The Federal Reserve: Summers over
IT WAS only a coincidence that Larry Summers withdrew as a candidate for Federal Reserve chairman five years to the day after Lehman Brothers went bankrupt. But it was, in a way, fitting: Mr Summers’s surprise decision, conveyed in a letter to Barack Obama on September 15th, would not have been necessary without the forces unleashed by Lehman’s failure in 2008.
Mr Summers and Janet Yellen, the Fed’s current vice-chairman, were the two leading candidates to succeed Ben Bernanke, who is expected to step down when his second four-year term ends in January. Mr Summers had what in previous eras would be the two most important qualifications to lead the central bank: unimpeachable economic credentials and the trust of the president. Mr Summers had been Mr Obama’s top White House economic adviser from 2009 to 2010. He remains an informal adviser. In any other era most senators, who seldom think about the Fed except when it raises interest rates, would have rubber-stamped the president’s nominee. Few would have asked, much less cared, what his or her views on regulation were.
But the politics of the Fed have changed in the last five years. The invasive and unorthodox measures it took to rescue the financial system and prop up the economy have kept it permanently at the centre of political controversy. And its role as the country’s most powerful financial regulator, usually a secondary concern to monetary policy, has been thrust to the forefront.
Those on the left who blame lax regulation for the financial crisis were incensed by the thought of Mr Summers in charge of the Fed. Mr Summers had backed many deregulatory decisions as treasury secretary in the 1990s, and in Mr Obama’s administration had resisted more draconian treatment of the banks. This was enough for many critics to throw their support behind Ms Yellen and work to defeat Mr Summers. On September 13th, they scored a major victory: Jon Tester, a conservative Democrat from Montana, said he would vote against a Summers nomination, bringing to four the number of Democrats on the Senate Banking Committee likely to oppose him. Democrats control only 12 of the panel’s 22 seats and 54 of the Senate’s 100 seats (including independents who vote with the Democratic Party). With so many members of his own party opposed, Mr Obama would need help from Republicans to get Mr Summers confirmed, no sure thing given his shabby relations with the opposition.
“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery,” Mr Summers said in his letter.
There was more, of course, than just Mr Summers’s record on regulation at work. His famously combative personality alienated many of the people he worked with in his long career in academia and government. He was forced to quit as president of Harvard University over insensitive remarks he made about women. Even people who thought Mr Summers superbly qualified for the job worried whether his personality fit the central bank’s collegial atmosphere. A survey by the Wall Street Journal found that large majorities of both academic monetary economists and Wall Street forecasters preferred Ms Yellen. This newspaper also endorsed Ms Yellen for the job, citing her experience and demeanour and Mr Summers’ political baggage.
The White House’s inept handling of the process hardly helped. Presidents usually try to avoid speculating about the Fed, to safeguard its independence and maintain their own flexibility. Mr Obama inadvertently did the opposite by disclosing in a television interview in June that Mr Bernanke would likely not stay on past January. A tsunami of media coverage, much of it unflattering to Mr Summers, followed, as did a series of leaks suggesting Mr Obama would nominate him anyway. Mr Obama reinforced that impression by defending him in a meeting with Democratic legislators, while raising another possible nominee, Donald Kohn, a former vice-chairman. The long and excruciatingly public process gave Ms Yellen’s supporters and Mr Summers’ enemies time and ammunition.
It is not just Mr Summers who has been hurt by the process. So has Ms Yellen. She is an accomplished macroeconomic scholar and an experienced central banker. Since 2010 she has had a hand in all of the Fed’s decisions on quantitative easing, forward guidance and revamped communications policy. By any reasonable standard she is exceptionally qualified. Yet Mr Obama’s team has managed to leave the impression that they consider her flawed. Nor did many of her advocates do her any favours by citing the significance of naming a woman to the job. Mr Obama could yet turn to other candidates: Mr Kohn or Tim Geithner, his former treasury secretary who says he doesn’t want the job. There are other, less likely names as well, such as Stan Fischer, the former governor of the Israeli central bank, or Roger Ferguson, another former vice-chairman. But Mr Obama has less than four months to vet, nominate and confirm a candidate in a Congress soon to be consumed with fights over the budget and the debt ceiling.
Oddly, one thing that played almost no role in the controversy is monetary policy. Mr Summers’s critics showed little interest in his views on inflation, unemployment or how the Fed should behave in a world where its main tool, the short-term interest rate, is impotent. If they had they would have found him as dovish as Mr Bernanke or Ms Yellen, all of whom are far more preoccupied with unemployment than inflation. That is testament to the consensus in mainstream macroeconomic circles about the right stance for monetary policy now, and the durability of the framework Mr Bernanke has assembled. This suggests that, even though the search for its next chairman has turned into a circus, the Fed will be fine in the end.
Mr Obama’s second term may be another matter. He had called the selection of the Fed chairman one of the most important economic-policy decisions of his second term, yet he has managed, through no one’s fault but his own, to make a hash of it. It bears an uncanny resemblance to his apparent retreat over the use of force in Syria, which also started with some off-the-cuff remarks and ended with a failure to properly read Congress. After two self-inflicted debacles within weeks of each other, one on foreign and the other domestic policy, Mr Obama can ill afford another.
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Written by gregip
September 16, 2013 at 7:18 pm
Posted in Uncategorized