Larry Summers and the politicization of the Fed
Ezra Klein has an excellent piece on Larry Summers today, basically saying that he’s “the overwhelming favorite” to become the next Fed chair just because he’s an old Clinton hand, and is trusted by all the other old Clinton hands with whom Barack Obama has surrounded himself. (Interestingly, that’s a phenomenon unique to the economic team: no other department exhibits the same trait.)
The top slots on the economic team are all held by members of the Clinton clique. Sperling leads the National Economic Council. Lew is secretary of the Treasury. Furman is chairman of the Council of Economic Advisers. Sylvia Matthews Burwell, deputy director of the Office of Management and Budget during the Clinton administration, now heads OMB…
It stretches credulity to believe that a pure meritocratic process has simply and ineluctably led to the same six or seven people cycling among positions.
Klein’s thesis, when it comes to economic appointments, is that “the bar for each appointment is that the economic team already likes the candidate and knows he or she is good at the job and will work well with the other members of the team”. The reality of economic appointments to date is entirely consistent with that thesis, and I, for one, am convinced.
But here’s the problem: such a mechanism is a bad idea in principle, a bad idea in practice, and an especially bad idea when it comes to the Fed chairmanship in particular.
In principle, it’s even harder for a team like this one to learn from its mistakes than it is for an individual to do so. When the world changes, individual technocrats tend to change with it. But when a small, close-knit team is put in charge of running the economic policy of the global hegemon, they create the facts on the ground. In practice, what that has meant is a depressingly predictable cycle of laissez-faire regulatory policy leading to crises, which are solved with massive bailouts, which leave the financial sector largely unscathed, and free to continue taking excessive risks, safe in the knowledge that if and when things blow up again, there will be yet another bailout.
This cycle creates what I call Obama’s dangerously heroic view of economic technocrats — a view which, it should go without saying, works very much to the advantage of the very advisers who have helped him develop it. It’s a view which places crisis-management skills far above crisis-prevention skills, and which considers crisis-management experience as being uniquely valuable. It’s also a view which makes it almost unthinkable for Larry Summers not to be nominated to the Fed: short of nominating Terry Checki to the position, it’s hard to imagine a candidate with more crisis experience than Summers.
But it’s one thing having groupthink within the White House — it’s the job of a disciplined executive branch to implement clearly-articulated policies, and if the populace doesn’t like it, they can kick the incumbents out at the next election. It’s something else entirely to take one of the most central — and most political — members of the White House team, and nominate him to lead the independent board of governors of the Federal Reserve.
Make no mistake: Summers would be the most political Fed chair in living memory. Greenspan was pretty bad, especially when he testified — in clear support of the Bush administration’s tax cuts — that we had reason to be worried about budget surpluses. But Summers has been one of Obama’s closest economic advisers since the day that Obama took office: he’s much closer to Obama than Greenspan was to Bush.
Summers has spent most of the past five years doing everything in his power to shape and advance Obama’s agenda. Obama, of course, is very happy about this, and would love to reward Summers for his loyalty by handing him the Fed chairmanship.
Summers is not a consensus-builder; he’s the kind of person who, as chairman, would be convinced that he was right, and who would bully the rest of the board into doing exactly what he wanted them to do. (In this, he would have the active help of Obama, who would certainly nominate Summers-friendly names to the multitude of open board positions, and to the vice-chairmanship.) The result would be a central bank which had, to a first approximation, zero independence from the government, at least so long as Obama is president.
A non-independent central bank is a bad thing; a bullying central bank chairman who’s determined to get his own way is also a bad thing. (The Fed is run by a diverse board of governors for a reason.) But put the two together, and you get a uniquely toxic combination, a way to fulfill all the craziest conspiracy theories of Ron Paul. Having what Klein calls the “Clinton clique” in sole command of Obama’s economic policy is bad enough. But it would be much worse if they essentially managed to engineer a hostile takeover of the Federal Reserve Board.
When Tony Blair became prime minister of the UK in 1997, the first thing he did was to make the Bank of England independent. It was a signal that he was committed to orthodox economic policy, and that he was willing to be punished by an independent central bank should his policies go awry. It didn’t exactly work out that way, in the end, but his initial decision was clearly the right one, and came from a position of strength and self-confidence.
If Obama nominates Summers to the Fed, the message will be the exact opposite: that he’s not going to be comfortable unless he can install his own man to run the show. Obama, it seems, can’t trust Yellen to do the right thing — or maybe he worries that her actions will reflect the consensus of the board as a whole, and will therefore be less predictable and controllable. So he’s going to pass her over, and put a political operative in charge instead, albeit a political operative with genuine economic chops.
That’s a move even Clinton would never have dared make: he kept Greenspan at the Fed for his whole presidency. And it sets a horrible precedent: the next Republican president will henceforth have no compunctions whatsoever about appointing a party hack to the post. From here on in, if Summers gets the job, we won’t just be voting for president in presidential elections. We’ll be voting for Fed chair, too. And the Fed will become just as politicized as the Supreme Court has become.