Janet Yellen, dubbed “Ms. QE Infinity” by some wags because of her support for printing money to create jobs, and her willingness to pierce the Fed’s long-held 2 percent annual inflation ceiling, will have more to worry about than monetary policy when she steps into Ben Bernanke’s ample shoes on February 1. There is the small matter of regulating the nation’s banks, a chore made difficult for her by two unrelated facts.
The first is that she does not have as firm a theoretical grasp of regulatory issues as she does of monetary policy. Second, her relations with fellow Fed governor Daniel Tarullo are reported to be more than a little fraught. And Tarullo, a one-time Obama campaign adviser still close to the White House, has primary responsibility for the Fed’s bank-regulation program. The differences between Tarullo and Yellen is not doctrinal – both favor aggressive regulation – but personal, which unfortunately often proves to be the more difficult to overcome.
While attention focuses on the will-she-won’t-she- taper-soon guessing game popular with traders and the business press, the problems faced by America’s banks receive far less attention. And they are many and non-trivial. Indeed, the more important question is whether the world has changed sufficiently to cause us to wonder whether the big beasts of the banking world are on course to becoming heavily regulated, boring financial utilities, more like your local electric company than like the money-spinning, risk-taking institutions of the good old days before Lehman Brothers made its noisy exit from the financial sector. Put differently, did Brookfield Office Properties, a large New York City landlord, have it right when it changed the name of its World Financial Center complex to Brookfield Place in recognition of the ongoing shrinkage of the demand of big banks for commercial office space in the world’s financial center?