Like much of the rest of the economics blogosphere, I was no Lawrence Summers fan. I’m still not one. But I see now a novel and convincing reason why the Obama administration would want to nominate Summers, the president’s former chief economic advisor, to the head of the Federal Reserve.
Until recently, the main concern about rolling up the Fed’s $85-billion a month bond-buying program was that it would choke the U.S. recovery if done too soon and fuel asset bubbles and inflation if delayed too long. In the past few weeks, though, the focus of the worry has quickly turned from domestic to international, with countries from India and Indonesia to Brazil hit by massive capital outflows and rapid currency depreciation.
Summers, of course, was undersecretary for international affairs and then deputy Treasury secretary during the emerging market crises of the mid-1990s, which also started with a rapid climb in long-term interest rates in the U.S. Today, there are many reasons to think the powerhouses of the developing world are better equipped to confront the challenge: They have much larger central bank reserves, more solid and sophisticated banking systems, and are armed (we hope) with the knowledge that it’s far better to let one’s currency sink—which helps reduce ballooning current account deficits—than try to fight it with capital controls. Still, should things unfold in the most undesirable way, Larry Summers is the guy who’s already seen the worst case scenario from a front-row seat.
Managing the Mexican and Russian debt crises of 1994-1995 and later the Asian financial crisis of 1997-1998 along with then-Fed Chair Alan Greenspan and former U.S. Treasury Secretary Robert Rubin is arguably the highlight of Summers’ resume. Critics take stabs at his record on financial deregulation and many on the right and the left have reservations about the stimulus plan he crafted as Obama’s National Economic Council director. But the emerging market rescue is widely regarded as a resounding success.
But Summers’ expertise in international affairs predates his time under the Clinton administration. When he joined Treasury he’d already been chief economist at the World Bank and written extensively about all manner of global economic issues as a Harvard academic.
International relations, on the other hand, aren’t Fed Vice-Chair Janet Yellen‘s forte. The assets that, until recently, made her look like the obvious choice to succeed Bernanke—being a Fed veteran, having intimate knowledge of QE and forward guidance, a well-known stance on monetary policy and a scholarly focus on unemployment—now seem like weapons to fight the battle of yesteryear. Donald Kohn, the third name Obama has mentioned with reference to the Fed race, would also be a status quo chairman.
I believe Yellen is still the best person for the job. She is a clear communicator and promoter of a transparent Fed, traits that could come in very handy when managing expectations about Fed policy around the world. On this, I find particularly telling a footnote in the prepared remarks of a recent speech by Deputy Bank of Canada Governor John Murray on the impacts of the end of QE:
Federal Reserve Board Chairman Alan Greenspan did try to prepare markets for higher short-term interest rates in testimony before the Joint Economic Committee a few days before the February 1994 meeting of the Federal Open Market Committee at which the tightening began. However, this preparation was quite minimal in comparison with recent Fed statements about “tapering.”
Summers, by contrast, has a known penchant for controversial remarks, which have repeatedly landed him into trouble—the best known example of this are his comments on girls’ aptitude for math, which contributed to his resignation as president of Harvard University, but there are many others. I don’t mind a provocative thought, and am aware that Summers’ utterings have often been taken out of context, but I wonder if he’ll be able to resist the temptation to shoot out verbal cannon balls when the world is hanging from his lips.
Still, the case for Summers to head the Fed is undeniably stronger. The good news is the improved optics might help Summers, with all his political baggage, through the Senate confirmation hearing. The last thing markets need right now is a drawn-out Congressional battle on who should be the next Fed Chair.
Erica Alini is reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.