WASHINGTON – President Obama doesn’t like getting jammed by liberal groups, or anybody for that matter, and that’s why he entertained the possibility of naming controversial Harvard economist Lawrence Summers the next chairman of the independent Federal Reserve. In Washington, launching a trial balloon is a time-honored tradition, and the test flight for Summers’ appointment popped last weekend after three Democrats on the Senate Banking Committee said they would not support him.
On Monday, the markets soared on the knowledge that Summers was out of the running, and that the quantitative easing (The Fed’s stimulus program of printing money to buy U.S. and mortgage debt) he had expressed skepticism about was safe, at least for now. It’s hard to understand why Obama wanted Summers in the first place knowing that as Fed chair he might pull the plug on quantitative easing. Given the weakness of the economy, why would Obama want to empower someone whose policies could threaten the recovery?
Much has been made of the personal relationship Obama has with Summers, which goes back to the 2008 campaign, and that’s all well and good, but should never have merited him the Fed chairmanship. The runner up is Janet Yellen, currently vice-chair of the Fed and the top pick of more than 350 economists, who signed a letter to Obama urging him to appoint Yellen, calling her “an extremely effective leader.” Congressional Democrats back Yellen, and women’s groups are behind her as a history-making first for the Fed.
It’s been more than three months since Obama unceremoniously showed current Chairman Ben Bernanke the door, saying on the Charlie Rose show in June, “He’s already stayed a lot longer than he wanted or he was supposed to.” It was an inelegant way of putting Bernanke on notice, and it initiated a long period of speculation about whomever Obama might name, unsettling the markets and adding more uncertainty about future economic policies.
Bernanke is a student of the John Maynard Keynes and the Great Depression, and he put his weight behind a monetary policy that would provide economic stimulus. Summers was on the other side from day one in the Obama administration, arguing for a smaller stimulus package from Congress, and then later questioning the Fed’s stimulus policies. He presumably would have continued in that tradition should he have gotten the Fed job.
From the perspective of Keynesian economic stimulus policy, Yellen would be the next best thing to Bernanke, yet Obama has kept her guessing about her future for months now. Why is that? Perhaps her age, 67, is an issue, but then another candidate whose name has surfaced, former Fed board member Donald Kohn, is 70, so Obama apparently doesn’t have his heart set on getting someone in their fifties, like Summers. The Fed is not the Supreme Court where the goal is to nominate people who can serve for decades.
Obama is no economist, and he is one of the least market-attuned presidents of modern times or he wouldn’t have said what he said publicly about Bernanke, and he would be more sensitive to the vacuum he has created around the Fed and its policies. Outside of Washington, people are probably not tuned into the in-fighting over who will take over the helm of the Federal Reserve. But it matters whom Obama chooses, and the kinds of policy perspective they will bring to the job. Bernanke saved the day, putting in place the supports that avoided a full-scale collapse into Depression. Four years later, with the economy limping, Obama’s decision on a successor will be anti-climactic, but it still needs to be made, and soon.