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July 28, 2013
David Warsh, Proprietor


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Larry Swings for the Fences Again

For the sixth time in five years, Lawrence Summers has mounted a campaign for a top job in Washington.  He has won one of these and lost four so far. He’s not likely to get this one, either.  But even if he fails, the 58-year-old Harvard professor won’t be going away.

Summers and his mentor, former Treasury Secretary Robert Rubin, joined the Obama campaign in September 2008, three days after Lehman Brothers declared bankruptcy, just as the financial crisis entered its most serious phase (EP: A Fan’s Notes).

After the election, Summers hoped to be named Treasury Secretary, a job he had held for the final eighteen months of the Clinton Administration.  Instead, Timothy Geithner, his former subordinate, got the nod. Summers became director of the National Economic Council, with an office in the West Wing of the White House – a job that required no Senate confirmation (EP: More Rivals).

Eighteen months later, Summers unsuccessfully sought to jostle Geithner out (EP: Is Physiognamy Destiny?). When that didn’t work, he campaigned in 2010 to replace Ben Bernanke at the Fed (EP: Is Summers Headed Home?). Bernanke was reappointed and Summers returned to Harvard, and a variety of consulting engagements, including the advisory board of a competing online for-profit university.

In early 2012, he actively campaigned in Davos to be appointed president of the World Bank. President Obama chose Dartmouth University president Jim Yong Kim instead (EP: One Thing Obama Could Have Done Differently).

This time Summers is trying to shoulder aside vice chair Janet Yellen to become chairman of the Federal Reserve Board when Bernanke’s second four-year term as chief ends in January.  Summers seems unlikely to get the nod. Damian Paletta and Jon Hilsenrath, of The Wall Street Journal, surfaced previously undisclosed consulting ties to Citigroup Inc. and the Nasdaq stock exchange.

Summers is qualified for the Fed job mainly by ambition. He’s a macroeconomist, with little background in monetary policy.  He possesses few of the consensus-building skills the job requires.  And while he has proved to be an excellent leader in harness with others, as when assembling the framework in 1992 that became Rubinomics, or serving as the Clinton administration’s ramrod in various international financial crises in the 1990s, he has displayed a remarkable lack of judgment when in charge himself.

He was forced out as president of Harvard University after running off the university’s star endowment manager and replacing the well-loved dean of the college, both with many ill effects; alienating a substantial swathe of faculty; and digging himself in deeper with Harvard’s Russia scandal, a matter which would presumably receive renewed scrutiny if his nomination came before the Senate (EP: The Asterisk).

Summers’ gifts include an agile mind, a passion for debate, a lust for power, a knack for friendship, and, of course, by now, a wealth of experience. (He entered politics in 1988 as an adviser to Michael S. Dukakis’s presidential campaign.)  He is able to remain in competitive play thanks equally to the backing of his one-time boss, Bob Rubin (formerly of Goldman Sachs and, more recently, Citigroup), as well as to a legion of his own former staffers still working in the White House and elsewhere. The current round of speculation commenced, for example, with an enthusiastic endorsement by Edward Luce, Summers’ former Treasury Department speechwriter, now the Washington Bureau chief of the Financial Times. Every policymaker hopes for favorable coverage from friendly journalists, but Larry’s admirers sometimes overdo it (EP: A Rice Bowl Should Not Be Carelessly Threatened).

You can’t blame Summers for trying. Yellen, 67, a former chairman of the Council of Economic Advisers, has plenty of experience of Fed team play (three years as governor, then president of the Federal Reserve Bank of San Francisco, 2004-2011, before Obama re-appointed her governor and vice chair). She is a highly regarded macroeconomist and has a bevy of friends in Congress and is married to Nobel laureate George Akerlof, but seems to lack enthusiastic backing, at least for the top job, among monetary economists, who include students of financial markets and of the central bank. Thus Summers might win and can’t lose for being so furiously mentioned.

If neither Summers nor Yellen is chosen, who might serve?  Before the financial crisis Rubin might well have been chosen – certainly economic policy was successful under his management during the Clinton years. Today the best candidate, bar none, is Stanley Fischer, 69, formerly of the Massachusetts Institute of Technology (where he was Bernanke’s teacher), an US citizen who enjoyed great success for eight years as governor of the Bank of Israel, now living in Manhattan and looking for a job (EP: The Head of the Table).

There is the usual list of dark horses, as well, which presumably includes Kevin Warsh (no relation!), 43, who went through the crisis with Bernanke, and Roger Ferguson Jr., 61, Fed vice chair from 1999 to 2006, now chief executive of the enormous TIAA-CREF retirement  fund. It is always possible that in an emergency, Bernanke could be persuaded to stay on but he has made it clear that he has no wish to do so (EP: Bush’s Best Pick).

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The story of Goldman Sachs’ “aluminum shuffle” which broke into plain view with a front-page New York Times story last week will take some time to clarify, but it  definitely is not good news for the big banks.

A Senate hearing presided over by Sen. Sherrod Brown (D-Ohio) unfolded without fireworks last week. Brown promised to hold another in September. The Federal Reserve Board announced in mid-July that it was reviewing the permissions it had given three years ago for big banks to enter commodities markets.  J.P. Morgan disclosed at the end of last week that it was thinking of selling the $1.6 billion oil, gas and industrial metals businesses that derivatives wizard Blythe Masters had bought for it after the Fed gave the green light.

Much the best explanations I have seen this week appeared on the Financial Times’ Alphaville blog (a kind reader pointed them out to me). If you’ve gotten this far and are interested in the story, it’s really worth while filling out the brief registration stories to scan Izabella Kaminska’s recent posts, in order to see what you’re missing.

Commodities and Banks: A Recap is the best explanation of the colossal contango   in commodities markets (believe me, this is a word you want to know, the opposite situation is backwardation) produced by the 2008 crisis, that gave rise to the opportunities that the big banks seized with much alacrity.  Explaining the Commodies Warehouse Trade with Scripture is a very lucid tour of the possibilities for manipulation that exist on any darkling plain. And The Dawn of Systemically Important Commodities Traders, in September 2012, was downright prescient.

Who thinks economics journalism doesn’t have a future?

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One Comment

  1. Dave,
    I think you understate the support Janet Yellen has among monetary and other economists. She is the person responsible for the fact that most central banks now use a 2% annual inflation rate target. She is enormously capapble, not just experienced. Loot at Jim Hamilton’s strong endorsement of her. Sure, there may be some alternative candidates who would be good, and maybe Fischer is the top of that list. But I do not see some major move for him. Yellen has the experience and ability for the job. It would be extremely disappointing to many if she does not get it (and particularly if the alternative is Summers).

    Monday, July 29, 2013 at 2:23 pm | Permalink

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