By Laurence Kotlikoff and Jeffrey Sachs
On the surface the debate about the Chairmanship of the Federal Reserve is about the merits of the two leading candidates, Lawrence Summers and Janet Yellen. But looks can be deceiving. President Obama leans toward Summers not on the merits but because the Wall Street bankers want him. Summers is one of the boys, and the bankers know that Summers will do their bidding, at the expense of everybody else.
Obama has declared that the two candidates’ attitudes to inflation and unemployment are his main concern, entirely glossing over the fact that the Fed oversees and regulates the US banking system. Our recent near-death experience under Alan Greenspan’s anti-regulation Fed chairmanship, aided and abetted by the deregulation pushed by Summers, should cause the President to think hard about banking regulation. Yet Obama and his tight-knit circle of advisors, almost all of whom are from Wall Street, are apparently too beholden to Wall Street to contemplate any serious regulation of an industry that continues to be out of control.
The case for Yellen
On the merits, Janet Yellen is the obvious candidate. For six years, 2004 to 2010, she was President of the San Francisco Fed. She is Deputy Chair of the Federal Reserve Board and former Chairman of the Council of Economic Advisors. Her academic record is exemplary and distinguished. Her leadership of the Fed was widely admired, while Summers’ Presidency of Harvard ended in a debacle. Yellen correctly foresaw the risks of the 2008 financial meltdown, while Summers famously missed it. She, not Summers, has hands-on experience running the Fed.
Moreover, she has not played the revolving door by cashing in on government service for personal wealth. That, of course, is why she is suspect on Wall Street. Yellen has proven herself to be less interested in her personal wealth than in her nation’s monetary policy. For that reason, Wall Street leaders view her as dangerous.
Summers, the bankers' best friend
Summers, on the other hand, is safe and reliable, the bankers’ best friend in politics. From the bankers’ point of view, his record is perfect. Summers late 1990s' advocacy of financial deregulation is of course legendary. In the Obama years, he championed the bank bailouts while also fighting attempts to cap the bankers’ bonuses and to set limits on risky bank behavior, including Summers’ opposition to the Volcker rule to limit banks from trading on their own account.
Summers not only shot down proposals by Senator Dodd and others to limit Wall Street bonuses, but took an even more audacious stand: that the AIG unit that helped trigger the entire calamity by writing reckless credit default swaps should also get their mega-bonuses after the fact. Summers explained to a shocked nation that he did not want to “violate the contracts” of these employees, even as the world economy lay in ruins at their handiwork. Even Gordon Gekko would not have had such audacity.
When Summers left the Obama White House, he made a beeline back to Wall Street, just as he had done after leaving the Treasury in 2001. In a normal moral universe, a leading candidate for the Fed Chairmanship would hesitate to pass through the Washington-Wall Street revolving door so quickly and boldly, for fear of triggering public concerns about financial conflict of interest. Yet Summers quickly took up not just one Wall Street position but many, including with DE Shaw, Citigroup, NASDAQ, and other companies.
Conflicts of interest?
As Summers’ colleague and former Harvard dean Harry Lewis has recently noted, Summers did all of this while being a full-time professor with the limited right to consult “one day per week.” Moreover, Lewis describes how Summers’ lucrative consultancies reflect a persistent pattern in which Summers has shown a completely dismissive attitude towards financial ethics and financial conflict of interest.
When a Harvard colleague of Summers was caught in a financial conflict of interest, Summers, shrugged it off under oath (at the time he was President of the University): “In Washington I wasn’t ever smart enough to predict them [ethics rules] … things that seemed ethical to me were thought of as very problematic and things that seemed quite problematic to me were thought of as perfectly fine.” Summers testified that in his view, ‘’there was no aura of wrongness of any kind [in the US Treasury] that would be associated with providing advice on a financial issue in which one had an interest.”
Unseemly, yes. Problematic for Summers’ public credibility as a bank regulator? You bet. A problem for Obama to select Summers as Fed chair? Sadly not. The Administration has long ago blurred any boundaries between itself and Wall Street.
If Summers had demonstrated some magical powers of macroeconomic judgment over the years, his revolving-door approach to personal enrichment might be held in a different light, at least partially. Yet Summers has not displayed such magical powers. He has failed repeatedly to anticipate financial crises, whether in Mexico, Russia, and East Asia in the 1990s, when he had the Treasury’s international portfolio, or in the sub-prime crisis.
His crisis responses have been undistinguished as well. Most recently, Summer’s Keynesian policies piled on trillions of dollars of public debt but did very little to restore robust growth or reign in risky bank behavior. Behind the scenes Summers has also been on the biggest foes of responding effectively to climate change, another example of his big-business bias.
Many cynics have put the Fed issue far more succinctly. Since the banking lobby is already so powerful in the White House and Congress, why not simplify matters and just turn the Fed over to Wall Street. In fact, Obama seems on the verge of doing so.
Laurence J. Kotlikoff is a professor of economics at Boston University and author of "Jimmy Stewart Is Dead" and Jeffrey D. Sachs is a professor of economics and Director of The Earth Institute at Columbia University and author of "To Move the World: JFK's Quest for Peace."