If the Beltway rumor mill is to be believed, President Obama is on the verge of nominating his old pal Larry Summers to be the next chair of the Federal Reserve.
Summers, as most readers probably know, is one of the country’s most prominent neoliberal economists and an admirer of Milton Friedman and Alan Greenspan. He served as President Clinton’s Secretary of the Treasury during the 1990s, as President of Harvard during much of the Bush error, and more recently, as Director of the National Economic Council for President Barack Obama.
Summers is quite wealthy (his net worth is said to be in the tens of millions), has a reputation for being arrogant and closed-minded, and bears responsibility for many of the economic policy changes that set the stage for the Great Recession.
Nevertheless, because he has such a good relationship with Barack Obama, the president reportedly favors him as the successor to Fed Chairman Ben Bernanke, who is stepping down in January. There is a more qualified and credible candidate waiting in the wings – Fed Vice Chairwoman Janet Yellen – but the president’s heart is said to be set on Summers, though he has not officially nominated him.
Choosing Summers, in our view, would be a terrible mistake, and would rank high on the list of President Obama’s worst mistakes.
For decades, the Fed has been run by power-hungry, overconfident old white men who don’t tolerate or listen to criticism. The United States’ monetary and fiscal policy has suffered as a result. The last thing this country needs is more of that. As Michael Hirsh writes in The case against Larry Summers for The National Journal:
The man whom Summers once considered a model chairman, Alan Greenspan, offers an example of the dangers of being too certain of one’s views without much accountability. Back in 1994, Congress instructed the Fed to police unfair and deceptive practices related to mortgage loans. But because the chairman believed in minimal regulation, no rules were ever written; Greenspan quietly slapped down efforts by governors such as Ed Gramlich to warn him; and the Fed did little to intervene in the emerging subprime fraud.
Greenspan was in charge for a very long time – an unhealthy amount of time, actually – and he left behind an awful legacy, the extent of which has only become apparent with the passage of time. Greenspan’s successor, Ben Bernanke (who was appointed by George W. Bush and reappointed by Barack Obama four years ago) has not been much better. Like Greenspan, he is a neoliberal and an insider.
Bernanke’s reconfirmation vote in 2010 was the narrowest margin of victory for a Fed Chair nominee ever. Our own Senators Maria Cantwell and Jeff Merkley (who sit on the Finance and Banking Committees, respectively) voted nay on Bernanke’s reconfirmation; Senators Patty Murray and Ron Wyden voted aye.
The day before the vote, Senator Merkley issued a detailed and thoughtful statement explaining his decision to vote no. He said:
Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.
My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first.
Our nation is just beginning to emerge from the greatest financial crisis since the Great Depression, and there is no guarantee we will continue on the road to recovery over the long or short terms. Unemployment remains far too high, credit is unavailable to too many businesses, and families are plagued by falling home prices and high foreclosure rates. Even as we move forward with our efforts to get our economy back on track, it is critical we carefully examine what led us to this point.
For too many years, federal regulators turned a blind eye to signs of an impending financial crisis. Tricks and traps proliferated in the credit card and consumer lending industries. Predatory mortgage loans exploded, fueling an unsustainable housing bubble. Regulators lifted rules requiring banks to keep adequate capital, and a laissez-faire approach to securitization, derivatives, and proprietary trading encouraged excessive risk-taking on Wall Street.
As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.
Senator Merkley concluded by noting:
These failures are very relevant to the future. We need economic leaders who understand that the ultimate goal of economic policies and the key to meaningful economic recovery should be financially successful families, not oversized Wall Street profits.
Indeed, it should be recognized that although Wall Street prospered in the short-term from reduced leverage requirements, securitization of faulty mortgages, and the explosion of derivatives, Americans did not. The expansion that occurred from 2002 to 2007 became the first economic expansion in which working families were worse off at the end than at the beginning.
This is not a path that we can afford to travel again.
We are very proud of Senators Cantwell and Merkley for their votes against Ben Bernanke’s reconfirmation. The above statement from Jeff Merkley epitomizes his courageous record and his incredibly solid work as a United States Senator. He is one of the best senators we have, and it’s a real shame we don’t have a couple dozen more men and women just like him serving in Congress’ upper chamber.
Sadly, although the stock market has recovered and Wall Street is humming again, ordinary Americans are still grappling with the consequences of the Great Recession. Income inequality is worse than it has ever been. Tuition and healthcare costs have gone up while wages have remained stagnant. Many Americans still cannot find work, or lack the skills to successfully transition into a new position in a new field.
It is extremely disappointing that President Obama, who paints himself as a defender of middle income families, is leaning strongly towards asking the Senate to sign off on putting one of the architects of the Great Recession into the driver’s seat at the Federal Reserve. The position of Fed Chair is one of the most powerful in the country, and it should be held by someone who can thoughtfully craft and implement monetary policy. In other words, not Larry Summers.
Summers has been called brilliant, gifted, and talented, and we have no doubt he’s got a sharp mind. But he also has his flaws, chiefly his adherence to a neoliberal ideology that has caused tremendous damage to our country.
The prospect of a Summers nomination has the Senate Democratic caucus in almost open revolt. A third of the caucus has reportedly signed onto a letter urging the President to appoint Janet Yellen instead. Yellen would be the Fed’s first female executive, and is widely respected. She would probably be able to earn the support of the entire Senate Democratic caucus and most of the Republican caucus.
But the letter apparently did not move Obama, who still wants Summers.
Again, Summers’ nomination has not been announced, but the White House is said to have been quietly letting Senate Democrats know that Summers is the president’s choice – apparently hoping to tamp down pro-Yellen advocacy.
But so far, the White House’s attempts to lay the groundwork for a Summers nomination have been backfiring, much like the administration’s attempts to rally Congress to back a military strike against the Syrian regime. Three Democrats who sit on the Banking Committee have now signaled they will oppose a Summers nomination. One of them, not surprisingly, is the wise and courageous Jeff Merkley; the others are Jon Tester of Montana and Sherrod Brown of Ohio.
Without Merkley, Tester, or Brown’s vote, Summers’ nomination will not be able to pass out of the Senate Banking Committee without Republican votes, because Democrats only have a three vote margin. Progressive champion Elizabeth Warren also sits on the Banking Committee, and although she hasn’t voiced opposition to a Summers nomination yet, it’s hard to imagine she would vote aye, especially when her colleagues Jeff Merkley and Sherrod Brown are voting no.
Senator Maria Cantwell, meanwhile, has indicated she’s completely opposed to a Summers nomination unless she hears a genuine mea culpa.
(Cantwell does not sit on the Senate Banking Committee, but she is one of the Senate’s most authoritative voices on finance).
As she recently told the Seattle Post-Intelligencer’s Joel Connelly: “Nobody is going to get my support unless owning up to mistakes of the past… We need to usher in a new day. We need to usher in some daylight.”
Larry Summers, of course, is not known for his humility. I’m unaware of any occasion where he has accepted responsibility for his role in bringing about the worst financial crisis since the Great Depression… or for advising the Obama administration to respond to it with a stimulus bill that was way too heavy on tax cuts and not big enough to fully lift our country out of the recessionary gap it had fallen into.
Republicans don’t seem enthused about Larry Summers, either. Texas Republican John Cornyn, who is Mitch McConnell’s deputy, has made it clear he would not vote for Summers for Fed Chair. Senator Pat Roberts of Kansas was even more blunt, declaring last month: “I wouldn’t want Larry Summers to mow my yard.”
Yellen and Summers are not thought to be that far apart when it comes to the basics of monetary policy (although Yellen has a record and central banking expertise that Summers doesn’t). However, as Michael Hirsh argues, temperament ought to be a consideration for the job of Fed Chair, much as it is for a judgeship.
The Federal Reserve chairman wields such enormous power, with so little accountability, that he or she is said to be the second-most-powerful person in government after the president. Decisions are habitually made in secret. The job requires a person of great personal tact, subtlety, and self-control. It requires someone who knows how to build consensus at the highest levels for the right kind of policies—someone who possesses the maturity and character to admit error and shift course when needed.
The inability to admit error isn’t just a serious flaw, it’s a fatal flaw that can result in catastrophic consequences, as we have seen.
America needs a Fed Chair, who, as Senator Cantwell said, will usher in some daylight. The country would greatly benefit from a more transparent Fed led by a more thoughtful and humble chairperson.
Given what’s needed, Larry Summers doesn’t even merit inclusion on the short list for the position. President Obama would be wise to listen to Senators Merkley, Cantwell, Brown, Tester and others, and drop Summers from consideration.
If he goes ahead and nominates Summers, he will, in our view, damage his administration’s credibility and risk a bruising confirmation battle that has the potential to end in an extremely embarrassing defeat.