Summers Backed Yellen for Fed Before Rivalry for Top JobRich Miller and Joshua Zumbrun
As a Treasury Department official in 1994, Lawrence Summers was an “enthusiastic” supporter of putting Janet Yellen on the Federal Reserve Board, said Brad DeLong, who worked with him at the time.
Almost two decades later, Summers, 58, finds himself in contention with Fed Vice Chairman Yellen, 66, over who will be nominated by President Barack Obama to take the top spot at the central bank when Ben S. Bernanke’s term expires in January.
The increasingly public debate over who would be better for the job highlights the disparities that divide them rather than the similarities Summers saw back in 1994. Opponents of Summers, now a professor at Harvard University, say his record shows he won’t be sufficiently tough on banks the Fed regulates. Yellen’s adversaries say her paper trail suggests the Federal Open Market Committee under her guidance won’t be strong enough on containing inflation.
DeLong, now a professor of economics at the University of California, Berkeley, after serving at the Treasury from 1993 to 1995, said the differences boil down to nuance.
“The major potential advantage that Janet has is that she is a wonderful consensus builder, and the FOMC historically is a committee that moves by consensus,” he said.
Summers “is somewhat more likely to think outside the box and is not likely to be as constrained by Federal Reserve conventions if things get bad,” said DeLong, who backs Summers for the job.
Both candidates declined to comment.
The next Fed chairman will confront two main tasks: rolling back the unprecedented level of monetary stimulus the central bank has provided and ensuring the safety and health of a financial system still on the mend after its worst crisis in more than 75 years.
As Fed vice chairman since 2010, Yellen played a key role in the FOMC’s campaign to pump up the economy. She’s been a defender of the central bank’s bond-buying, arguing that the strategy helped bring down long-term interest rates and reduce unemployment. The Fed yesterday decided to keep purchasing $85 billion of assets per month.
Summers, a former Treasury secretary who was chief economic adviser to Obama in 2008-2010, has been more circumspect. He said last year that such a quantitative easing program might be worthwhile given the dangers then facing the economy, while questioning how much help it would deliver.
While Summers’s views on monetary policy aren’t “totally clear,” he would probably be “somewhat less dovish than Yellen,” putting more emphasis on containing inflation than the current Fed vice chairman, said Michael Feroli, a former Fed staff member who is now chief U.S. economist for JPMorgan Chase & Co. in New York.
Summers’s views on regulation are better documented. While at the Treasury from 1993 to 2001, Summers earned a reputation as being predisposed to less oversight of financial markets and firms. More recently, as Obama’s adviser, he supported steps to correct the excesses that triggered the last crisis.
He told a White House meeting in October 2009 that it was time for a “fundamental change” in the way financial markets and firms were regulated.
“I’m not usually thought of as someone who would be called a raging populist,” he said. But “this is important for the economy, for the sense of economic justice in our society and for millions of Americans.”
Yellen hasn’t given many speeches on regulation. Officials who’ve worked with her at the Fed said she wasn’t swept up in the deregulatory fervor of the 1990s and has always been interested in bank supervision, both during her time on the central bank’s board in Washington and as president of the Federal Reserve Bank of San Francisco.
“Yellen has said relatively little about regulation but what she’s said is encouraging,” said Simon Johnson, an economist at the Massachusetts Institute of Technology’s Sloan School of Management and a former chief economist at the International Monetary Fund. “Summers has this long and distinguished track record of being one of the country’s leading deregulators.” Johnson supports Yellen for the Fed job.
Summers and Yellen have a lot more in common than the public debate might suggest. Long-time Democrats, they both first made their mark in academia. Yellen is a professor emeritus at Berkeley, while Summers was president of Harvard from 2001 to 2006.
“They are from the same tradition,” said Robert Solow, winner of the Nobel prize in economics in 1987 and professor emeritus at MIT in Cambridge, Massachusetts. “They understand macroeconomics in approximately the same way.”
Their public comments reflect the same diagnosis about what ails the economy now -- insufficient demand and too-high unemployment -- and they agree it’s not the time to tighten the federal budget. Both were early to sound the alarm about dangers in overheated housing and financial markets before the bust of 2007.
In January of that year, Summers warned investors at the World Economic Forum in Davos, Switzerland, that they were underestimating risks to the world economy. “Complacency can be a self-denying prophecy,” he said then. Yellen warned in May 2007 that home prices might fall instead of stabilizing as the Fed staff was forecasting, according to Fed minutes.
Such similarities explain Summers’s early support of Yellen. DeLong said she was “at the top of all our lists” when Treasury officials discussed whom then-President Bill Clinton should nominate to be a Fed governor. “Larry was enthusiastic about her,” he said.
Summers again backed Yellen when the job of chairman of the White House’s Council of Economic Advisers came open in 1997. After serving 2 1/2 years in that position, Yellen returned to Berkeley before taking over as president of the San Francisco Fed in 2004.
Obama, in a meeting yesterday with House Democrats, mentioned Summers, Yellen and former Fed Vice Chairman Donald Kohn as potential nominees to succeed Bernanke, according to a Democratic aide who sought anonymity to discuss the private session. At the same meeting, Obama said Summers is being unfairly criticized in the public debate about the selection, according to lawmakers who were present, including Representative Brad Sherman of California.
Bernanke, whose second four-year term ends on Jan. 31, hasn’t indicated whether he would seek or accept a third term. In June, Obama said the Fed chairman had stayed in the post “longer than he wanted.”
In a July 24 interview with the New York Times, Obama said he wants a chairman who understands the Fed’s dual mandate to promote maximum employment and price stability.
“I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation,” the president said.
That’s the balance the Fed chairman will have to weigh as the central bank begins to scale back record stimulus. Bernanke has said policy makers may reduce their monthly bond purchases later this year and end them around the middle of next year if the economy improves along the lines the Fed is forecasting.
The FOMC also has pledged to keep its short-term interest rate target near zero at least until unemployment falls to 6.5 percent and as long as forecast inflation isn’t above 2.5 percent. Joblessness was 7.6 percent in June, and inflation was 1 percent in May.
“Janet is a known quantity and is a virtual certainty to continue what we now think of as Bernanke-like policies,” said Alan Blinder, a former Fed vice chairman and now a professor at Princeton University in New Jersey. “You just don’t quite know what you’re going to get from Larry on policy preferences,” said Blinder, who backs Yellen.
While Summers customarily refrains from commenting on monetary policy, he has provided some hints of his stance in articles for the Washington Post. Discussing ways to fix the housing market, Summers suggested in October 2011 that the Fed could expand purchases of mortgage-backed securities. The central bank started doing that less than a year later.
Writing in June 2012, Summers said further quantitative easing might be “appropriate” as the risk of not doing anything to help the economy was much greater than doing something. He did question how much good that would do and wondered whether ultra-low interest rates eventually would promote bubbles in financial markets. Fiscal stimulus would be more effective, he said.
Summers also presaged the Fed’s decision late last year to tie its interest-rate moves to the achievement of economic goals, suggesting in March 2012 that such a strategy was the “right approach” for the central bank.
JPMorgan’s Feroli said neither Summers nor Yellen is likely to hurt the economy by prematurely tightening monetary policy.
Feroli said he did see a risk that investors, mindful of Yellen’s reputation as a policy dove, might become more worried about inflation and push up bond yields in response. He said the chances of that happening are small.
Yellen did show a willingness to tighten credit in 1996 when she and fellow Fed Governor Laurence Meyer privately urged Chairman Alan Greenspan to raise interest rates, Feroli said. Greenspan demurred, putting off an eventual 0.25 percentage-point increase in the benchmark rate to 1997.
While investors have focused on Summers’s comments on monetary policy, his opponents in Washington have zeroed in on his record on financial-market regulation.
Calling Summers a “life-committed deregulator,” Senator Jeff Merkley, an Oregon Democrat who serves on the Banking Committee, said he is “extraordinarily skeptical that his background is appropriate” to lead the Fed. Merkley is among 20 senators who signed a July 26 letter to Obama urging him to nominate Yellen.
Critics such as Merkley attack Summers for his role in helping to eliminate barriers separating deposit-taking institutions from investment banking in 1999 and for blocking then-chairman of the Commodity Futures Trading Commission Brooksley Born from regulating the over-the-counter derivatives market the year before. They charge those decisions helped set the stage for the worst global recession since World War II, a contention Summers and his supporters dispute.
Jared Bernstein, who worked with Summers at Obama’s White House, said Summers isn’t the knee-jerk deregulator he is often portrayed to be.
“He very much recognizes the importance of financial-market oversight,” said Bernstein, now a senior fellow at the Center on Budget & Policy Priorities in Washington. “He may be more skeptical of how government regulators accomplish that.”
Summers, for instance, had early doubts about the so-called Volcker rule, which seeks to ban proprietary trading by banks, before eventually supporting the proposal in altered form.
Yellen’s record on regulation mostly entails her role in bank supervision at the board of governors and in San Francisco, which typically occurs outside of the public limelight.
“She was one of the presidents of the reserve banks -- they’re not all that way -- that understood the role that regulation and supervision plays in the context of the Federal Reserve’s mandate and mission,” said Deborah Bailey, a former deputy director of regulation and supervision at the Fed board of governors and now a director at Deloitte & Touche LLP.
When Yellen arrived at the San Francisco Fed in 2004, she began courting Stephen Hoffman, then the No. 2 supervisor at the board of governors, to be her top regulator in California.
“Yellen pioneered a multidisciplinary approach to banking supervision at the San Francisco reserve bank that was adopted by the system during the financial crisis,” said Hoffman, who spent 39 years in supervision roles within the Fed system, and is now a managing director at the financial consulting firm Promontory Group Inc. in Washington.
“In 2006 and 2007 she began making sure that the teams in economic research, payment-systems operation, and supervision and regulation were working together,” he said. “She saw the possibility of fissures, and set about making sure that people were prepared as best they could be for handling a period of difficulty.”
What’s important, MIT’s Solow said, is that Summers and Yellen share the same sort of mindset as Bernanke: They are pragmatic and not doctrinaire.
“Either one of them would be a fit successor to Bernanke,” Solow said.