Obama, Congress and the next Federal Reserve chair

Larry Summers

It was always going to be peculiarly challenging to get a majority of US Senators to confirm Larry Summers as the next head of the US Federal Reserve. I am in Washington this week, and what is most surprising to people here is that the Summers' candidacy lasted as long as it did.

One lesson is that President Obama really, really, wants "one of his guys" to run the Fed (and yes, the people who fit this description are all guys). We don't yet know whether he has given up on that goal.

Another conclusion you could draw is that when it comes to the financial system, many Senate Democrats are happier fighting the last war than worrying about the next one.

Janet Yellen was quicker to see the seeds of the 2008-9 financial crisis being planted than Larry Summers was. But today, the financial imbalances that worry people most are the ones coming from the super-loose policies of the Federal Reserve.

When it comes to those policies, it is Yellen - not Summers - who seems to be the true believer.

True, Summers' enemies on Capitol Hill are a broad church. Some Democrats have hated him ever since a politically incorrect memo about the environment was written in his name while he was chief economist at the World Bank.

Financial crisis

But what seems to have damaged him most in his bid for the Fed is his association with the liberalisation of US financial markets when he was working for President Clinton, including the moves to free up investment banking and the trade in derivatives. (Full information: I was working for him at the US Treasury when this was happening.)

Summers' enemies say these reforms helped pave the way for the financial crisis, by allowing enormous imbalances to build up in the under-regulated parts of the system, including the market for credit derivatives.

The then Fed Chair, Alan Greenspan, had argued strongly that the investors in these parts of the market could be trusted to look after their own interests. He was wrong, and the Clinton Treasury is fully implicated in that mistake.

By contrast, Janet Yellen has a record as someone who sounded the financial alarm relatively early. That makes her a much more popular choice in the president's party.

She is also very well qualified for the job. Even the academic heavyweights who came down on Summers' side have said that she would also be a strong choice.

President Obama knows all that. He also knows if he doesn't appoint Yellen, he will seem to have gone out of his way not to appoint the first woman in this crucial job. Even fans of Summers might be uncomfortable with that.

So, global investors might be right to think that Janet Yellen as chairman is now a sure thing. They are probably also right to consider her the more "dove-ish" choice.

Though Summers has been tight-lipped about monetary policy since the start of the crisis, Yellen seems to have fewer reservations about the Fed continuing to have a super-loose policy stance - with or without "tapering". She is also more of a true believer when it comes to the value of forward guidance.

Plan C

As I mentioned at the start, that does not necessarily make her the safe choice right now, at a time when many worry about the distortions building up in the financial system as a result of all this cheap liquidity.

But, President Obama may be less worried about that side to Janet Yellen than the simple fact that he does not know her.

Whatever the truth, he cannot be entirely comfortable with her as Fed chair or he would have have nominated her already.

The word is that Mr Obama tried quite hard to persuade Mr Bernanke to stay in the job. He also tried to get former Treasury Secretary Timothy Geithner to put his hat in the ring.

It is probably too late, now, for the president to revisit these options. It may also be too late for him to appoint his "own man". But having lost Summers, I can't help thinking Mr Obama will spend some time looking for a Plan C.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 15.

    JfH and toryboy
    Quite correct - the lunatics are still in charge of the asylum.
    The parasitic leeches in the global Finanical Services and their place people in (un)representative democratic legislatures have run us into the ground to keep the illusion of continued inflated asset prices and failed doctorine alive.
    FDR would have dealt with them by now.

  • rate this

    Comment number 14.

    No individual will make the slightest difference if the role is to prop up the failed, corrupt neo- liberal economic system that has been a disaster for the people's of the world since the Thatcher - Reagan revolution.
    A complete 'new model' international economy is required if we are to avoid the mistakes of the past.
    The IMF, WTO and World Bank need to be swept away - urgently.

  • rate this

    Comment number 13.

    Cant agree more with the sentiment below In addition I would say get someone who is comitted to returnign to the godl standard and sees the sense in deflation.

  • rate this

    Comment number 12.

    If they appointed someone who hasn't a clue at all, will they do a better job? Arguably so.

  • rate this

    Comment number 11.

    A lucky escape from Larry Summers . . . ?


    . . . but as he says it probably doesn't matter anyway.

  • rate this

    Comment number 10.

    Both Carney and Bernanke have fallen into the inescapable trap of preserving the money lenders at the cost of the economy & the people.

    Both need to be locked up.

    We must de-leverage the debts properly - the Fed has done some but their QE is insane whilst the UK has done none - even the reverse.

    It is economic insanity to push house prices up and then make comments about being 'vigilant' -NOT!

  • rate this

    Comment number 9.

    Ben Bernanke is pursuing a policy which for most people is a clinically insane - it ONLY saves the zombie banks!

    No one can say why the whole global economy should be destroyed just to save the money 'changers in the temple'.

    That is why nobody wants to replace BB.

    What's more no one can show that if the zombies are preserved then there is a way of engineering a real recovery.

    The Fed are MAD!

  • rate this

    Comment number 8.

    US bankrupt:
    US TRILLIONS wiped out. Families lost homes;businesses collapsed & massive unemployment resulted. Millions are on food stamps (over 50M Americans).
    Who to blame? The FED & US Treasury - able to print so much money, flooding the market with cheap credit, multiplied many, many times via fractional reserve banking.
    Q. Where will Obama find another chair for the Federal Reserve?

  • rate this

    Comment number 7.

    Who would want the job?
    US is bankrupt - world’s biggest debtor.
    As at 2013, total national debt = $16.805 TRILLION which is larger than the country’s GDP. When we include the unfunded liabilities, some calculated the debt to be over $100 TRILLION. It's impossible to repay US debt even if govt raised taxes 250%!
    So, US bonds issued by US treasury are “JUNK”.

  • rate this

    Comment number 6.

    Could be working up a special edition of the Apprentice. Hey Mr PC is it so awful if the broad gets the job.

  • rate this

    Comment number 5.

    Who would want the job?
    Prop trading desks invest for their banks’ own accounts. This was something that depository banks were forbidden to do by Glass-Steagall Act, but then came Gramm-Leach-Bliley Act, which repealed portions of Glass-Steagall = massively risky $700 + TRILLION speculative derivatives.
    You don't need to be a financial wizard to hear the time bomb ticking.

  • rate this

    Comment number 4.

    Obama, Congress and the next Federal Reserve chair:
    Please take the time to read this letter, signed by several members of Congress:
    "...financial imbalances that worry people most are the ones coming from the super-loose policies of the Federal Reserve."

  • rate this

    Comment number 3.

    The best candidate is always the one who tells the Emperor he has no clothes on!
    It's the credit bubble 'stupid'.
    Obviously Carney doesn't cut the mustard because he tells us and politicians repeat it, that there is no housing market bubble because relative house prices in the current market aren't moving much?
    The problem is in the cheap credit bubble - mother of all property crashes to follow

  • rate this

    Comment number 2.

    Maybe he will finally turn to someone who isn't tainted from head to toe as being a primary architect of the huge, corrupt, no-tax-for-the-wealthy mess we live in today. That would be a start. He's a champion of deregulation and a paid Wall Street consultant. Tell you what - appointing him is be like giving an arsonist a box of matches and the keys to a fireworks factory. Deluded in every sense.

  • rate this

    Comment number 1.

    much as I resent the excessive amounts of US QE which have damaged pensions, savings etc etc..... I think the BRICs are yelling for Yellen after the chaos of the last few weeks...anyway lost Summers is win win for the world...anyone else.....


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