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On Sunday Lawrence Summers, the front-runner to be President Barack Obama's nominee for chairman of the Federal Reserve, withdrew his name from consideration. Since it was revealed that the Obama administration had preferred Summers over other contenders like the Fed's current vice chairwoman, Janet Yellen, the selection process became one of the most debated topics in economic policy. And now suddenly the debate is over. But Senate Democrats who blocked Summers were right to do so, especially since there are better candidates available, such as Yellen and former Council of Economic Advisers chairwoman Christina Romer.
Summers withdrew after it became clear that at least five Democrats on the Senate Banking Committee would have voted against his nomination, making it unlikely to proceed to a full Senate vote. It also signaled a bigger fight in the Senate. The White House had clearly erred, floating a very controversial candidate before working the Senators necessary to secure his confirmation. There were few who defended Summers in public as particularly well suited for the job -- those who did were primarily former Obama White House officials who happened to be friends of Summers -- and the administration gave the impression that he was inevitably the man for the job instead of the best choice.
The Summers candidacy ultimately failed because the criticisms leveled against him, amassed over his career, made him look particularly unsuited for the Federal Reserve. Those supporting him pointed to his sharp intellect. By this, they meant the intelligence of a fox -- knowing a little about a lot of different topics. But the Fed chairmanship is the ultimate hedgehog job -- having to know everything about two narrow but crucial topics: the economics of money and financial regulation.
The administration also pointed to Summers' role in triaging the 2008 financial crisis and preventing a collapse of the financial markets. However, many of his critics associate him not with daring and unorthodox actions but with the worst parts of the bank bailouts that, though they saved the economy from ruin, were overly generous to the very companies responsible for the crisis. Whether in promising serious relief for homeowners -- especially through changing bankruptcy laws, then putting little energy into implementing them -- or in allowing AIG, a ward of the state, to shovel out bonuses to the employees who wrecked the company, Summers' crisis management appeared to be ad hoc and favorable to industry rather than organized and independent.
By far the biggest concern liberal critics in the Senate and elsewhere focused on was his history in the Treasury Department with financial deregulation in the 1990s. Supporters countered that Summers wrote many op-eds starting in 2008 that called for significant reforms of the financial sector to resolve the chaos. For example, he wrote about the need for banks to hold more capital, for derivatives to be traded through an exchange and for the Federal Deposit Insurance Corporation to be able to impose losses on the shareholders of failed banks.
These were excellent opinions to hold in 2008, but in 2013, in the context of his nomination, it seemed thin compared with the actual debates regulators were having. Indeed, the skeletal form of ideas that Summers shared in 2008 are now law, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010. The question now is how aggressively to implement those reforms. And on the substance of the debate pitting government regulators against Wall Street -- how much more capital banks need, what kinds of derivatives and lines of business should be restricted from Wall Street firms -- Summers has been silent.
The Federal Reserve chair is the most important financial regulator in the government. It is difficult to convey the sheer amount of power the Fed has, both to write rules and, crucially, to grant exemptions from those rules. It was unclear whether Summers would espouse a more aggressive or a weaker version of rule writing. What policymakers examined were his instincts and past performance. There in particular, they found the black mark on his resume: his willingness in the 1990s to circumvent and overrule independent regulators. When Brooksley Born, chairwoman of the Commodity Futures Trading Commission during the Clinton administration, wanted to regulate new kinds of derivatives -- the financial product whose opacity would eventually be blamed for contributing to the financial crisis -- Summers joined the fight to keep them unregulated.
The incident that landed Summers most publicly in hot water was also relevant to his qualifications for the Fed chairmanship. Feminist critics of Summers focus on a 2005 speech he gave while president of Harvard University, mentioning women's inaptitude for science. What stands out from that example is his willingness to provoke people on topics on which he is not an expert. Given that the financial markets hinge on even the slightest word about policy from the Federal Reserve chair, Summers' temperament was an important issue, especially given current Fed chair Ben Bernanke's move to establish consensus among the Fed's top board members.
Moreover, Summers never offered reassurance that he would be more aggressive than Yellen in dealing with the country's unemployment problem. While conservative activists obsess over whether the Federal Reserve is doing too much, liberals tend to ignore or downplay its ability to spark a swifter recovery with the tools it has. This is a problem, because the Federal Reserve will be the entity most responsible for how or whether we fix the postrecession economy. If Summers had shown interest in taking bolder steps than the current policy -- which has, according to critics, allowed the unemployed to suffer without taking any action -- that would have won him significant support among liberals and would have sliced his opposition in half.
Though many groups interceded in the Summers nomination, liberal opposition posed the most difficulty for the president's agenda. Left-wing critics of Obama's White House have had three types of policy disagreements.
First, they agreed with the administration's actions but wanted them to go further: Yes, a stimulus bill, but one more focused on infrastructure investments than on tax cuts; yes, Obamacare, but with a public option.
Second, they wanted to block something the administration wanted but the Republicans were clearly the reason liberals won. For instance, Republicans were responsible for stopping a grand bargain on the federal budget's overwhelming tilt toward spending cuts -- a plan that would have infuriated liberals. These are disagreements with the compromises Obama is willing to make to pass legislation -- for example, changing the inflation rate for Social Security benefits, in effect cutting them, in exchange for other budgetary goals.
Third, liberals have recently challenged the administration in the areas where it has the most discretion in setting policy: national surveillance, foreign policy and, now, economic appointments. Pressure of this magnitude against Obama was last triggered by the disbursement of bailout funds during the financial crisis. There were no major victories there, and Summers was partly to blame.
Lawrence Summers is a unique individual in Democratic policy circles, and his aborted nomination could reflect his idiosyncratic personality and roles in recent policymaking. However, we may be seeing the beginning of a liberal policy agenda that challenges more centrist Democrats. This agenda isn't comfortable declaring the financial sector done with but wants to see the strongest implementation of Dodd-Frank. And it may also demand stronger intervention to resolve the long-term unemployment problem from the Great Recession, including a Federal Reserve chair who will take bold action. There are people better suited to carrying these ideas forward, such as Yellen and Romer. The country will be better off with one of these candidates in the position.
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