In January, President Obama will likely name a new chairman of the Federal Reserve, replacing Ben Bernanke after eight eventful years on the job. The choice will come at a key moment, since the economic recovery remains fragile, and the Fed is facing tough decisions about when and how to scale back its epic bond-buying stimulus program.
Until about three days ago, Bernanke's current right-hand woman, Janet Yellen, seemed like a shoo-in. She's "clearly going to be the choice," said Matthew Yglesias at Slate, while Neil Irwin at The Washington Post said she "has higher odds of being selected than any other individual." Larry Summers, the former Treasury secretary, was considered a distant second.
But in recent days, their positions have seemingly flipped. Yesterday Wonkblog's Ezra Klein proclaimed Summers the new front-runner, saying Obama has a personal affinity for Summers, as do the markets. In Klein's words, "There’s a sense that Summers has the market’s trust in a way Yellen doesn’t."
The two candidates share similar monetary views: A bias toward boosting employment, rather than taming inflation. Their key difference has more to do with their work styles. Summers, who was also Obama's top economic adviser early in his first term, has earned a reputation for rubbing people the wrong way. Klein argued this might not be all bad:
The big open question is Summers’s ability to manage the Federal Reserve’s Open Markets Committee. Here, Summers’s reputation for being difficult to work with is a big issue. But inside the White House, that reputation is considered overblown, or at least outdated — after all, they worked with him, and enjoyed working with him, and there’s some sense that maybe a more aggressive Fed chair wouldn’t be the worst thing in the world. [The Washington Post]
Others, however, argue that Summers' personality could be a way bigger detriment. Noam Scheiber at the New Republic:
No one disputes that Yellen, who’s been socialized into the mores of the Fed over the past seven years, and who has a superior bedside manner by disposition, would be better suited to this task. But the people making the case for Summers are massively understating its importance. While a Fed chairman can technically get his way through a seven-to-five majority of the committee — suggesting that a strong-willed, argumentative chairman should almost always be able to carry the day — in practice, the FOMC operates by consensus. A chairman who suffers more than one or two dissents on any given vote is assumed to have been pretty thoroughly refuted. [New Republic]
Personalities aside, David Dayen at Salon said Summers is a terrible choice. "If we wanted to pin the crisis on one person, Summers would be a viable candidate," he wrote.
In the 1990s, Summers and then-Treasury Secretary Robert Rubin led the effort to stop Brooksley Born from regulating derivatives, precisely the financial instruments that magnified the housing bubble and accelerated the financial collapse. Under his watch as Treasury Secretary, Congress eliminated Glass-Steagall’s firewall between commercial and investment banks, legalizing the merger of Citigroup (where Rubin would later become CEO). He further oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, even from state anti-gambling laws. Even Bill Clinton has apologized for deregulation of the riskiest sector in finance; Summers has not. [Salon]
No wonder Summers has the market's trust! And when you throw in the fact that Summers has already amassed pretty much every prestigious government position that can be held by an economist, it becomes even more baffling that Obama would even consider passing over Yellen. Perhaps it's time for someone not named Larry Summers to run things for a change.