Update (August 1) – I shortened this article slightly from the original.
Based on media reports over the past few weeks, there are two clear front-runners in the competition to be named Ben Bernanke’s successor as Fed chairman.
Current Vice Chair Janet Yellen sits in one corner, former Treasury Secretary and National Economic Council (NEC) Director Larry Summers in the other corner, and pundits are actively placing their bets.
Here’s my $0.02:
Janet Yellen’s candidacy
If I had to describe Yellen in a single sentence, one possibility would be this:
Soft-spoken, even-tempered, 100% mainstream academic economist who boils the world down to simplistic concepts such as aggregate demand shortfalls and wealth effects, justifies decisions with research papers that are steeped in dubious assumptions and enjoys strong support from liberal Democrats.
Does that sound like anyone else you know?
I’d use the same sentence to describe Bernanke, whose eight years as chairman is due to end on January 31, 2014.
Not surprisingly, Yellen strongly backs Bernanke’s policies. Both economists believe their aggressive approach can stabilize the economy, despite historical evidence to the contrary. And both embrace the Keynesian and Monetarist thinking that permeates their profession, despite real world evidence that their theories and models are built on flawed premises.
In fairness, there are certainly differences between Bernanke and Yellen, one being that Yellen could prove tougher on banks. But that’s not especially hard to do. With the exception of Tim Geithner, there may be no one alive who’s done more for the banking lobby than Bernanke.
In the big picture, similarities between Bernanke and Yellen are far stronger than the differences. A hand off from one to the other would be about as eventful as a rainy day in Seattle.
In a word, I’d call it a yawn.
Larry Summers’ candidacy
Compared to Yellen, Summers has a longer history as a heavyweight policymaker. But his two decades as a public figure are full of missteps and failed policies of all shapes and sizes, from small to spectacular. His track record is not just bad, it’s shockingly bad.
Filmmaker and author Charles Ferguson may have said it best when he wrote that “rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy.”
Here are a few of the lowlights that have led Ferguson and many others to wish Summers would retreat to a private life where he can do no more harm:
- While serving as Bill Clinton’s Treasury Secretary in 1999 and 2000, Summers spearheaded legislation that banned regulation of most over-the-counter derivatives and helped to cause the 2008-09 global financial crisis. Along the way, he strong-armed former CFTC head Brooksley Born, who had warned about the risks in these markets. In response to Born’s efforts to merely prompt public discussion of these risks, Summers is remarkably reported to have said to her: “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.”
- When economist Raghuram Ragan famously warned of growing risks in the financial sector at the Fed’s 2005 Jackson Hole conference, Summers led the charge to discredit his prescient ideas. Rajan was quickly isolated, while Summers announced disdainfully that he found “the basic, slightly lead-eyed premise of [Rajan's] paper to be misguided.”
- Summers’ five year stint as Harvard University president ended with an ignominious resignation in 2006, following an earlier no confidence motion in his leadership that was passed by the school’s Faculty of Arts and Sciences. His blunders included controversial assertions about the sexes, favoritism toward a friend who had engaged in unethical behavior, and massive endowment losses (that’s right, in the unregulated derivatives markets) that bore his fingerprints.
And apart from specific policies and actions, how about Summers’ personal qualities? Unfortunately, it’s hard to see any redeeming characteristics here. More accurately, you’ll find one story after another about his oversized ego, lust for perks and power and general sense of entitlement.
Now, it’s always good to withhold judgment about these types of qualities when you don’t know someone personally, and I’ve never shared a beer, coffee or ice cream cone with Larry Summers. But I challenge you to read Pulitzer Prize-winning author Ron Suskind’s Confidence Men and still keep an open mind. To choose just one passage, Suskind describes the aftermath of Obama’s 2010 decision to deny Summers the Fed chairmanship at that time and instead reappoint Bernanke:
Summers was outraged and petulant. He started to list demands to [Chief of Staff] Rahm [Emanuel]: A round of golf with Obama. He wanted to walk into major events, such as signature speeches or the State of the Union, with the cabinet, a privilege not given even to the senior-most advisory posts. And he wanted a car and driver, like Geithner had. The behavior was, for want of a better term, childish, and the Obama team’s attitude toward Larry began to shift from frustration, and sometimes fear, to eye-rolling incredulity.
As for the demands, Rahm balked. He could manage everything but the car and driver. No one in the West Wing had that. Summers would have none of it. So, for two weeks, as deputy chief of staff Jim Messina raced between the White House and the Baucus committee, he had to search for a car for Larry Summers. When he came up empty-handed, Summers reluctantly accepted two rounds of golf and preferred seating at the State of the Union as consolation.
But the issue of appeasing Summers went well beyond golf.
He was short-tempered in meetings, even more than usual, and began to launch a rearguard assault for even greater clout, using his broad mandate and closeness to the president to envelop the various departments in the executive branch…
Call me cynical, but this story and others reveal some serious character flaws.
Lastly, in my opinion no one should write about Summers’ fitness for office without mentioning his connections to the banking industry. I’ll turn again to Ferguson, who extensively documented the cozy financial arrangements that benefit banks, academics and government officials at the expense of all the rest of us. Ferguson estimates that Summers earned over $20 million from financial institutions in between his Treasury Department departure in 2001 and NEC appointment in 2008. He notes that Summers was paid $135,000 for a single speech at Goldman Sachs.
It goes without saying that we shouldn’t be comfortable with Summers’ yearning to be our top big bank regulator at the same time that he thrives on handouts from our largest banks.
Here we go again
Of course, the Obama administration clearly has no problem with public officials whose allegiances lie with banks rather than Joe taxpayer.
The fact that Summers is being vetted once again for a major appointment reminds me of former FDIC head Sheila Bair’s response to another presidential appointment back in 2008. When Obama nominated Geithner to be his first Treasury Secretary, Bair called it a “punch in the gut.”
Should Summers be elevated to the most powerful position of all, I’d say the White House decided to add some variety to its penchant for gut punches by stomping on our throats.
To react with a single sound - and one that I may be able to manage even with a shoe constricting my air flow – a Summers nomination would deserve a hiss.
And that’s what it seems to be coming down to: a choice between a yawn and a hiss.
Why not appoint someone with a track record of getting things right, you ask? Someone like a Rajan – with a proven ability to think critically about economic theory, while foreseeing developments that more famous economists only recognize in hindsight?
Well, that would require a culture of accountability in the White House. Does anyone remember when we last had that?
I wrote about Summers indirectly earlier this year when I critiqued the Brad DeLong-Larry Summers fiscal policy model.