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Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's unconventional perspective on world, national, and local politics.

Saturday, September 14th, 2013

Larry Summers’ nomination for Fed Chair isn’t official yet — but it’s already in trouble

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.

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3 Comments

  1. The “Fed­er­al Reserve” is a pri­vate­ly owned bank whose inter­est is to make mon­ey for its own­ers. Let’s abol­ish the “Fed­er­al Reserve” and let Con­gress get back to print­ing our Amer­i­can dol­lars! It’s time we stopped let­ting them (this pri­vate­ly owned bank) print and steal our dol­lars. Lar­ry Sum­mers helped destroy our economy.

    Edi­tor’s Note: This com­ment has been edit­ed to com­ply with NPI’s Com­ment­ing Guide­lines.

    # by Gene Brown :: September 15th, 2013 at 7:14 AM
    • Gene, the Fed­er­al Reserve is actu­al­ly a qua­si-pub­lic cen­tral bank. In oth­er words, it’s a pri­vate and pub­lic insti­tu­tion. The Pres­i­dent appoints the board of gov­er­nors of the Fed­er­al Reserve, and they serve four­teen year terms, except for the Fed Chair, who serves a four year term. So you’re part­ly cor­rect about the Fed being pri­vate. But it’s also pub­lic. It’s con­fus­ing, I know.

      If the Fed­er­al Reserve Sys­tem is abol­ished, some­thing would need to take its place. It’s not an insti­tu­tion that can sim­ply be dis­ap­peared. What do you pro­pose replac­ing it with? And please don’t say Con­gress… Con­gress is a leg­isla­tive body. It has over­sight over mon­e­tary pol­i­cy as the leg­isla­tive branch of our gov­ern­ment, but it was nev­er intend­ed to car­ry out mon­e­tary policy.

      # by Andrew :: September 15th, 2013 at 4:21 PM
  2. Even Greenspan has acknowl­edged some of the dam­age done under his watch. Not so Sum­mers, as Cantwell points out.

    If Sum­mers is indeed cho­sen, hope­ful­ly pro­gres­sives will help defeat Oba­ma’s selec­tion, rather than remain silent for such a dis­grace­ful choice for Fed Chair.

    At this point, Oba­ma pick­ing Sum­mers can­not sim­ply be called a ‘mis­take’. It would be an all-too-inten­tion­al gift to the worst prof­i­teers from Main Street’s eco­nom­ic ruin.

    Oba­ma deserves a drub­bing if he puts this for­ward. There is next to nil cred­i­bil­i­ty for this admin­is­tra­tion to lose. Let’s acknowl­edge pro­gres­sives and con­ser­v­a­tives alike have a com­mon ene­my in such a selection.

    # by Alva :: September 15th, 2013 at 11:30 AM

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