Chairing the US Federal Reserve is one of the world’s most important policymaking roles, but Obama’s apparent favorite, Larry Summers, is reviled for his role in the financial crisis, prompting Democrats to campaign for rival Janet Yellen
The fight of the summer in the US is stretching into August, even as most of Washington flees the city’s heat for their holiday homes. The most important job in international finance is up for grabs, and the two leading candidates have polarized opinions across the political spectrum.
President Barack Obama has said he will announce in the autumn who is to replace Ben Bernanke when he steps down as chairman of the Federal Reserve. The leading candidates, Larry Summers and Janet Yellen, are both economic superstars, but there the similarity ends.
Summers appears to be the favourite, and despite the former Treasury secretary and ex-Harvard president being a longstanding liberal bete noire, there is a significant lobby effort behind him from the Obama administration. But Summers has a problem. People hate him.
The hatred does not come just from the left. Long a controversial figure, with a prickly reputation and a chequered past, Summers is attracting ire from both sides of the House of Representatives. “I wouldn’t want Larry Summers to mow my yard,” Republican senator Pat Roberts said recently. A majority of the female Democrats in the House, 38, have written to Obama urging him to back Yellen, the Fed’s vice-chair and so far Summers’s main opponent.
Yellen is far less well-known than her rival but, like Summers, she is a star economist with a substantial CV, and has been credited with helping the Fed bring down unemployment. She would also be the first woman to head a central bank. There is some spin that the cautious, independent and methodical Yellen is not a “team player” – something Obama values. Should her name be put forward, more critics will no doubt emerge. Given current levels of hostility in Washington, no appointment Obama makes these days can avoid it.
The US’s most prestigious publications have carried editorials for and against the two candidates. Even Bette Midler has weighed in. On Twitter she called Summers “Mr De-Regulation” and said he had “turned straitlaced banks into casinos and bankers into pimps”.
At stake is the chairmanship of an organization whose global influence has grown ever larger in recent years. The impact of the Fed’s policies can be seen everywhere from the building booms in Istanbul to the recent gyrations in the Asian markets. On top of its global role, the Fed has beefed up its activities as regulator in the US. Whoever gets the job will be taking over a position more powerful than the one Bernanke inherited when he was appointed in 2006.
Bernanke has yet to confirm that he is leaving, but he is widely expected to step down when his third term finishes at the end of January next year. A Reuters poll of economists gave Yellen the edge earlier this month, but ultimately this is Obama’s decision and a look at the White House guest book shows significant support for Summers from within his administration. Summers has visited the White House 15 times since he stepped down as director of the National Economic Council in late 2010. Yellen has been just once.
Many Democrats would agree with Midler that the main problem with Summers lies in his previous love of deregulation. In the late 1990s, Summers championed the end of the Glass-Steagall Act, which prohibited banks from taking part in speculative trading. He also helped to fight off an attempt to regulate derivatives, the complex financial instruments that later played a starring role in the 2008 financial crisis.
His seeming willingness to back Wall Street’s desires over main street’s concerns continued under the Obama administration and he initially opposed a provision in the Dodd-Frank act, brought in after the financial crisis, that aimed to limit the risks banks were allowed to take. The author of that rule, former Fed chairman Paul Volcker, had clashed with Summers in the past.
Volcker has steered clear of the Fed battle so far but in a recent article in the New York Review of Books, he once more decried the impact of deregulation on the economy. “The erosion of confidence and trust in the financial world, in the financial authorities that oversee it, and in government generally is palpable.” he said. “That can’t be healthy for markets or for the regulatory community. It surely can’t be healthy for the world’s greatest democracy, now challenged in its role of political and economic leadership.”
Sheila Bair, former chair of banking safety watchdog the Federal Deposit Insurance Corp, was more forthright. Calling Summers part of the “deregulatory cabal that got us into the 2008 financial crisis”, she endorsed Yellen in Fortune magazine as the most qualified candidate.
Yellen may prove a less controversial choice. A Fed veteran of two decades’ standing and an expert on the labour markets, she is married to George Akerlof, a Nobel prize-winning economist she met during an early stint at the Fed. Wall Street may find her less accommodating than Summers has been in the past. The Centre for Public Integrity reviewed her career through two stints on the Fed board and as president of the San Francisco Fed Bank. The non-partisan, non-profit journalism group entitled its report: “Yellen as Fed chair would be tougher on banks.”
Alan Blinder, former Fed vice-chairman, championed Yellen in a recent editorial in the Wall Street Journal. After underlining her talents and arguing that Fed minutes show she was among the first to foresee the extent of the financial crisis, Blinder delivered the killer blow: “Perhaps the most important, but least understood, asset Janet Yellen would bring to the table is an ability to manage the fractious FOMC [the rate-setting Federal open market committee]. The committee is a peculiar debating society where politeness rules, politics is scorned, and intellectual arguments hold great sway. It’s now populated by a bunch of strong-willed people who don’t just defer to the chairman. Managing such a nearly unmanageable group requires a delicate blend of intellect, diplomacy and persuasiveness, plus the ability to disagree without being disagreeable – all quintessential Yellen traits.”
Few would care to argue that the rebarbative Summers has the ability to disagree without being disagreeable. But for someone seen as off-puttingly sharp, Summers has some powerful friends. An article in the Washington Postsaid that Timothy Geithner, who recently stood down as Treasury secretary, is now advising Summers on how he can overcome opposition. Obama, too, has been effusive in his praise: “He was the rock of Gibraltar on trying to work through policies to turn the economy around, and I’m not going to stand idly by and let his name be disparaged and his reputation trashed because people have a political agenda about who should or should not be the chairman of the Federal Reserve,” the president told Democrats recently.
Not that Obama’s praise is likely to sway opponents of Summers. These include Democrat senator Jeff Merkley, a member of the Senate banking committee. He told Bloomberg News he was “extraordinarily skeptical” about Summers’ suitability.
“If you nominate someone who is a life-committed deregulator to be in a regulatory position, and if you believe regulation is necessary to prevent fraud, abuse, manipulation and so forth, then there’s a lot of questions to be asked. Why is this person appropriate?” he said.
With Summers receiving such a bruising even before any nomination, Obama too seems to be hedging his bets now. During a recent meeting with Democrats, he mentioned the possibility of a third candidate, former Fed member Donald Kohn.
It’s clearly a decision he is not taking lightly. Obama said recently that the appointment “is definitely one of the most important economic decisions I will make in the remainder of my presidency. The Federal Reserve chairman is not just one of the most important economic policymakers in America. He or she is one of the most important policymakers in the world.”