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Janet Yellen Is A Bad Treasury Secretary Because She Knows What She’s Talking About



This is, really and in fact, the complaint being made over at the American Prospect. Janet Yellen is a bad Treasury Secretary because she has the temerity to know what she’s talking about.

While those appointments were regrettable, the assignment of responsibility holds true. Unfortunately, Yellen’s recent congressional testimony raised concerns about her eagerness to fulfill that duty and regulate for the crises ahead of her.

The headlines from the testimony concerned a verbal sparring match between Yellen and Sen. Elizabeth Warren over BlackRock, the world’s largest asset manager, controlling over $9 trillion in assets. Warren inquired whether Yellen would designate BlackRock as a systemically important financial institution (SIFI), better known as being “too big to fail,” and thus subject it to more extensive oversight and regulation.

Yellen’s answer didn’t please the senator. “Rather than focus on designation of companies, I think it’s important to focus on an activity like that and to consider what the appropriate restrictions are,” Yellen said, referring to fire sales of mutual funds.

Yellen should have told Warren to bugger off because she’s an ignorant oaf but of course Yellen is far too polite to say such a thing.

Because Yellen is an economist – and a good one – she understands what a SIFI is and why they’re important. That something is large doesn’t make it systemically important. A bank is not, for example systemic because it is large. Rather, because a bank run, if large enough, can be systemically important. It’s the run part, not the large part, that is the point.

Similarly we might worry about an open ended fund in an illiquid market – property say – but it’s the illiquidity of the underlying that causes the problem, not size and size alone.

So, what particular problem might there be with Blackrock? None other than size. It’s therefore not a SIFI.

More than this, the economist – and Yellen is a good one – will go on to think about moral hazard. If something is “too big to fail” then that’s an implicit – with large banks explicit – guarantee that the government won’t let it fail. This is an advantage to the organisation that will not be allowed to fail – it can point to the guarantee and thus gain at the expense of those not so guaranteed. More than this, it can – and the way bureaucracies, corporate or government work means this will happen eventually – fall into dangerous behaviour precisely because it is guaranteed.

The designation of SIFI is thus something an economist is not liberal with. Both because they want the underlying reason to be clear, and because the designation itself can have bad effects.

Salon is criticising Yellen simply because she knows what the hell she’s on about – in that stark contrast to Warren.



  1. It does indeed sound as though the correct regulation for Blackrock is to make it very, very plain that if you’re stupid enough to invest in it, you’re on your own sucker. The taxpayer won’t come to your rescue.


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