WASHINGTON — The president’s decision on whom to nominate as the next Federal Reserve chief appears to be coming down to Larry Summers and Janet Yellen. My newspaper colleague Ezra Klein describes well what seems to be the state of play here: The president (or at least the people close to him) is leaning toward Summers, but assessing just how stiff the blowback will be if the polarizing former Treasury secretary gets the nod.
Let’s back up a minute. What are the traits we really want in a successful Federal Reserve chairman, and what do we know about Summers’ and Yellen’s capabilities and limits?
First things first: No one is really qualified to be chairman of the Federal Reserve until they’ve done the job for a while, and some not even then (cough, G. William Miller).
It is in many ways an impossible job, requiring a person to be simultaneously a skilled economist, crisis manager, politician, administrator and regulator. Ben Bernanke himself was in key respects underqualified when he was nominated in 2005.
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That is not a problem Yellen or Summers would face. Both are, on paper, extraordinarily qualified, having spent many years at the highest levels of economic policymaking. But what do we know about their specific skills and weaknesses on each of those frontiers?
Here’s an analysis, based on years of closely watching them and conversations with those who have worked for or with them.
Above all else, the Fed chief needs to make the right calls: when to raise interest rates, when to buy more bonds or fewer. And that requires excellent macroeconomic judgment. Both Yellen and Summers are accomplished academic economists with a long track record of publishing journal articles on macroeconomic topics.
Yellen is one of the key engineers of the Fed’s current strategy of pairing monthly bond purchases with “forward guidance” to explain to markets the future path of policy.
Summers has been largely quiet about his views on the recent direction of monetary policy, no doubt in part to maintain viability as a possible nominee for Fed chairman (though the Financial Times has reported he expressed skepticism about the effectiveness of quantitative easing at a private conference recently).
Add it all up, and we just don’t know in advance how a Summers Fed might differ from the Bernanke Fed, though we do know Yellen is almost certain to continue with the strategy she helped put in place.
When the financial crud hits the fan, the Fed chief invariably plays a crucial role cleaning it up, as Bernanke knows all too well. The White House, according to Klein’s reporting, tends to view Summers more favorably on this count.
It is true he was a key member of the team that led the response to international crises in the late 1990s. (However, his presence on the famous Time magazine “Committee to Save the World” cover may seem cringe-inducing now.)
Yellen was at the San Francisco Fed during the darkest days of the Fed’s response to the current crisis, not among Bernanke’s inner circle in Washington and New York making the nitty-gritty, middle-of-the-night decisions on whether to bail out this investment bank or that insurance company.
People who have worked with her describe her as exceptionally careful and deliberative — usually desirable qualities in a central banker.
The question is whether she could make the fast decisions with imperfect information that are inherent to responding to a crisis. It’s worth adding that Bernanke had no real relevant experience in this area and has acquitted himself remarkably well.
The Fed chief must navigate the shoals of politics, representing the institution on Capitol Hill and with the White House. Summers has more experience in this aspect, having served as Treasury secretary and chief White House economic adviser.
That doesn’t necessarily mean he will be better at it; he has a frequently abrasive personality that has earned him enemies on the Hill over the years. There has already been a surprising amount of blowback from senators to his potential nomination, including a tweet from Sen. Jeff Merkley, D-Ore., that a Summers nomination would be “disconcerting.”
But it’s also worth noting Yellen has had a lower profile than Summers over the past 15 years, and thus been less subject to the kind of partisan maw that Fed chiefs find themselves in the middle of. In three years as vice chairwoman of the Fed, Yellen has not testified before Congress a single time.
Indeed, the last time she did, in her confirmation hearing to become vice chairwoman in July 2010, she bungled her response to the first question. Sen. Richard Shelby, R-Ala., pointed out that many of the banks Yellen regulated as president of the San Francisco Fed had failed, and asked what role she thought a breakdown in regulation played in those failures.
She began her answer, “Working with other regulators, I think that our regulatory oversight was careful and appropriate,” prompting Shelby to interrupt her, seemingly astounded she was defending pre-crisis bank regulation.
Yellen recovered fine, acknowledging the failures of pre-crisis bank regulation, but it was a small example of how she would need to work on navigating minefields in testimony if named Fed chief.
In short, Summers has pre-existing sour relations with some lawmakers, but also less of a learning curve.
The Fed chairman is the ultimate authority over a sprawling, complicated Federal Reserve system, encompassing 12 banks and 18,000 employees, responsible for everything from regulating banks to managing the payment systems through which trillions of dollars flow each day.
Yellen has a clear edge on experience, having served as president of the San Francisco Fed and vice chairwoman of the Fed system; in that role she has had particularly responsibility for overseeing “reserve bank affairs,” such as reviewing and approving the banks’ budgets.
Summers has administered large organizations, namely the Treasury Department and Harvard University, but his experience at Harvard, where he resigned under pressure, is probably not a line on his résumé he wishes to emphasize.
Incidentally, for the Fed economists and other staff who work directly for the chair, either would likely prove a demanding boss. Both have reputations as expecting much from subordinates.
Much of the immediate criticism to a possible Summers nomination, particularly from the left, has boiled down to this: He was part of the Clinton-era deregulatory zeal of the late 1990s that helped cause the financial crisis. And that’s true.
But, as Klein reports, the sense in the White House is Summers is a changed man, and is inclined toward a more restrictive view of what financial firms should be able to do (and how much capital they need to hold) than he was in the past.
One reason to give them some benefit of the doubt: Summers was a key White House staffer as the Obama administration pushed the Dodd-Frank financial-reform act, so if he had been a force for loosening the law in internal debates, the president and his inner circle would be well aware of it.
Yellen, meanwhile, is known more for her role shaping monetary policy than as an architect of bank regulatory policies at the Fed, and would likely embrace continuity of the strategy of pushing for higher capital requirements and other restrictions on megabanks.
The post-crisis Fed chair faces a harder job now than when Bernanke took on the job eight years ago. And in making his choice, President Obama will have to weigh which of these roles — and which type of background — really matters.