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September 2, 2013
David Warsh, Proprietor


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Obama at the Crossroads

After a week of traveling in the Midwest, I returned to Massachusetts convinced that President Obama’s presidency is at a crossroads. I talked to more streetwise Republicans in a few days than I ordinarily do in a month (or two) in Boston.  It’s become harder to defend the president.

I don’t mean Obamacare. That courageous achievement set in motion vast changes in the health care landscape. They’ll take decades to run their course. The states, those famous laboratories of democracy, have gone to work on implementing the measure (or not), and much will be learned in the next few years about what works and what needs to be fixed.  (This Politico story, about how the popular governor of Kentucky has embraced the program despite the impassioned opposition of Senators Mitch McConnell and Rand Paul, is a good example of the process.) To have put in motion the restructuring of health care in the United States will always be the signature accomplishment of the Obama presidency (the auto industry rescue in the wake of the financial crisis also ranks high).

I don’t mean Syria, either, though the president – caught between a hawkish Secretary of State, John Kerry, and a dovish national security adviser, Susan Rice – is engaged in a memorable waffle. There are worse things than hesitating, of course – talking big and then hesitating, for example.  The ever-antagonistic Republicans in Congress, by resisting, may for once make matters better than worse.

I mean economic affairs.  The nomination of the next chair of the Federal Reserve Board has serious implications, for the world, the United States, and for Obama’s presidency.  Evidence is accumulating that the president is on the verge of making a very big mistake.

Last week John Harwood, of CNBC, reported that a “Team Obama” source had told him that Lawrence Summers would likely be nominated in a few weeks.  Meanwhile, Jon Hilsenrath and Carol Lee, of The Wall Street Journal, reported  last week that Fed vice chair Janet Yellen, who for months had rumored to be, with Summers, a leading contender, had, in conversations with friends,  played down her chances of getting the job. Ezra Klein, of The Washington Post, checked around and concurred:

At this point, Larry Summers isn’t just the favorite for Federal Reserve chairman. He’s the overwhelming favorite. Unless something truly unexpected shows up in the vetting process (a paid toast at Bashar al-Assad’s birthday party, for example) or the administration comes to believe Senate Democrats will revolt against a Summers nomination, he’s going to get the job.

But White House sources bruiting Summer’s impending nomination are precisely those who are rooting for it. What is going on in the rest of the world?

The veteran Stanley Fischer sounded an alarm of sorts in an interview with Charlie Rose, subsequently excerpted in Bloomberg BusinessWeek.  Fisher, a Massachusetts Institute of Technology professor for twenty-five years, is probably the world’s leading authority on the theory and practice of central banking. He taught then-undergraduate Summers, taught Ben Bernanke (and many other central bankers as well), then served for eight successful years as governor of the Bank of Israel, learning Hebrew in the process, and steering the Israeli economy through the crisis with barely a dip.

On the Summers-Yellen issue, they’re both very good economists. Janet has more experience in the Fed. Larry has more experience in the government. I would say that Larry was really one of the outstanding economists of the era when he was still an academic economist. He hasn’t done as much central banking. Janet is a very safe pair of hands, and you want the central bank to be in a very safe pair of hands.

A “safe pair of hands,” Larry Summers definitely is not.  He has no qualifications as a central banker, aside from his relationships with regulators and market participants he built over the years as a Treasury official and, subsequently, as a highly-paid adviser to hedge funds (which is very different from central banking). A plunger by nature, he lacks the temperament for the job. (He vigorously campaigned last year for the World Bank presidency, which ultimately went to Dartmouth president Jim Yong Kim.)  His five-year tenure as president of Harvard University, an institution he didn’t understand, was a disaster, as recounted last week by Bloomberg’s Michael McDonald.

Finally, there is an issue of serious corruption.  Harvard’s Russia scandal isn’t on the order of a paid toast at a dinner for Bashar al-Assad – it’s more serious. Summers’s best friend and foremost protégé, Harvard professor Andrei Shleifer (and Shleifer’s hedge-fund operator wife) attempted in 1996 to steal from better-qualified competitors Russia’s first license to sell mutual funds – all the while leading Harvard’s State Department mission to teach Russians American-style market fair play. The mission was shut down amid much embarrassment after their actions were revealed; the US Justice Department sued Harvard and Shleifer and got its money back. Summers’s role in the affair and the subsequent investigation, heretofore almost completely ignored, presumably is about to get a good going over in the administration’s “vetting” of his candidacy, in the newspapers, and in whatever comes next.

The Post’s Klein noted that among president’s economic advisers all that remains are what he calls “the Clinton clique,” economists and others who won their spurs under former Treasury Secretary Robert Rubin, formerly of Goldman, Sachs and, after, Citigroup Inc. Jacob “Jack” Lew is Secretary of the Treasury. Gene Sperling directs the National Economic Council. Jason Furman is chairman of the Council of Economic Advisers. Those few counselors who might have been deemed to be independent are gone – icon Paul Volcker; former Council of Economic Advisers chairs Christina Romer, of the University of California at Berkeley, and Austan Goolsbee (of the University of Chicago’s Graduate School of Business); Jared Bernstein, Vice President Biden’s chief economist; former Treasury Secretary Timothy Geithner (the former subordinate who bested Summers for the Treasury appointment). Because power is about influence going forward, Summers, no longer Rubin, is the undisputed leader of the clan. Having the Clinton clique in charge at the White House “is bad enough,” wrote Felix Salmon, of Reuters, last week. “But it would be much worse if they essentially managed to engineer a hostile takeover of the Federal Reserve Board.”

Hence the crossroads.  Obama should count heads (as Rachelle Younglai, of Bloomberg News, did last week) and realize that he probably can’t win Summer’s nomination without Republican support. As in the case of threatening to take action against Syria, he would have put himself at the mercy of his Republican foes.  If he hasn’t already, he should appoint a Team B, led by Volcker and Geithner, to consider alternatives to the heretofore two leading candidates, the chances of both now injured the fray.

I don’t mean to be apocalyptic. Yellen may be chosen. Whatever her shortcomings may be as a battle captain, she is a proven leader within the Fed. Summers may be nominated and confirmed. The sun will come up every morning if he is. There will be plenty of good stories for those who cover the Fed. He may even serve with distinction; the risky course sometimes works out.  But even if Summers succeeds, United States prestige will have been diminished by the rise of a man who, when his friends cheated the government they represented and got caught, backed them to the hilt and, unrepentant, still climbed to the top.

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2 Comments

  1. Dave Backus @ NYU wrote:

    Rachelle Younglai link: http://www.reuters.com/article/2013/08/27/us-usa-fed-congress-idUSBRE97Q0RH20130827

    Monday, September 2, 2013 at 3:29 pm | Permalink

  2. Excellent post, Dave. I completely agree.

    Tuesday, September 3, 2013 at 6:01 am | Permalink

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  1. Links for 09-03-2013 | Symposium Magazine on Tuesday, September 3, 2013 at 7:05 am

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