Friday, 2 August 2013

FEDERAL RESERVE: YELLEN versus SUMMERS


I will state up-front that I do not like Larry Summers. 

But, given that I've never met the man in the flesh, you'll have to trust me when I say that that this dislike is not personal and entirely based of what is known of Summers. 

Very recently, Obama, seemingly unhappy with the search for a new Federal Reserve Chairman turning into a rather nasty match between Summers and Yellen supporters (thanks in no small part to Ezra Klein's "Larry Summers is the Front-Runner"), has mentioned a former Fed Vice Chairman, Donald Kohn as a possible, an example of someone he is considering and who was not even on the short-list often mentioned... 
To me, though, this is starting to sound a lot like "Anyone But Yellen"... It's not that Obama doesn't like Yellen, as far as I know - according to Klein, he simply doesn't know her - it's that he seems pissed off his buddy Summers isn't better liked and thus Yellen's candidacy becomes an unintended victim, collateral damage. 

But, if that is what is going on, it would be extremely disappointing. The Obama presidencies certainly haven't turned up how I'd have hoped. One thing, though, that has remained true since he was but an outside candidate at the Democratic National Convention was that Obama is smart and fair-minded. 

He may not have had the pleasure of working with a reasonable opposition. He may have had to deal with the worst crisis since the 1930s. He may have had to wind down unpopular foreign wars. None of this is easy. 

But none of this would justify indulging in nepotism. Let's do a quick pro & cons.

1- YELLEN

Pros: Tons of experience; best forecaster out of the Fed's Open Committee.

Cons: Possibly too attached to present-day policies i.e. she'd follow Ben Bernanke's footsteps and, if you'd like to see greater easing (or less?), she might disappoint you.

2- LARRY SUMMERS

Pros: Erm. Is "brilliant"? Friendly with lots of White House folks? Close to some big Wall Street guys (though that last one will warrant further debate). Has a penis a.k.a "gravitas"? Got Brad DeLong totally on his side (his 'slight preference' for his friend and colleague mutated into a cry for love: "why does the Left think Larry Summers ia a right wing hyena?") and Tyler Cowen marginally so (pun intended).

Cons: Where to begin?

Daniel Khuen, in reply to Brad DeLong, thinks 4 items explains the Left's dislike of Larry Summers: To quote "(1) female scientists, (2) Cornel West, (3) Alan Greenspan/Bob Rubin on a Time magazine cover (and they think the trio's principal purpose was making bankers rich), and (4) pollution in Africa".

I think this is not too far off the mark but a bit glib. Let's get into this a bit more...

First, things like the dispute with Cornel West, the talk on female scientists and the supposed "joke" about pollution in Africa paint the portrait of an asshole, possibly a conservative asshole but that's not the point. Let's just say that Larry Summers isn't exactly a smooth operator when it comes to people he doesn't respect/doesn't feel he needs to earn the respect of.

But this is not the most important, by far. After all, who cares if the Fed Chairman is an asshole on a personal level? I don't have to work with him and, as long as he does his job of reviving the economy, fighting unemployment and controlling inflation, I don't care much (his work colleagues and employees under him might have a different calculus).

What matters above all is Daniel Khuen's point number 3 - but taken seriously. Larry Summers presided over the big 1990s deregulation fiesta. And he hasn't shown any indication that he now considers this bit of policy making a big mistake. To quote Felix Salmon extensively:

"The choice of Summers would also be the clearest signal yet that Obama feels that he did what needed to be done to deal with the financial crisis, and that financial reform is, for the rest of his presidency, going to be a very low priority. Summers is a deregulator in his bones; he didn’t like the consumer-friendly parts of Dodd-Frank, and his actions have nearly always erred on the side of being far too friendly to Wall Street. (....) [T]here is no chance whatsoever that he would take a robust leadership role with respect to the Fed’s other big job, which is regulation. If you want to repeat all of the Clinton-era mistakes of financial regulation, you can’t do better than appointing Clinton’s very own Treasury secretary".
At this point in time, the ability of any Fed Chairman to ease monetary policy further is likely to be limited. Apart from avoiding a Fed Chairman who outright would want to tighten money a.s.a.p, the last thing we need is a Fed Chairman who believes that banks can do no wrong and don't need to be supervised much.
We've already had Greenspan pathetically admitting that "he had found a flaw in the model that he perceived is the critical functioning structure that defines how the world works"... 
And, as pathetic as it might be, Greenspan , at least, admitted to being wrong. Did Larry Summers even come close to admitting as much for his role in the genesis of this crisis? I don't think so...