Janet Yellen Defends Her Record – and Delivers a Warning

Treasury Secretary Janet Yellen spends a lot of her energy thinking about what might threaten the U.S. financial system.

She wants to ensure that the market where the U.S. government borrows money is running smoothly. She’s worried about hedge funds that load up on debt. She’d like banks to be better prepared for a crisis.

These days, there’s also another, more foundational item on her list: whether we’ll have a peaceful transition of power after the 2024 election.

In a phone interview Wednesday afternoon, Yellen laid out the stakes to me.

The smooth transfer of power after elections, she said, is “really essential to our having a democratic system and a democratic government, and one of the tremendous strengths of our financial system is that it is based on strong institutions and rule of law.”

The market for U.S. debt “is the deepest, most liquid, most important market that’s at the base of the entire global financial system.”

“If you say, ‘What enables [us] to play this role?’ It certainly is both that we have a well-managed economy, but also deep respect for the rule of law,” she added. “And institutions that promote that enable us to have deep, rich, open capital markets.”

I spoke with Yellen ahead of a speech she’s giving in New York on Thursday, in which she will deliver a forceful argument: That the work done to regulate the financial sector in the decade and a half since the 2008 credit crisis has been worth it. At the core of her case is the Financial Stability Oversight Council, a panel of top regulatory officials that the Treasury secretary chairs — and that Yellen takes credit for revitalizing.

But Yellen also acknowledges some fragility around preserving that work. While the Treasury chief did not mention former President Donald Trump’s name to me, the prospect of aggressive deregulation under a new president hangs over her words.

“A resilient financial system is critical to a strong economy,” she will say in her speech, according to text I saw in advance. “And strengthening it requires insisting on thoughtful regulation, including in the face of challenges from those who advocate to roll back policies and regulations.”

I asked her whom she was thinking of in that passage, and she pointed to the tenure of her predecessor, Steven Mnuchin (again, not by name), arguing that Treasury’s focus on financial stability “had all but disappeared” by the time she stepped into the building in 2021.

Mnuchin would no doubt find this characterization uncharitable, particularly as he spent a significant chunk of 2020 staving off a financial crisis that nearly happened at the onset of the Covid pandemic.

But the thrust of Yellen’s point is that staff and budget had been slashed at FSOC, an otherwise powerful panel that includes officials like Federal Reserve Chair Jerome Powell and SEC Chair Gary Gensler.

As Treasury secretary, Yellen has presided over reforms to the Treasury market where U.S. government debt is sold, aimed at making sure it keeps functioning well even during a crisis. She has revived the council’s dedicated work examining hedge funds and launched an effort to explore the potential market risks posed by climate change. And she has sharpened FSOC’s regulatory blade for firms with influence across the financial system.

There are gaps in Yellen’s argument, some of which cut at very live questions about the regulatory regime put in place after the 2008 financial crisis. If Yellen has given a jolt of energy to FSOC, that doesn’t necessarily mean the panel is really delivering the oversight it was designed to secure.

Government agencies have done a lot to beef up banks’ defenses since 2008, though they are still fine-tuning that rule book. This is a central point Yellen makes in her speech.

But institutions that weren’t banks — like AIG and Lehman Brothers — played an outsize role in the crisis. And the financial council, created under the 2010 Dodd-Frank Act, was tasked with looking at those non-banks — that is, finding the next potential Lehman Brothers and making sure it’s properly regulated.

There were some companies that FSOC cracked down on under the Obama administration, but for various reasons, none of them faces that heightened scrutiny anymore. As Fed chair during the first year of Trump’s presidency, Yellen herself voted alongside Mnuchin to let AIG, by then a smaller company, no longer face federal oversight.

The council is importantly an action-forcing mechanism to get regulatory agencies to talk to each other. I’m not kidding: That is a more crucial role than you might think. Those conversations can help spur more rules from the individual agencies that make up the council. And officials across administrations have found use for it: Mark Calabria, Trump’s libertarian housing finance chief, successfully nudged FSOC toward greater scrutiny of the market where investors buy mortgages.

But it hasn’t filled in quite as many regulatory gaps as lawmakers maybe intended.

I recently asked Andrew Olmem, a top economic official in Trump’s White House, what he sees as the future for FSOC (outside of the context of Yellen or her speech), and he essentially said he thinks people expect more from the council than it can deliver.

“It's a useful function to get [the heads of financial agencies] together, but it’s challenging for the FSOC to be the driving force because it simply doesn’t have the statutory authorities that the other financial regulators have,” said Olmem, who is now at law firm Mayer Brown.

Yellen defended the panel to me as more than just a “talk fest” and underscored why it continues to be worthwhile by citing vulnerabilities in important markets exposed during the pandemic.

“It required really unprecedented intervention by the Fed … to deal with these risks,” she said. “So it’s not as though the threats have gone away.”

“They needed to be dealt with. And we've certainly, I believe, made progress,” she added.

Essentially, Yellen is making multiple notable points. First, that people who said more rules would hurt banks were wrong. Second, that FSOC itself has performed valuable work under her leadership. And then, perhaps most importantly: She argues there is more work to do that the council and future regulators should not retreat from.

“Work to build and maintain a resilient financial system is never over,” she will say in her speech. “We’ll never be able to just declare victory. And successes can be hard to fully appreciate because they often entail having avoided counterfactuals. But that does not make them any less significant.”

Financial stability is a key and underappreciated piece of Yellen’s legacy, a theme in both her time as chair of the Federal Reserve and as Treasury secretary.

But the framework she’s helped build will be continually tested, by both her successors and by future economic crises — and maybe political ones, too.