The Exchange

The Case Against a Larry Summers Fed

The Exchange

By Lisa Gilbert and Micah Hauptman

Just a week after celebrating an epic victory with Richard Cordray’s confirmation as director of the Consumer Financial Protection Bureau, we received troubling news that could put our economy in peril. Credible rumors began circulating that Larry Summers is the leading contender to replace Ben Bernanke as chair of the Federal Reserve Board.

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Given Summers’ past failures, it’s baffling that the White House is seriously considering him for any position in government, let alone to be the most powerful banking regulator. Summers was one of the earliest proponents of financial deregulation. He fought to repeal the last vestiges of Glass-Steagall, which separated commercial (traditional) banking practices and investment (risky) banking; he also pushed to deregulate complex derivatives in the late 1990s. Both of these actions contributed to the 2008 financial crisis.

An anti-regulatory ideologue

Considering the Fed’s duty to regulate banks and mitigate risks to financial stability, it makes no sense why an anti-regulatory ideologue like Summers should even be considered as its head. Summers’ poor judgment on crucial public policy issues reflects a lack of foresight to deal with imminent risks in the financial system. He was monumentally wrong before, and there’s no reason to believe he won’t make the same mistakes again.

Summers’ cozy Wall Street ties also should create suspicion about whether he is the right person for the job. Currently he serves as a paid advisor or consultant for a variety of financial firms, including the behemoth bank and bailout recipient Citigroup. These connections raise serious questions about how Summers would regulate Citigroup and other financial institutions if he were the Fed chair.

Additionally, Summers doesn’t have the right temperament to be Fed chairman. To be the chair of the Federal Reserve Board and the Federal Open Market Committee, one must lead by finding consensus. Internal discord and dissention could easily destabilize financial markets. Larry Summers is universally known for his inability to play nice with others. He has been characterized as a “bull in a china shop” who often disregards and disrespects others—even to the point of taunting his colleagues. In our currently fragile economy, it makes no sense why someone with such a mercurial personality would be qualified for this critical leadership position.

Yellen the smart choice

What is even more bewildering about a Larry Summers nomination is that it would mean President Obama would be choosing him over a far more qualified woman candidate, Janet Yellen. Yellen is currently the vice chair of the Fed; before that, she was the president of the San Francisco Fed, and before that, she served as the chair of President Clinton’s Council of Economic Advisors. Throughout her career, she has been known as a thoughtful, deliberate and inclusive leader.

Yellen has been a continuous proponent of effective regulation of the financial industry, and offered some of the earliest warnings about the impending financial crisis. For example, when she was president of the San Francisco Fed in 2007, she sounded the alarm on risks proliferating in the housing market and on the possibility of those risks spreading to other sectors. Those predictions came as Chairman Bernanke and others incorrectly believed the market would stabilize. Yellen’s demonstrated knowledge of markets and regulation, and her previous foresight should be rewarded.

Additionally, Yellen is not known as someone who caters to Wall Street interests; instead she considers how her actions affect Main Street. With ongoing risks to price stability and unemployment—also within the Fed’s jurisdiction—someone like Yellen at the Fed’s helm would be a boon for ordinary Americans, and for the broader economy.

The ultimate insider

The contrasts between the two leading candidates are stark. Larry Summers epitomizes the Wall Street boys’ club, and has time and time again proven himself wrong. Yellen, on the other hand, has excelled in her duties, offered prescient views on risks to markets, and works well with others. She also would be a historic nominee if she were to break the glass ceiling at the Fed.

The choice for Federal Reserve chair is with President Obama. He can side with the Wall Street protectors—Summers, Tim Geithner and Robert Rubin—who were chiefly responsible for Wall Street deregulation, followed by Wall Street bailouts. Or he can side with the American people.

Lisa Gilbert is director of Public Citizen’s Congress Watch division. Micah Hauptman is the financial policy counsel for Public Citizen’s Congress Watch division.

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