Is Obama Really Going to Pick Larry Summers to Replace Bernanke?

While the common wisdom has been that dovish Fed vice chair Janet Yellen was the modest favorite to replace Ben Bernanke, the summer buzz in Washington is that the job is Larry Summers’ to lose. While that well may be, I am not sure why.

Take a recent pro-Summers Financial Times commentary by my friend Edward Luce. Luce writes that if President Obama “wants to fill the job solely on merit, Mr Summers ought to have the edge. … The most important quality is intellectual leadership – something Mr Summers would offer in greater abundance than the others.”

Yet the bulk of the piece actually makes the anti-Summers case quite well, mentioning Summers’ a) reputation as being abrasive and charmless, b) central role in the financial deregulation of the 1990s, and c) 2004 resignation as Harvard University’s president “after seeming to cast doubt on women’s aptitude for maths.” And let me add, Summers’ role as architect of the Obama fiscal stimulus plan, which GOPers see as a monstrously expensive failure.

But Luce thinks Summers’ economic IQ and “neutrality” on monetary policy would trump those negative factors.

Maybe. Maybe not. Just imagine the confirmation hearing if GOPers decide to go hard at Summers. In addition to the stimulus:

1. Tired of Team Obama portraying them as anti-women, Rs would surely bring up the Harvard controversy. A delicious turnabout for GOPers, not to mention the subtext of Obama passing over qualified women like Yellen and Christina Romer for the Fed job — perhaps the most powerful job in the world other than US president — in favor of Summers.

2. Tired of Team Obama blaming them for the Financial Crisis, Rs would surely conduct a thorough reexamination of the Clinton administration’s housing policies and their role in the collapse. Summers was at Treasury throughout the Clinton years, including serving as Treasury Secretary. And this would likely be in addition to Elizabeth Warren grilling Summers about financial deregulation. (And if Warren has any thoughts about running again Hillary Clinton, that would be a good time to demythologize Clintonomics.)

3. Republicans might also make a big deal — call it crony capitalism, call it the revolving door — of Obama appointing a former Wall Streeter (Summers made millions working at hedge fund DE Shaw) to regulate the megabanks. And this is in addition to having a banker at Treasury, Jack Lew.

4. Not sure Rs want monetary “neutrality” as much as a Fed chair to disavow the central bank’s QE policies.

Given a potentially fiery hearing, a little charm from the nominee might come in handy.

The strongest argument for Summers might be this one from Luce: “Mr Bernanke’s successor will need to reassure the markets that he or she is tough enough to raise interest rates when necessary. Much as a dovish president might feel under pressure to order air strikes, Ms Yellen’s reputation could push her to tighten too soon.”

Of course, Romer is as dovish as Yellen, if not more so — though without the reputation — and has the warm personality that Summers apparently lacks. And her knowledge of the Great Recession makes her sort of the Dem version of Bernanke. She just doesn’t come off as partisan as Summers, though certainly she would have to answer some tough questions about her time in the Obama White House.

So even if Team Obama thinks Summers the best choice on merit, his nomination potentially invites a nasty political fight that brings up all sorts of issues — from gender to the role of Clintonomics in the Financial Crisis — that Dems might wish to avoid. If Summers is confirmed, it could be by an awfully close margin, further politicizing the central bank. Could Summers really be a strong chairman and persuasive dove under that scenario? If not, what is the upside for Obama picking him?

At Politico, Ben White offers an expanded Dem defense of a Summers pick:

Here is a top Democrat making the case for Summers (and no, it’s not Summers himself or someone who reached out on his behalf): “He’d add substantial international expertise to an economic team whose depth of experience is clearly on the domestic side. In a highly connected world where economic risks are as likely to emanate from Beijing or Brussels as from Bakersfield, that’s something the White House has to consider a strength.

“With Geithner gone, Bernanke leaving, [David] Lipton at IMF and [Michael] Froman at USTR, he’s the only veteran of the financial firefights around Mexico (‘94), Asia (‘97-‘98), and the aftermath of 2008 who is ready to step up. While that world seems reasonably quiet right now, the White House doesn’t underestimate the risk of another ‘event’ in the next 3 years that could undermine the recovery. … So, LHS is a battled tested veteran who knows his way around the international financial system like no one else. Hard to discount that. As for why now, I have no idea but the White House shouldn’t let this drift into fall. Any confirmation will be tough (even Bernanke’s reappointment was harder than it should have been) and you need to give the Senate time to chew it over.”

  1. Joseph Eagar

    I doubt Obama or his top advisers are itching to appoint Larry Summers to the Fed.  The man’s reputation for abrasiveness would not go over well with the FOMC, I think.

    That being said, if Obama feels he owes Summers he may do it.  There’s also a political element; there’s always the temptation to appoint a partisan Fed governor who will use monetary policy to manipulate presidential elections.  Janet Yellen would never do that; Larry Summers might (at least if Hilary Clinton runs in 2016; by all accounts, Summers believes in the Clintons, and he might be willing to risk a little inflation to help get Hilary elected.  Or not; this is all conjecture, and I’m not really sure if Summer’s arrogance and conceit go that far.  The man probably wouldn’t go so far for any other Democratic candidate).

  2. J Climacus

    “…perhaps the most powerful job in the world other than US president…”

    and yet it is an unelected position. Trying to read the tea leaves to determine who the elites will appoint our next financial master is an exercise for monarchies and other tyrannies. That’s its happening here is too depressing for words. 

  3. BrentB67

    James, even if the republicans raised every issue you mention during Mr. Summers’ confirmation I am not sure it matters.

    If a republican tree falls in a forest of reporters nobody will hear about it anyway. The objections will be criticized as republican obstruction of President Obama’s appointee  to the Federal Reserve solely because of President Obama’s race. Case closed. 

  4. Brian Clendinen

    My favorite economist (Arnold Kling)  when it comes to banking regulation and monetary policies who is a die hard libertarian has Summers as his ideal pick for the job. So I actually agree Summers is the best pick for any person who has libertarian leaning on economic issues. From everything I have read by Summers and interviews with him he is by far the best candidate. The problems I have with Summers have to do with his opinions on subjects outside of his monetary policy positions. Summers has sound extermly conservative positions on monatary policy that even Milton Freedom would whole heartly agree with.

    So if Obama does do this, this would be only the second time I would ever have applauded any of the presidents policies in his capacity has an elected offical.

  5. Steve C.

    As a veteran of all those financial firefights, maybe he should “just fade away”.

  6. Scooby

    Summers is so bad, even the left publication The Nation wrote this about Summer’s time in Lithuania:

    in 1990, when Summers first arrived, Lithuania’s suicide rate was 26.1 per 100,000 and falling. Just five years after Summers got his hands on Lithuania’s economy, life became so unbearable under the economic transition that the suicide rate nearly doubled to 45.6 per 100,000, worse than any other ex-Soviet republic in transition. In fact, it was the highest suicide rate in the world, suggesting something particularly harsh and brutal about the economic transition in that country as opposed to the others, where suffering and pain were common. Things got so bad that in 1992, after just two years of Summers-nomics, the traumatized Lithuanians voted the communist party back into power, the first East European nation to do so–even though just a year earlier Lithuanians actually died on the streets fighting communism.