Why the Next Fed Chairman Should be a Chairwoman

Buried in a recent article in The Wall Street Journal was an interesting point about the insight of two women who served in leadership roles at the Fed prior to the financial crisis. The point was a subtle one, and it appeared only at the end of the article. You could easily gloss over it.

Wall Street Journal graphWhat the article seems to suggest is that, in contrast to a group of men who may have been clouded by miscalculations (and hubris), women at the Fed demonstrated better foresight and greater caution with regard to the US economy.

And it got me thinking: Would the US economy have fallen less – or rebounded sooner – if the Federal Reserve were run by a woman?

Titled Little Alarm Shown at Fed At Dawn of Housing Bust, the article is primarily about how individuals at the Federal Reserve – Ben Bernanke and Timothy Geithner among them – largely misjudged the coming crisis, based on transcripts from closed-door Fed meetings.

According to the article, “The transcripts suggest the Fed underestimated the extent to which the housing boom had strained the financial-services industry, particularly through exotic mortgage securities.” Mr. Bernanke, the article says, “predicted a ‘soft landing’ for the economy as 2006 ended, not a housing bust that would trigger the worst financial crisis since the Great Depression.”

“So far we are seeing, at worst, an orderly decline in the housing market.” – Ben Bernanke, 2006

To be sure, there were those in the Fed who saw things differently. In particular, the article cites Susan Bies, a former banker who served as a Fed governor from 2001 until 2007, and Janet Yellen, the Fed vice chairwoman who headed the San Francisco Fed in 2006. These two women warned about the risk of exotic mortgage securities, about the growing debt among households, and about a slowdown becoming a “housing slump.”

Had these women been in charge, or had the Fed Chairman paid more attention to their insights, would the economy have fared better? No one knows, of course, but there’s reason to believe it might have.

According to a new survey from the Pew Research Center, Americans rate women “superior” to men on a number of key traits valued in leadership. Analysts at Pew note that “on seven of eight leadership traits measured in this survey, the public rates women either better than or equal to men.” Those traits include honesty, intelligence, decisiveness, compassion, and creativeness, among others.

Of course, this report isn’t saying that women are in fact superior to men in these areas. It reveals instead a perception among the general public with regard to certain leadership traits. But if women are indeed better in areas such as honesty, creativity, and compassion, would that make a significant difference at the highest levels – for instance, in managing business and the economy?

Norway thinks so.

In 2006, the Norwegian government mandated that every company traded on the Oslo Stock Exchange increase the fraction of women on its board to at least 40% by February 2008. Four years later, says Slate, “we’re now starting to see how this social experiment has affected Norway’s companies.” (A study by economists David Matsa and Amalia Miller describes the results.)

“Companies where women were given a strong voice in decision-making,” according to Slate’s analysis, “were less likely to react to short-term dips in profits by shedding employees. It seems a world run by women may indeed be kinder and gentler, though also one with lower profits, at least in the short run.” The economists believe that the lower profit margins were due in part to the way the women-led companies “were particularly protective of low-skill jobs that were vulnerable to layoffs.”

So, having women in charge is good for workers, especially those who need more protection. But, as Slate suggests, maybe it’s not so bad for shareholders either:

…for years now, we’ve heard about the excessive short-termism of corporate leaders who can’t look past the next quarterly earnings report. While it’s too early to tell what the longer-term effects will be of giving women a voice in the boardroom, perhaps their kinder, gentler management style will be more effective in retaining talent and motivating employees, which will eventually give a boost to the bottom line.

And here’s where it ties back to the US economy. There should be little doubt that the Great Recession that started in 2008 was fueled by greed and dishonesty. Certainly individual homeowners got in over their heads (through their own greed and dishonesty). But bankers and Wall Street investors played a huge part in encouraging people to take high-risk home loans and then packaging those loans as complex, opaque investment vehicles that were supposed to be risk free, though they clearly were not.

There were, of course, many factors at play in creating the ensuing bubble, including reduced financial regulation and a long period of low interest rates (thanks to Fed Chairman Alan Greenspan). But it seems evident that an important contributor was the desire for short-term profit at the expense of long-term, sustainable growth. And who ultimately lost? American workers – especially those at the bottom.

Would a woman-run economy have done better? Perhaps grown in a less robust but more sustainable way, with less risk of systemic shock? There’s evidence it may have.

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Postscript. I just discovered (thanks to Slate.com) a TED talk featuring Sheryl Sandberg, current COO at Facebook. Ms. Sandberg’s talk is about why we have two few women leaders and how to fix that problem. It’s a very good talk on an important issue.