The Battle for Chair of the Federal Reserve Board
Usually the nomination and approval of a chair of the Federal Reserve Board moves quickly with little public debate. The president announces his pick and the Senate approves him without much debate.
However this is not the case with the successor to Ben Bernanke, the current chair of the Fed. Mr. Bernanke made it clear that after serving two terms he was not interested in a third term. This seemed to open the door to Janet Yellen, the current vice-chair, to move up and become the first woman to head the Fed.
Yellen has all the obvious credentials. Prior to serving as vice-chair, she had been president of the Federal Reserve Bank of San Francisco for six years. She had also served as head of President Clinton’s Council of Economic Advisers in the 1990s as well as having served an earlier stint as one of the seven governors of the Fed. In addition, she has an impressive academic background, having been a professor at both Berkeley and Harvard.
It turned out that Yellen’s ascension to chair was not going to be a simple coronation process. Last month President Obama told a group of reporters that he wanted to have Larry Summers fill this position. Summers had previously served as head of Obama’s National Economic Council in the first two and a half years of his administration. In this role Summers was the person responsible for summarizing the views of the president’s top advisers and giving his opinion.
Summers already had considerable notoriety before holding this post. He had been the chief economist at the World Bank prior to taking a top Treasury post in the Clinton administration in 1993. In this capacity he played a key role in structuring the bailouts after a series of financial crises, including the crisis in Mexico in 1994 and the East Asian financial crisis in 1997. The following year he was promoted to be Treasury Secretary.
After leaving the Clinton administration he had a brief but stormy tenure as President of Harvard. He quickly managed to antagonize much of the faculty before eventually being forced out in 2006. One of his comments that aroused anger was the suggestion at a seminar that the low number of women in top positions in the science might be in part due to genetics.
This comment has been raised many times in the battle for Fed chair, since Yellen has been one of the few women to reach the top echelons in an area of economics that is overwhelmingly dominated by men. Many women’s groups point to this comment in arguing the case for Yellen.
However the split goes well beyond breaking a gender barrier. Summers is associated with many of the policies that created the basis for the bubble and crash. In his years in the Clinton administration he was a strong proponent of deregulating the financial sector. He was one of the top officials who famously beat back an effort to regulate derivatives by Brooksley Born who was then head of the Commodities Future Trading Commission. He also supported the repeal of Glass-Steagall, the law that required a separation between commercial banks and investment banks.
Summers was also a proponent of the strong dollar policy that lead to the explosion of the U.S. trade deficit at the end of the 1990s. The trade deficit created an enormous demand gap in the economy since a large portion of the income generated in the United States was spent abroad rather than in the United States. The gap peaked at almost 6 percent of GDP ($960 billion in today’s economy) in 2006.
This lost demand was filled by the stock bubble in the late 1990s and the housing bubble in the last decade. That is not a path for stable and sustainable growth.
Summers is also strongly associated with what many regard as the failures of the Obama administration. The stimulus that President Obama got in his first months in office was far too small, as many economists warned at the time. Rather than pressing for additional stimulus, President Obama touted the “green shoots of recovery” and spoke of the need to pivot to deficit reduction. This shift of focus by the president made it almost impossible to get further stimulus, condemning the economy to years of slow growth and high unemployment.
Summers is also associated with a lax policy toward finance that allowed the big banks to grow even bigger than they had been before the crisis. In this case the administration was especially well-situated to alter the structure of the financial system since several major banks would have collapsed without government support. Government intervention was needed to keep them in place, not to downsize them or break them up.
It is this history that has led many progressives in the Democratic Party to strongly oppose picking Larry Summers as Fed chair. On the other hand, Summers enjoys strong support from prominent figures in the financial industry who are extremely important to the President Obama and the Democratic Party. It will be interesting to see how this one turns out.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.