By: Sonia Torrico
What do The New York Times, Bette Midler, and the head of AFL-CIO have in common? No, this is not the set-up for a joke. It is a small sample of the individuals and groups that entered what was a very public debate over who should be the new Chair of the Federal Reserve and of those that backed Janet Yellen, the current Vice-chair of the Fed, over former Secretary of the Treasury Larry Summers (who recently withdrew from consideration). The debate as to who President Obama should nominate to succeed Ben Bernanke reached an all time high; there were roughly five times as many articles written about this nomination (so far) than there was when Bernanke was nominated in 2005. There are many possible explanations for the increased coverage; including that Yellen would be the first female Chair of the Fed and Summers’ infamous comments about women’s “innate differences” from men during his time as President of Harvard University. However, the biggest question in this debate remains: How will this impact the economy and financial system?
The current Fed made history in 2008 when it bailed out many of the largest banks and kick‑starting what has proven to be a long, arduous road to financial recovery. The question that is front and center in financial, political, and legal wonks’ minds centers on how the new Fed Chair will handle the transition and whether that transition will negatively impact the progress of the past five years. Then, regardless of how seamless the transition to the new Fed Chair goes, what kind of policy will the new Chair enact? And, considering that the markets hang on every word that comes out the Fed Chair’s mouth, will the new Chair be able to effectively convey these policies?
It is no wonder that Janet Yellen received widespread support from numerous members of the Senate (Barbara Boxer (D-CA), Angus King (Ind.-ME), Jeff Merkley (D-OR), Elizabeth Warren (D –MA), to name a few), economist Paul Krugman, and former FDIC chair Sheila Blair. Yellen’s transition from Vice-chair of the Fed to Chair would be seamless because of her knowledge of the key policies and economic measures enacted by outgoing-chair Bernanke. This continuity would ensure that the policies and regulations currently in place would remain and would help bolster the economy further. Yellen’s, up until now, lack of exposure in the media would allow her to execute her duties as Fed Chair effectively because she would be able to shape herself as a neutral arbiter as the most influential financial regulator in the world.
While Larry Summers is equally distinguished as an economist, it is difficult for this author to imagine that he could have effectively managed the transition into the new Fed Chair in order to continue to aid the economy’s slow recovery. After all, this is the same man who supported deregulating the banks, the repeal of the Glass-Steagall Act when he was Secretary of the Treasury, and ensured that derivates would not be regulated; the latter of which greatly contributed to the 2008 financial crisis. Further, considering that one of the primary roles of the Fed Chair is to be distant, cautious with words, and politically neutral, it is difficult to imagine that Summers—who seems to suffer from foot-in-mouth syndrome—would be able to manage this outward image with aplomb. Nonetheless, if various news outlets were to be believed, President Obama was leaning toward nominating Summers for the job before Summers removed himself from the race. The President’s nomination seemed to be so certain, that Japan’s Nikkei newspaper released an article just last week claiming that President Obama was “‘in the final stages’ and moving toward naming Summers.”
Some of Summers’ supporters argued that he would have been better equipped than Yellen to manage crises in the future. However, there are two aspects to managing a crisis: reactive and proactive measures. It is true that Summers has shown his ability to react in times of crisis, such as the economic downturn in Asia that took place while he was at Treasury, but Summers seems to come up short in being able to proactively manage a crisis. His lack of foresight in decision‑making, a key part of proactive measures, led to an economic downturn that turned into a recession and, finally, into a depression. This, combined with his tendency to support the deregulation of the financial industry, led this author to conclude that, should another crisis arise, Summers’ ability to manage would have had a similar effect on the fragile economy as it did during his time at Treasury. It seems like Summers has done his country a favor by removing himself from the running, and we are no longer left hoping that all of the supposed White House insiders implying that President Obama will nominate Summers were wrong.