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Wednesday, July 24, 2013

Fed Watch: Shock and Awe(ful)

Tim Duy:

Shock and Awe(ful), by Tim Duy: Yesterday's hot story from Ezra Klein that Larry Summers was the lead candidate for the top spot at the Federal Reserve was greeted with shock and awe(ful). I wish I could say that I was surprised, but at the end of last month I tweeted:

I often think we have prematurely declared Janet Yellen the front runner. We forget that politics will be in play. http://t.co/ghIPnl0kjj

My concerns were only reinforced when news broke last week of the campaign against current Vice Chair Janet Yellen. From Ezra Klein:

The favored parlor game of the political-economic complex right now is guessing who will replace Ben Bernanke as chairman of the Federal Reserve. The clear front-runner is Federal Reserve Vice Chairman Janet Yellen. But she’s by no means a sure thing.

One important reason she’s not — and I don’t know another way to say this — is sexism, as evidenced by the whispering campaign that’s emerged against her.

Yesterday, Klein declared Summers the front-runner:

People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand (though I suspect have to do with a bunch of elite trial balloons going up at the same time), have really hardened in the last 72 hours.

Klein lists a variety of reasons in favor of Summers, most important of which I think is that President Obama and his staff know and like Summers, while Yellen is a virtual unknown in White House circles. This is also the message of Washington Post reporter Zachary Goldfarb's tweet yesterday:

Larry Summers visited White House 14 times in past 2yrs. Janet Yellen visited once, records show. pic.twitter.com/ufFuVbrH7V

— Zachary A. Goldfarb (@Goldfarb) July 23, 2013

Reaction was swift and fierce from some quarters of the blogosphere. Cardiff Garcia begins with a defense of Summers:

...Some of the mistakes of his past, such as his role in deregulating derivatives (the Brooksley Born episode) or the Harvard interest rate blowup, don’t really tell us much about his capacity to guide macroeconomic stabilisation policy.

His more recent mistakes, specifically his failure to better advise Obama on the stimulus (should have been bigger) and housing policy (should have done more for people in foreclosure and underwater homeowners), included political considerations that are hard to untangle from his actual views.

before launching into his reasons for supporting Yellen, beginning with the most important:

The simplest reason is that she is more conventionally qualified for the job, boasting a much longer entry in her CV as a monetary policymaker.

Like him or hate him, Summers lacks Yellen's depth of exposure to monetary policy. If relative experience with monetary policy is a requirement for the job, Yellen clearly has the upper hand. Felix Salmon, not exactly a fan of Summers to begin with, sums up the situation:

...if Obama picks Summers, it won’t be on the merits; instead, it will be on the grounds that Obama likes Summers, and is in awe of his intelligence. (Summers is, to put it mildly, not good at charming those he considers to be his inferiors, but he’s surprisingly excellent at cultivating people with real power.)

Salmon then launches into an attack on Summers:

What’s more, the move would be a calculated snub to bien pensant opinion. Never mind the utter shambles that Summers made of Harvard, or the way he treated Cornell West, or his tone-deaf speech about women’s aptitude, or the pollution memo, or the Shleifer affair, or the way he shut down Brooksley Born at the CFTC, or his role in repealing Glass-Steagal, or his generally toxic combination of ego and temper — so long as POTUS likes Larry, and/or so long as Summers is good at working key Obama advisors like Geithner, Lew, and Rubin, that’s all that matters.

Evidently, Salmon holds a grudge a bit longer than Garcia. Now, if only President Obama would shift his focus from Summers and Yellen to Ben Stein, then we would see some real fireworks from Salmon.

Mark Thoma has a more succint reaction:

Larry Summers is the Front-Runner? WTF?

Perhaps not all is lost. Back to Klein:

That’s not to say Summers is anywhere near a sure thing. His confirmation would be far tougher than Yellen’s, as Republicans will make him answer for the stimulus and the bailouts, and progressive Democrats have a list of grievances going back to financial deregulation in the Clinton-era. There’s also the simple fact that appointing Yellen would break a significant glass ceiling — and do so in an administration that hasn’t always been great about appointing women to top economic positions. And Summers continues to be a polarizing figure: Those who like him love him, but those who don’t like him really don’t like him.

That said, one gets the feeling that this is not a sudden decision. Instead it is one that has been building for weeks, at least since June 29, when I began to get nervous about the assumption of Yellen as a front-runner. I suspect that if the position has hardened within the White House as Klein suggests, it is because Obama has made his choice and it is time for everyone to get on board.

I have to say that if Yellen is not the pick, I will be disappointed. I think she the best qualified candidate for the job, and agree with the pro-Yellen arguments of Garcia, Salmon, and Bill McBride. I am very concerned about Summer's disposition to be a de-regulator, especially after we see that the Federal Reserve, in its infinite wisdom, gave permission for investment banks to openly manipulate commodity markets. Does anyone see Summers pushing back at that kind of regulation, or getting on board? I don't think that he is the kind of person to take the words of Adam Smith to heart:

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Bottom Line: Nothing is certain until the announcement is made and the Senate takes its turn, but it is looking like the White House is pushing to make Larry Summers the next Federal Reserve Chairman. The curse of the Vice Chair would then live on.

    Posted by on Wednesday, July 24, 2013 at 10:33 AM Permalink  Comments (61)


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