Economist Lawrence Summers' abrupt withdrawal from the race to be the next chairman of the Federal Reserve may have created turmoil in the White House, but it has brought a sudden sense of calm in other important circles.
As President Barack Obama's reported favorite to be nominated to the position of world’s most powerful banking chief, Summers' unexpected bowing out was a blow to the politically embattled president.
The choice of Fed chairman is crucial, because he – or now for the first time, perhaps, she – is the public face of America's central bank and decides on U.S. interest rates, the price of borrowing money that affects every pocketbook and influences economic growth and inflation. The Fed also controls the nation's money supply, which affects the whole economy from trade and industry to spending and unemployment.
So picking a new chairman is always a pivotal moment in a presidency, and Obama's process has gotten off to a rocky start.
But many experts are far from upset that the race has lost such a divisive character in Summers at a time when the economic recovery is fragile and markets are looking for a steady hand. Summers is controversial for his economic track record as a supporter of deregulation, ties to the financial industry that could have become awkward and a headstrong personality.
Still many expressed shock. "It was certainly surprising," said Yelena Shulyatyeva, U.S. economist at BNP Paribas about Summers' sudden departure from the competition. "But it was becoming more and more of an issue. … There was a lot of uncertainty from the markets around a Summers nomination, that he did not have a good record as a person with a collegial style who could build consensus between doves and hawks at the Fed during the continued uncertainty over the economy," she said.
The Washington-based citizen advocacy body, Public Interest Research Group, also pointed out that Summers as Fed chair would have proved complicated on an ethical level. As a former adviser to Citigroup, he would have had to recuse himself from economic and regulatory decisions that would have affected the mega-bank, in line with the ethics rules implemented by Obama when he became president. "It would have been tricky, and we have enough trouble in this recovery as it is," said PIRG's Blair Bowie.
The person regarded as the new front-runner, Janet Yellen, the current vice chair at the Federal Reserve, also is likely to create headlines. There has never been a female Fed chair, and her appointment would shatter a notorious glass ceiling. Some observers are already describing her as a potentially safe pair of hands. "If it ends up being Yellen, she would be a great choice, very experienced in economic policy," said Anil Kashyap, economics professor at the University of Chicago Booth School of Business.
There has reportedly been a sexist whispering campaign against Yellen in political circles, dressed up as doubts about her "gravitas" and her tendency to be "soft-spoken" and prefer consensus to assertiveness. But many pundits scoff, pointing out that current chair Ben Bernanke had less experience than Yellen when he was nominated. Bernanke is also known to be soft-spoken and to prefer consensus, but he has never been accused of lacking gravitas.
Yellen is expected to be extremely cautious about tapering off the kind of stimulus intervention that is keeping interest rates at rock bottom, sustained by the Fed's buying $85 billion in government bonds every month while it waits for unemployment to fall further from its current rate of 7.3 percent.
There are other possible candidates being discussed in Congressional and financial circles. Donald Kohn, who has been mentioned by Obama, is a former deputy chairman of the Federal Reserve. Also mentioned are former Treasury Secretary Timothy Geithner and wild cards Stanley Fischer, who has served the World Bank, the International Monetary Fund and the central bank of Israel, and Roger Ferguson, Fed vice chairman under President George W. Bush's chairman, Alan Greenspan.
Even as he withdrew from the race, Summers' legacy in the Obama administration remains. Few things have roused as much ire on the left of the Democratic Party as the president's close ties and high praise for Summers.
Obama first raised eyebrows when he drew Summers into his inner economic advisory circle when trying to deal with the aftermath of the 2008 financial crisis. On a professional level, Summers was known for supporting deregulation when he was President Bill Clinton's treasury secretary in the late 1990s, helping to loosen restrictions on what kind of Wall Street trading traditional banks could do and on the higher-risk derivatives market. These policies hastened the growth of mega-banks, which many believe are still, post-2008, susceptible to the kind of debt-exposure that deepened the crisis. Clinton has since gone on the record to say he thought some of Summers' key decisions on deregulation were wrong.
He is also infamous for remarks he made while president of Harvard University in 2005 that fewer women made it to the top in science and engineering possibly because they had "issues of intrinsic aptitude" around math and science.
Yet Obama appeared very invested in him as the future Fed chief – perhaps as a display of personal loyalty rather than out of political calculation. "In the fog of war, Summers was there for Obama as a steady and experienced influence during early 2009 when things were very scary," Kashyap said. "I think his favor of him was as much about 'I have seen this guy in action' than anything else – and Obama has this huge preference for picking people for key posts that he has already worked with."
The president had signaled he would name his choice for the chair this fall, and spokesman Jay Carney has confirmed that is still the case despite the disruption over Summers – noting that fall does not officially begin until the equinox on Sept. 22.
The Senate banking committee must approve the president's nomination for chairman before the candidate is presented to the full Senate for confirmation, so gathering opposition to Summers among rebellious committee Democrats left Obama's favorite economist fatally isolated.