FED UP JULY 25, 2013
Okay, let’s try this again. Ezra Klein says the president really, really wants to nominate Larry Summers to replace Ben Bernanke as Fed chairman, but is hesitating over the blowback he’d court as a result. In fact, he’s already receiving a fair bit of blowback over the mere possibility of nominating Summers.
The White House, according to Ezra, is mystified by the intensity of this reaction (if not the reaction itself), since it believes Summers and his fellow short-lister, Janet Yellen, are basically interchangeable on the merits. This is not just in their passion for fighting unemployment, a key Fed responsibility, but also when it comes to implementing the Dodd-Frank financial reform bill and regulating Wall Street.
I’ve already weighed in on most of the substantive issues separating Summers and Yellen (short-version: it’s not nearly the wash the White House makes it out to be), but the financial reform/regulation point is a new wrinkle, since it’s very much at odds with the conventional wisdom on Summers.
Unfortunately, it suffers from a basic logical flaw. As Ezra notes, the people responding most favorably to the Summers trial balloon are “economic and Wall Street heavyweights who’ve worked or fundraised at high levels in Democratic administrations.” How plausible is it that someone whose most vocal backers are Wall Street moneymen would be vigilant on the subject of financial regulation? It could happen, I guess. But it’s not where I’d place my bets. (In fact, I’m pretty sure it’s not where Larry Summers would place his bets either if he were coming at this dispassionately.)
But wait! Ezra says the president’s aides believe “a lot of the opposition to Summers is based on bad or outdated information.” Maybe the soft-on-Wall-Street gripe expired long ago. After all, the key data point in this particular brief against Summers came in the late 1990s, when he helped persuade Treasury Secretary Bob Rubin that the government should refrain from regulating derivatives (the same financial instrument that nearly blew up the world a decade later).
There’s something to be said for this rebuttal. Based on reporting I did for my recent book, I can confirm that Summers was extremely tough on the big banks in internal administration discussions, if not the financial sector as a whole. (He still has a soft spot for brilliant hedge-fund types.) To take one example, Summers was very skeptical of the so-called stress tests that Treasury and the Fed used to determine whether the banks had enough capital to endure another downturn. He was convinced that the banks’ accounting was borderline fraudulent. It would no doubt be refreshing to have someone so skeptical of big banks ensconced in the Fed’s corner office.
On the other hand, in Summers’ case, this doesn’t really translate into populism on the subject of financial reform—in general, he’s about as far from a populist as you can get. I’m especially mystified by the idea that Summers would doggedly implement Dodd-Frank. In 2009 and early 2010, Summers was the most vocal internal opponent of the so-called Volcker Rule, which prohibits federally-backed banks from making trades for their own bottom line (which is to say, gambling with taxpayer money). When Treasury Secretary Tim Geithner, a fellow early opponent of the Volcker Rule, made his peace with it and told the president he was getting on board, Summers was furious at him for this reversal. Again, it’s possible that Summers would implement and enforce the Volcker Rule with great zeal. But it’s not where I’d put my money.
As for the other key criticism of Summers—that he doesn’t play well with others, something that’s central to making the Fed work—the White House suggestion that it, too, is “outdated” strikes me as delusional or willfully ignorant. Unless Summers served in a high-ranking government job that I’m not aware of after leaving the White House in 2010, the critique seems rather perfectly up to date.
As I report in my book, Summers clashed constantly with fellow administration officials, most famously budget director Peter Orszag and White House economist Christie Romer. Often it was about matters of national urgency, and so a little heat could be forgiven. But all too frequently it arose from pure pettiness and immaturity. One example:
About six months into the administration, [Summers] and Orszag were scheduled to join the vice president at a White House event. When Orszag arrived, a body man seated him next to Biden, only to return a few minutes later and ask him to move. Summers had insisted on taking the seat even though it was assigned to Orszag. “I’m really sorry. We had a seating chart. But Larry walked in and saw that you were sitting next to the vice president,” the aide said. [Orszag agreed to move; a third administration official who was present confirmed this account.]
It wasn’t just running antagonists like Orszag and Romer that felt the impact of Summers’ rough edges. The origins of Rahm Emanuel’s ill-fated attempt to procure a personal car for Summers date back to a day in the fall of 2009, when Summers groused to the then-chief of staff: “Life sucks around here. I waited thirty minutes outside the Capitol because you fuckers can’t get your motor pool to work right.”
And then there were the senior Treasury officials whom Summers managed to alienate, like Lee Sachs1 (Geithner’s top financial consigliere during the first two years of the administration) and Matthew Kabaker, widely regarded as one of Treasury’s brightest stars at the time. Summers seemed to delight in pummeling these two during their hours-long debates over how to respond to the financial crisis. Now, as I say, these were consequential debates, so you’d expect some flashes of emotion. But Summers favored a distinctly unbecoming approach—including a need to taunt his sparring partners as they went back and forth. “Lee, you’re losing this argument!” Summers would thunder. “You’re getting crushed!”
I should say that cataloguing this stuff is slightly awkward for me because, whatever his faults, I kind of like Larry Summers. I enjoyed speaking with him while I was reporting my book. I thought he was on balance a force for good in the Obama administration, and I have enormous respect for his intellect. But Fed chairman simply isn’t the right job for someone with his shortcomings. (See my previous post for why that is.) In the end, I don’t think Obama is doing Summers any favors by pushing him for it. The longer the White House holds him up as the top candidate, the more damaging it will be to Summers himself, because the list of drawbacks really is quite lengthy.