Doubling Down on Stupid.


dollar shock

For monetary policy under a new Fed Chairman (oops, Chairperson), it’s shaping up as a battle between two worst-case scenarios. From the WSJ:

The real problem is that neither Ms. Yellen nor Mr. Summers seems likely to do what should be the next chairman’s priority—restoring the Fed’s independence by ending its post-crisis political interventions and focusing above all on maintaining price stability.

Obama’s Fed Circus

Democrats put on a spectacle of Wall Street and gender politics.

The Federal Reserve chairman is the world’s most important economic official, especially with today’s weak U.S. Treasury. So how embarrassing for American economic leadership to see the choice of Ben Bernanke’s successor devolve into a brawl between the Democratic Party’s gender liberals and its Wall Street wing. If only the two sides disagreed on the conduct of monetary policy.

President Obama opened the circus in June when he signaled to PBS’s Charlie Rose that Mr. Bernanke had “already stayed a lot longer than he wanted or he was supposed to.” A more managerially competent President would have quietly advised Mr. Bernanke about his intentions and let the Fed chairman announce his departure on his own terms after eight years.

Mr. Bernanke would have been treated with more respect. And the President could have given himself more flexibility in vetting a replacement and avoiding what is now a very public scramble for the job.

Janet Yellen, the current Fed vice chairman, has emerged as the favorite of the Democratic left. As an economist with long experience at the Fed, she doesn’t lack for professional credentials. But her cause has been taken up by the liberal diversity police as a gender issue because she’d be the first female Fed chairman.

Nancy Pelosi has bellowed her support, and Christina Romer, who was chief White House economist for the first two years of Mr. Obama’s Presidency, has all but said it would be a defeat for women if Ms. Yellen doesn’t get the Fed job. That led our friends at the New York Sun to wonder if they had somehow missed the creation of “the female dollar” given that they thought the Fed’s main task is to preserve the value of the currency.

Ms. Yellen is also seen, in and outside the Fed, as a leading monetary dove. That isn’t limited to her backing for Mr. Bernanke’s monetary interventions since the 2008 panic. We’ve followed Ms. Yellen for 20 years and can’t recall a key juncture when her default policy wasn’t to keep spiking the punchbowl. Many Democrats think the Fed needs to keep interest rates at near zero through the 2016 election, and Ms. Yellen is their woman.

The gender bender is compounded because White House aides are leaking that Ms. Yellen’s main competitor is none other than economist Lawrence Summers. Aficionados of diversity politics will recall that Mr. Summers was run out of the Harvard presidency by the faculty after he observed that women may have “different availability of aptitude at the high end” in the hard sciences. He was merely musing aloud trying to explain the relative dearth of tenured women professors in the sciences, but at Harvard this is like insulting Muhammad in Mecca.

Mr. Summers also worked in the Obama White House in the first term and repeatedly clashed with Ms. Romer. Among Democratic feminists, for Ms. Yellen to lose out to a man would be bad enough. To have her trumped by Larry Summers would be like losing to Phyllis Schlafly.

Mr. Summers, who was Bill Clinton’s last Treasury secretary, is also being pushed by his patrons on Wall Street and the other Robert Rubin protégés who populate the Obama Administration. They include Treasury Secretary Jack Lew, chief White House economic aide Gene Sperling and U.S. Trade Representative Michael Froman. They want one of their own at the Fed, as well as someone who would have more immediate credibility in financial markets.

The political problem is that Wall Street ties aren’t as golden as they once were among Democrats. Mr. Summers has in particular been part of the Democratic revolving door at Citigroup, which has been saved by the feds no fewer than three times, most recently in 2008-2009. Citi runs a best-in-class program for Democrats in between big political jobs, such as Mr. Lew, Mr. Froman and currently Peter Orszag, the former Obama budget director and architect of ObamaCare.

Mr. Summers has been a consultant to Citigroup since 2012, the year after he left the White House. A Citi spokesman says that “In addition to speaking at internal meetings, we engage Mr. Summers for small Private Bank client and institutional client meetings, where he provides insight on a broad range of topics including the global and domestic economy.” Neither Mr. Summers nor the bank will disclose his compensation.

Whatever it is, Citibankers will consider it a bargain if their man ends up running the agency with primary responsibility for regulating Citigroup. In the Dodd-Frank world, too-big-to-fail banks are public utilities that resist regulatory advice at their peril. If he returns to the heights of financial political power, Mr. Summers wouldn’t forget who helped him build a comfortable nest egg.

***

This political Big Top has everything—except a debate over what the Fed actually does. Mr. Summers has recently been quoted as saying the benefits of the Bernanke-Yellen quantitative easing are exaggerated, but that hasn’t been a major theme of his public writing since he left the White House.

We wonder if this isn’t merely a come-lately attempt to sound more hawkish than Ms. Yellen. Mr. Summers is above all a Democratic Party loyalist and would do whatever he thought necessary to help elect Hillary Clinton in 2016.

The real problem is that neither Ms. Yellen nor Mr. Summers seems likely to do what should be the next chairman’s priority—restoring the Fed’s independence by ending its post-crisis political interventions and focusing above all on maintaining price stability.

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