Ezra Klein reported yesterday that Larry Summers is now the leading candidate to replace Ben Bernanke when Bernanke's term as Fed chairman expires in January. This, for those who haven’t been following every twist and turn in the Fed sweepstakes, comes as a surprise. For months, most Fed-watchers assumed that Janet Yellen, currently the Fed vice chairman and a longtime president of the San Francisco Fed, had the job all but sown up.
Ezra helpfully lays out the criteria that are likely to guide the Fed selection: 1.) Obama’s personal affinity for a candidate; 2.) the candidate’s monetary policy stance (i.e., do you care more about inflation than unemployment, or vice versa); 3.) crisis-management ability; 4.) “credibility” in the markets (a vague, elastic, and grossly overused concept, but not one that’s entirely meaningless); 5.) ability to manage the Fed’s key interest-rate setting body, the Federal Open Market Committee (which consists of seven Fed governors based in Washington, the New York Fed president, and a rotating cast of four regional Fed presidents).
The case for Summers is that the former Treasury secretary basically wins on points: Summers comes out ahead on criteria 1, 3, and 4; Yellen comes out ahead on 5; 2 is basically a tossup. I can almost hear Summers’ friends inside and outside the administration—the Gene Sperlings and Bob Rubins and Jason Furmans of the world—framing the choice in these terms, since this is how they typically argue.
The problem is that the pro-Summers case implicitly assumes all five categories should be weighted roughly equally, when there’s no good reason to do that. Relatedly, the pro-Summers case overlooks the extent to which bad performance in one category can leach into another. Finally, the set of criteria held up as the basis for the decision strike me as less than exhaustive and conveniently tilted toward Summers (which is no surprise since it was presumably chosen by his boosters to build a credible case for him).
The easiest way to see the first problem is to consider criterion 5, management of the FOMC. 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.
If Summers were to preside by strong-arming and browbeating those who disagreed with him—a methodology he’s been known to favor--he might score a few tactical victories. But he would risk strategic defeat—the FOMC could eventually become ungovernable. Worse, long before then, Summers’ Fed would probably lose credibility in the markets (currently seen as one of his virtues), since bond traders and money managers would assume that a highly divisive Fed chairman can't make his preferred policies stick. And, of course, these assumptions would soon become self-fulfilling. The only way monetary policy can be effective is if people “in the markets” expect it to be effective, and behave the way the Fed wants them to. If they don’t, the Fed quickly loses traction.
Long story short, management of the FOMC isn’t some isolated criterion—just one of many to tally up in the Summers or Yellen column. It’s fundamental to the task of running the Fed. At least these days, when the Fed’s deliberations are far more transparent than ever before, and scrutinized more closely than ever before.
Likewise, I’m not so sure Summers’ experience navigating financial crises is quite the advantage it’s made out to be. I’m someone who thinks Summers and his fellow Rubinites did a pretty good job keeping the world from melting down during the 1990s. But for most of that time – certainly through the diciest parts of the 90s – Summers was either Treasury undersecretary or deputy secretary, not the boss himself. Then, in the Obama era, it was Tim Geithner who had the final say on the big financial-sector interventions. As valuable as Summers’s crisis experience is, it’s not quite the same as being the ultimate decision-maker. It’s hard to assess how someone will perform as the principal in a crisis until they’re actually tested.
As for the Fed-chairman criteria that Summers’ supporters omit, there are some big ones. For example, the politics of a Summers pick are pretty lousy for Obama, a president who’s disappointed supporters over the number of women he’s tapped for the highest-profile jobs. But probably more important is an idea Ezra alluded to in an earlier post: a candidate’s knack for getting “the big calls right.” Yellen has a solid track record on this front. As Ezra points out, she was early to see that the rumblings in the credit markets back in 2007 could turn into a full-blown recession. She was also an early voice within the Fed for doing more to address the country’s escalating unemployment crisis.
Summers has been prescient at times while writing from the remove of academia or the op-ed page. But, as my colleague John Judis observes, he seems to have a weakness for elite conventional wisdom once he gets into positions of power. This was true during the 1990s, when he echoed some of Alan Greenspan’s arguments for shielding derivatives from the prying eyes of regulators. And, as I reported in my book on the Obama administration, it was true in late 2008, when Summers recognized the need for a much larger stimulus than most in Washington were calling for, but nonetheless pushed for a far smaller package than necessary because he didn’t want to be laughed out of the room by Obama’s political advisers. “People will think we don’t get it,” he told his colleague Christina Romer, the incoming head of the Council of Economic Advisers, who preferred to present Obama with a much bigger number. (In fairness, Summers later became an aggressive internal advocate for doing more to stimulate the economy.)
My own view is that Summers is too fond of big shots—he’s always wanted to be part of the most exclusive club that will have him (which helps explain his close relationship with Rubin and Greenspan). In my book, I describe the pleasure he took from attending dinners with top Wall Street executives as a Treasury official in the 1990s.**
I understand Obama’s attraction to Summers. Like one of his illustrious predecessors--also a fan of Harvard professors--the president tends to believe that “You can’t beat brains.” But whatever Summers’ intellectual gifts, he has some dangerous blind spots for a Fed chairman, who must be in constant contact with financial elites and must strain to resist their self-serving pronouncements. Janet Yellen has demonstrated this sort of independent-mindedness. With Summers, it’s at best an open question. If you’re Barack Obama, why would you take that kind of risk with one of the most important appointments of your presidency?
Noam Scheiber is a senior editor at The New Republic. Follow him at @noamscheiber
*Summers would almost certainly have made a better Fed chairman in the pre-transparency era (prior to Alan Greenspan), when dissent was more hidden from public view and the chairman could rule with a heavier hand. By contrast, Ben Bernanke’s egoless-ness and deferential style go a long way toward explaining his success at moving the Fed as far as he has—on quantitative easing and other unorthodox methods of stimulating the economy. That’s especially true considering the conservative elements in his ranks.
**The dinners were the informal portion of a quarterly meeting that took place under the auspices of the Treasury Borrowing Advisory Committee, a group Treasury convened so it could discuss various technical and legal issues with the leading participants in U.S. government bond auctions.