Tuesday, August 20, 2013

The Case Against Larry Summers As Fed Chair

I will admit upfront that I do not get into the personalities of the various Fed presidents; I couldn't tell you who's a dove or hawk, or who has strong verses weak growth projections for the economy.  But I can tell you the qualities that I'd like the next Fed chief to have.  First, a track record of being right about the economy and business cycle in general is a foregone conclusion -- especially when considering the current recession and slow recovery.  Secondly, the last thing that needed is a divisive character; what we do need is someone who has the ability to listen to all sides, develop a consensus and nurture that conclusion.  For that reason, Larry Summers is clearly not the right person for the job, while Janet Yellen is.

Let's start with who's been right and who's been wrong about the economy.  Larry Summers has a spectacular track record of being on the wrong side of many policy issues.  I'll let Barry over at the Big Picture provide the rundown:
•  He has consistently argued for privatization and deregulation of the financial sector;
• He oversaw the repeal of Glass-Steagall via the passage of the Gramm-Leach-Bliley Act;
• He approved the (previously illegal) merger between Citibank and Travelers;
• He oversaw (and indeed encouraged) concentration in the financial sector, thinking bulked up banks are a virtue. This led to the rise of the TBTF institutions (formerly known as mega-banks).
• He successfully fought Brooksley Born, then chair of the Commodity Futures Trading Commission, to rein in financial derivatives;
• He oversaw passage of the Commodity Futures Modernization Act of 2000, preventing ALL Federal regulation of derivatives; The CFMA also exempted derivatives from state insurance oversight and antigambling laws.
• Thanks to Summers, derivatives still have no minimum reserve requirements, no disclosure obligations, no transparency and no exchange listing / reporting requirements.
To put it more generally, Summers has argued for all the ingredients that led to the financial collapse of 2007.  That's just not someone who should be in a position of authority.

Let's compare that to Janet Yellen:

In interviews with more than a dozen people who have worked closely with Yellen, the portrait that emerges is of a careful and deliberate thinker who has been mostly right in her assessments over the tumultuous past six years of crisis, recession and grinding recovery.  She has been a strong intellectual force within the Fed, a tough taskmaster for staff and  single-minded in her desire to push down joblessness. She has been less inclined to wring her hands over the risks that the Fed’s easy money policies could create new bubbles or stoke inflation.  

The fact that she's been right about the current economic situation speaks volumes about skills.  Also consider this:

At the University of California-Berkeley, Yellen studied the crucial question of why labor markets don’t work like other types of markets. In particular, she looked at why, in a recession, people go without work rather than take a lower wage — of particular interest in the past few years of high unemployment.

At a time when unemployment is clearly the main problem facing the country and the economy, we have someone who is an expert in that very problem.

And consider her warnings about the housing bubble in 2007:

So when the leaders of the Fed gathered around their big mahogany table overlooking the National Mall on Dec. 11, 2007, Yellen was perhaps the most gloomy.

“The possibilities of a credit crunch developing and of the economy slipping into recession seem all too real,” she said, reading carefully measured words from a sheet of paper. The “shadow banking system,” the complex financial markets that funnels credit to Americans, was freezing up, she said, and the economy was likely to slow significantly.

The above statements show a high level of prescience about the US economy which few economists had.

Let's turn to the issue of "likeability."  The floating of the Larry Summers trial balloon was greeted with remarkably stiff Congressional opposition:

The Wall Street Journal reports this morning that roughly a third of Senate Democrats have signed on to a letter urging Barack Obama to appoint Janet Yellen as the next chairman of the Federal Reserve. It’s being widely assumed that Obama’s first choice is Larry Summers, who is opposed by a number of progressive economists for various reasons, among them his previous support for banking deregulation. The letter is not available — nor is a list of signatories, but you can assume it’s compromised of the liberal flank of the Dem caucus — and is being closely guarded by the office of its lead author, populist Senator Sherrod Brown.

The push from Senate Democrats on behalf of Yellen — who is currently the Fed’s board of governors vice chairperson and would be the first female Fed chair — is significant, because the next chair will obviously need a lot of support among Dems. The letter doesn’t actively oppose Summers, but the groundswell of support for Yellen to replace Ben Bernanke is an implicit demand that the White House pass over him and pick her instead.

Before getting out of the gate, Summers is drawing fire.  That's just not the way we should be doing business.

And then there is Summer's personality, which is described as combative and undiplomatic -- not exactly the leadership qualities we should be looking for in a Fed Chair.

Compare that with Yellen:

“Janet was very much a person who asks very probing questions, wants to understand kind of what’s below the conclusions,” said John Williams, who was head of research under Yellen and followed her as president of the San Francisco Fed. 

I think Yellen's primary drawback is she has less personal experience with the financial sector than is ideal for a Fed President.  But this time around, that might actually be a good thing as she doesn't have the super-close relationship with banks.

And finally, consider this point about Summers:

This post is the product of numerous conversations with Summers’s supporters who, to my continuing frustration, typically refuse to be quoted even when they’re just saying nice things about their former colleague. Given the centrality of their testimony to this process, however, it’s important to know what they’re arguing. So here are the key points they make — points I’m passing along, to be clear, without endorsement:

Think about the emboldened statement.  His friends are basically saying this: "he's a really good guy.  Brilliant economist.  Wonderful mind.  Just don't quote me on that."  There's something fundamentally wrong with that development. 

I used to work with a guy who people would universally describe in the following way: he's a genius and he's an asshole.  And this guy was both.  Financially, he had one of the sharpest minds anyone had ever met.  But he was without a doubt, the biggest asshole anyone had met.  Larry Summers strikes me the exact same way.  Yes, he's brilliant.  But he appears to be distinctly lacking in people skills, which is something a manager cannot have.

So we have the following choice:

Janet Yellen was right about the recession and recovery, is a well-respected economist, has the ability to develop consensus and has extensive experience in the Federal Reserve System.

Larry Summers endorsed policies that created this mess, is well-respected but also feared and has all the people skills of Attilla the Hun.

Why is there even a debate?