”

Obama evidently was not willing or politically able to push through Summers’s nomination. Brad DeLong, a Berkeley economist and a leading member of what he called Team Larry, who posted pro-Summers material on his blog during this period (in a recent post, he called Summers “terrifyingly brilliant”), told me, “The people from the Administration should have gone around to the senators and said, ‘Those were our mistakes, not Larry’s.’ The senators were waiting for a call from the White House. That task was never accomplished.” Meanwhile, Team Janet, undeterred by the insult implied by the assumption that she was Obama’s second choice, never rested, although Yellen was never visibly involved in its activities. (There is no evidence that Summers and Yellen ever disagreed personally; Yellen has respectfully cited him in her work.) As president of Harvard, Summers had made a famously impolitic remark about the small number of prominent women in science, and women’s groups made it known that they preferred Yellen. Back in the late nineteen-nineties, when the Kyoto Protocol on global warming was being formulated, both Summers and Yellen clashed with Al Gore over how strict a position on limiting carbon emissions the United States should take; somehow, as often happens with Summers, his arguments became known, but Yellen’s did not. She loyally testified in favor of the Administration’s position. Last year, environmentalists weighed in on her behalf. In September, Summers announced he was withdrawing his candidacy. In October, Obama nominated Yellen as chair of the Federal Reserve Board.

Yellen spent much of last fall making the rounds of Senate offices. In January, she was confirmed, by a vote of fifty-six to twenty-six. David Vitter and Richard Shelby voted no. Bob Corker, who voted against her appointment as vice-chair in 2010, voted yes—after Yellen went to his office for two long private meetings, which left him persuaded that she was planning to stick to Bernanke’s announced plan to wind down the Fed’s program of unusual multibillion-dollar asset purchases to stimulate the economy. In 2010, thirty senators, mainly Republicans, voted against Bernanke’s reappointment as chair—the most votes against a chair’s nomination in the history of the Fed. Yellen got almost as many negative votes, all from Republicans.

It isn’t only Congress that Yellen has to keep calm. The Fed’s key policymaking body is the twelve-member Federal Open Market Committee, made up of the Fed governors and the presidents of five of the twelve Fed banks, which meets eight times a year to set monetary policy. The F.O.M.C. contains a range of hawks and doves, but to promote serenity in the markets they strive for unanimous, or nearly unanimous, votes at their meetings. When Greenspan was chair, he offered a pronouncement at each meeting about where he thought the economy was going. The other members of the F.O.M.C. were encouraged to see him privately if they disagreed with him about something. Yellen, who doesn’t have Greenspan’s lordly confidence and tends to overprepare for everything (when she flies, she likes to be the first person at the departure gate), held an F.O.M.C. videoconference three weeks before the first meeting she chaired, to make sure that she knew what everyone thought. She opened the meeting, in March, by asking each of the other members to speak in turn, about the state of the economy and about what they thought the Fed should do next. Then she went around the room summarizing what each person had said, demonstrating that she had been listening. The F.O.M.C.’s vote on the pronouncement was eleven to one.

Because of the extraordinary expansion of the Fed’s role since the crisis, the hawks have a lot more to squawk about now than inflation. They don’t approve of the Fed’s buying large quantities of financial assets and they don’t think the too-big-to-fail problem has been solved. Richard Fisher, the president of the Dallas Fed and a political conservative, at least by East Coast standards, told me, “My concern is are we helping the middle-income groups or are we just helping the rich and the quick? The wealth effect of our policies has been highly concentrated. I’m a bit of a populist on this. We’ve seen job destruction in the middle two quartiles of the income distribution. That’s the backbone of America!” But Yellen has spent time both with Fisher and with the Fed’s other vocal hawk, Charles Plosser, the president of the Philadelphia Fed, and at the four F.O.M.C. meetings Yellen has chaired thus far they both voted in favor of the reassuring official statements.

Wall Street is another ornery constituency. Yellen is lucky, given the markets’ suspicion of someone who is as concerned as she is with unemployment, to have assumed her job at a time when inflation was extremely low. At a press conference after her first F.O.M.C. meeting, someone asked when the Fed might begin to raise interest rates to forestall inflation. She responded, “Around six months,” and the Dow Jones average fell by about two hundred points. Historically, Fed-watching traders have been concerned that stimulating the economy will set off inflation, but these days they are so wary of another downturn that an offhand, arguably hawkish remark like Yellen’s unnerves them.

Eventually, Yellen will have to make a special effort to show that worries about inflation keep her up at night. In early June, a prominent Republican economist, Martin Feldstein, sent up a warning flare, writing in an op-ed piece in the Wall Street Journal that he thinks the Fed is underestimating the risk of inflation. There is an old Fed saying: “Only hawks go to central-bank heaven.” Yellen hasn’t had to demonstrate that she understands that the saying applies to her, but it’s likely that eventually she will feel pressure to do so.

Yellen thinks of herself as more than just an academic economist who has mastered the data. She likes to talk to people and dig into the details of specific situations. The region covered by the San Francisco Fed includes Las Vegas and Phoenix, which in 2008 and 2009 were among the hardest-hit places in the country. She used to grill people she encountered, starting with the security guards at the Fed’s building, about their personal experiences. Someone who worked for her in San Francisco told me that when the government was conducting an auction of a small failed bank, Yellen recalculated the bids, from a number of stronger banks, on a legal pad over a weekend.

In 2005 and 2006, she began to be concerned that there was a dangerous bubble in the housing markets. “I’m sorry that light bulbs didn’t go off in my head a couple of years before they really did, but there was no question,” she told me. “I was hearing stuff that was scary. And I wouldn’t have seen it in the data.” Her business contacts told her that people were trying to give them money to invest without asking questions about what they were going to do with it. The connection she failed to make, however, was between the housing bubble and a full-on economic disaster: “I absolutely did not see it as something that could take the financial system down.”

“But first, our National Anthem.”

During the first few weeks after she took office, somebody came up to Yellen in an airport and said, “You look just like Janet Yellen!” That comment represents a step in a progression that she is rapidly making, between being unrecognized and being unmistakable. Her ability to move in the real world, and to use the information she collects to hone her economic instincts, is rapidly narrowing. She told me, regretfully, that she doesn’t feel she can meet regularly anymore with people in business and finance who make a living predicting what the Fed will do, because she can’t control what they might report about the conversation.

The more constrained Yellen’s world becomes, the more her instinct will be to return to the distilled essence of herself, the unrepentant Keynesian; the pressure to demonstrate hawkish capabilities comes from without, and the Keynesian inclinations from within. “You can’t think about what is happening in the economy constructively, from a policy standpoint, unless you have some theoretical paradigm in mind,” she told me. Alan Blinder told me that, in the mid-nineteen-nineties, when he and Yellen were both Fed governors and felt they might have momentarily pushed Greenspan into a more dovish position, one of them said to the other, “I think we might have just saved five hundred thousand jobs.” He went on, “We felt pretty good about that. . . . Now she can raise her sights—one million jobs. Two million.”

Yellen doubtless will keep stimulating the weak economy. “Imagine I’ve got my hands on your shoulders and I’m pushing you,” she said. She held out her palms and gave the air a firm shove, to indicate how forcefully the economy was holding people back. “In the aftermath of the financial crisis, I was pushing you so hard you couldn’t get to where you wanted to go. You were dead in the water. And now I’m pushing you a little less hard, so you’re able to make some forward movement”—because the economy today isn’t quite so bad—“but I’m still pushing you. The headwinds are still there. And so even when the headwinds have diminished to the point where the economy is finally back on track and it’s where we want it to be, it’s still going to require an unusually accommodative monetary policy.”

This view isn’t at all controversial among Keynesian economists. In recent months, Summers has written a series of op-ed pieces calling for government stimulus in much more aggressive terms than Yellen uses, as if to disprove those who believed that he’d have been more hawkish than Yellen. But, because the Fed’s power has grown so significantly since the financial crisis, it can no longer simply embody a consensus among economists and go unnoticed. The Fed, not the Treasury or the White House or Congress, is now the primary economic policymaker in the United States, and therefore the world. Everybody is watching. During the next year, Yellen has to decide how quickly to wind down the asset purchases that began five years ago; when to begin notching interest rates higher to forestall inflation; and how aggressively to supervise the big financial institutions so as to prevent another wave of expensive and unpopular government bailouts if the markets go sour. And she has to maintain her very public commitment to improve the economy as ordinary people, rather than market players, experience it. Yellen is an economist. She has to become a politician. ♦

*An earlier version of this article misstated the name of the office that released the report.