Lawrence Summers withdrew over the weekend as a potential successor to Ben Bernanke as chairman of the Federal Reserve, even though he wasn’t really an announced candidate for anything. It’s an appointed position, of course, not elected.
So what exactly did he withdraw from? A horse race, that’s what.
The country has been treated to the spectacle of pitting Summers against the vice chairwoman of the Fed, Janet Yellen.
It’s been going on since at least midsummer, with dueling bloggers and columnists, lobbying by economists and who knows how much cajoling and logrolling taking place out of sight in Washington, D.C.
The Fed is coming up on 100 years old, and nothing quite like this has happened before. For those who care about sound economic policymaking and stability at the Federal Reserve, this was nothing short of depressing.
President Obama simply mishandled this appointment. He let it be known in early summer than Bernanke was going to move on. Then he let it be known that he preferred Summers for the job. Then he did nothing.
If Summers were the president’s choice, he should have immediately said so, and no horse race would have developed.
There still would have been plenty of sniping, however, as the president’s second mistake was being a fan of a guy who had attracted a whole bus load of critics.
In fact, it was people in the president’s own political party who forced Summers’ candidacy into the ditch. The thing is, it wasn’t about Summers’ views on monetary policy. This was not a policy debate, really; it was a political debate.
Summers had too much of a past outside of monetary policy, as an adviser to presidents as well as a former treasury secretary and president of Harvard University.
While president of Harvard in 2005, Summers made clumsy remarks suggesting that women are underrepresented in math and science due to some innate aptitude differences with men. That wasn’t going to be overlooked now.
And as a member of the Clinton administration, he had been an advocate for leaving the derivatives markets largely unregulated.
No one could have foreseen at the time the role derivatives such as credit default swaps would play in the disastrous collapse of markets in 2008. But when you are advising the president, it’s your job to foresee such things.
That’s particularly true when you are acting like the smartest guy in the room.
It seems Summers just isn’t that good at masking how smart he is. One of the best-known episodes in Summer’s long career was booting Tyler and Cameron Winklevoss out of his office at Harvard when the celebrity twins complained that Harvard was letting Mark Zuckerberg steal Facebook from them — and then later gloating about it.
Yellen is a far less polarizing figure, an economist now serving as vice chair of the Fed. She’s more consensus-oriented, and, her fans insist, a better fit for a decentralized and collegial organization like the Fed.
As to their views on monetary policy, it’s not clear there is much daylight between them. The market’s response on Monday indicated that Summers was thought to be far more interested than Yellen in quickly slowing the Fed’s massive bond-buying program, known as quantitative easing. But that program is going to be winding down no matter who leads the Fed.
The Federal Reserve is a government institution, so it is not going to be possible to keep the selection of its leadership completely outside of the political arena. But recent history has shown that if an appointment is done correctly, the fed chairman can make some very tough calls and be largely left alone.
President Jimmy Carter appointed Paul Volcker to the role, and he tamed inflation by stepping on the throat of the U.S. economy. In addition to bitter complaints in Congress, the street protests included farmers blocking the Fed’s headquarters with their tractors.
His reappointment by Republican Ronald Reagan in 1983 got confirmed in the U.S. Senate with just 16 no votes.
When the current chairman, the Republican Bernanke, was reappointed by President Obama, there was a sometimes heated, bipartisan debate in the Senate over such Fed actions as the massive infusions of capital in the banking system and a bailout of a reckless insurance company.
Then the Senate confirmed Bernanke with 70 votes.
The way this job stays out of politics is to have it be held by a technocrat, someone who needs to be just really smart, not necessarily brilliant, and who has the credibility and skills to drive consensus for an independent Fed policy.
The president needs to finally decide, and the wise choice is a “safe” choice, someone who can step in and pick up where Bernanke left off. Yellen would seem to be a very good candidate.
To take a different course of action — worst case being another horse race — risks turning the Fed chairman’s post into just another thing for politicians to squabble about.
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