Senate Democrats Unnecessarily Force Summers Out

Larry Summers is out of the running for chairman of the Federal Reserve after he notified the President yesterday “that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.” Summers is right here. After Jon Tester (D-MT) announced Friday that he would vote against Summers in the Senate Banking Committee, it became clear that his confirmation process would be extremely difficult. His decision to bow out saves an ugly intraparty fight between the Administration and Senate Democrats. It was a fight that the President should’ve won, but wasn’t going to and Summers knew it.

To start, Obama should’ve nominated current Fed Vice-Chair Janet Yellen from the beginning. It should’ve been an easy decision. But the President loves Summers and was seemingly set on choosing him from the start. It wasn’t the optimal choice, but Summers would still have made an excellent Fed Chair. This is what makes it so absurd that Tester and other liberal Democrats were going to vote against him.

Larry Summers withdraws from the Fed Chair search.
Larry Summers withdraws from the Fed Chair search.

Summers is, by all accounts, a brilliant economist. However, many liberals were wary of his prominent role in the repeal of Glass-Steagall and the deregulation of the derivatives market in the late ’90s. There’s no question that Summers was a leader in making those decisions, but Summers has also learned from them. He supports banks holding greater levels of capital, one of the focal points of Dodd-Frank. In addition, there’s not much information on Yellen’s regulatory beliefs. She’s an economist by trade, not a regulator. But skeptics of Summers inherently believe that she would be a tougher regulator than him. As Josh Barro pointed out on Twitter last night though, if Republicans thought that was true of Summers, they would’ve supported him as well. But that hasn’t happened either. The fact is that Summer would in all likelihood have implemented Dodd-Frank in a similar manner to how Yellen would.

Other arguments against Summers is that the nomination of an elite Democrat would politicize the Fed too much. But this argument is overblown. The Fed is already a politicized institution and nominating Yellen over Summers wouldn’t change that.

One of the least covered areas of this debate has been Yellen and Summers views on monetary policy. Yellen is considered more of a dove, but only slightly more. Markets perceive a larger difference between the two than may actually exist.

Finally, Yellen’s proponents argue that Obama has done a poor job appointing women to economic positions. This is true, but it’s not a strong enough reason to oppose Summers.

For all those reasons, Yellen is a better choice. But she’s only slightly better. Summers would still likely do an excellent job as Federal Reserve chairman. Both candidates should have had no problem receiving Democratic support. Instead, liberal Democrats jumped on this as a chance to fight the President. But why? This really does weaken Obama: he can’t even get his own party to support an extremely strong candidate in Summers. Does he have any sway on Capitol Hill at all? It’s increasingly looking like he doesn’t. This perceived weakness hurts not just Obama, but Democrats as a whole in trying to pass other legislation. A weak President is bad news the Democratic party.

This is why it was absurd for Democrats to vote against Summers. They may get a slightly better Fed Chair in Yellen (or maybe a worse one, if Obama nominates someone else) in return for showing that the President doesn’t even have sway in his own party. Does that sound like a smart move for Democratic senators and the Democratic party? It sure doesn’t to me.

Have Fed Chair Odds Really Changed?

First, current Federal Reserve Vice-President Janet Yellen was President Obama’s likely selection to take over for Ben Bernanke when his term expires next year.

Then, Ezra Klein reported that the race was between Yellen and Larry Summers with Summers the current odds-on favorite.

Then, Senate Democrats revolted and the liberal blogosphere exploded against Summers.

Last Friday, Klein posited that a dark horse candidate could emerge, such as Roger Ferguson.

Let’s take a moment to calm down, ignore “inside sources,” and look at what has really changed over the past couple of weeks.

1. Liberals are as hardened as ever against Summers
2. Summers’s few statements on monetary policy indicate he’d be more hawkish than Yellen.
3. WSJ analysis showed that Yellen’s economic predictions have been correct more than anyone else’s at the FOMC.
4. Wall Street overwhelmingly wants Yellen over Summers.

Numbers 1, 3 and 4 there overwhelmingly favor a Yellen selection. For most liberals, number 2 would also work in Yellen’s favor, but Obama’s recent interview with the New York Times indicates that he’s still concerned about inflation and may want a more hawkish Fed Chair, as Summers would be.

So, given all that, how can Yellen not be the favorite? Klein is well-connected within the Administration and if anyone had an inkling on which direction Obama was leaning, it’d be him. But it’s worth remembering how secretive this selection is. Here’s Wonkblog’s Neil Irwin just a few weeks ago:

The most important thing to know at this stage is this: The people who know aren’t talking, and the people who are talking don’t know.

For a decision of this much importance and sensitivity, the president is likely to rely on a very small number of senior advisers to come up with a short list of candidates and advise him on their strengths and weaknesses. For the Fed chairmanship, the process is reportedly being led by treasury secretary Jack Lew, and likely also includes Denis McDonough, the chief of staff. It probably includes Gene Sperling, the top economic adviser in the White House, and possibly Jason Furman, who has been nominated to lead the Council of Economic Advisers. Perhaps a close Obama adviser like Valerie Jarrett gets a seat at the table, and somebody from the ever-discreet presidential personnel office in the White House.

Whoever makes that exact list, those are the only people who actually know the state of play on the decision — who’s up, who’s down, what attributes the president really cares about. The details of the decision-making will remain closely held even within the White House until an announcement is imminent. And those on that short list of people actually in the know will reliably clam up and reveal absolutely nothing when the topic comes up, whether it is with a former colleague outside government or a reporter, even when off the record.

Former White House economic adviser Jared Bernstein said the same thing last week:

No one knows who it will be.  Sure, there’s a short list and Summers and Yellen top it–btw, I wrote those names in no other order than alphabetical.  I would very heavily discount anything you read that says anything much more than what I’ve just told you.

I’m actually a bit surprised to see Klein buying into all of this back-and-forth about who’s leading the race. Maybe he has great sources or the Administration was using him to see potential reaction to choosing Summers. Either way, the developments over the past few weeks would seem to increase the chances of Obama choosing Yellen, not hurt them. Will Yellen be the eventual selection? Maybe. Maybe not. We’re not going to know for a while. But don’t discount her because a few rumors hint at the President leaning in a different direction. The fundamentals still point to her and if anything, have only improved over the past few weeks. She’s still the odds-on favorite to be the next Fed Chair.