Who will be the next chair of the Federal Reserve? That question has been the subject of considerable debate this week, sparked off by an Ezra Klein article arguing that Larry Summers had the edge:
People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand (though I suspect have to do with a bunch of elite trial balloons going up at the same time), have really hardened in the last 72 hours.
The remarkable thing about this revelation is that a month or two ago, the consensus seemed to be that Janet Yellen (current Vice-Chair of the Fed) would be the inevitable nominee.
After detailing the reasons that Summers now seems to be President Obama’s top choice (Obama likes Summers, markets trust Summers more, Obama knows that Summers can respond effectively to a crisis, and the Obama administration believes Summers’ reputation for being difficult to work with is overblown), Klein himself admits that this news caught him by surprise:
Against all that, the conventional wisdom — which I fully bought into — a month or two ago was that Summers had little real chance. The politics of it just didn’t make sense. But if Obama feels strongly about Summers and his qualifications, the Fed job is more than important enough for him to fight through the politics. And so, though I’m a bit surprised to be saying this, at this point my reporting says Summers is the front-runner.
Because Summers is a relatively polarizing figure, the backlash against his potential appointment has been swift and harsh, even from fellow Democrats: Krugman worries that Summers’ personality will alienate Fed colleagues, Tim Duy worries that Summers’ tendency toward deregulation in the 90’s bodes ill for his role as Bank-Regulator-In-Chief, and Felix Salmon thinks that the argument against Janet Yellen is non-existent and that Summers would be a significantly worse choice.
Yglesias makes what I think can fairly be described as the cynical case for the reason that Summers has been in the news over the last 4 days:
I don’t know whether Janet Yellen or Larry Summers will be the next Federal Reserve chair, but I do know that Yellen’s advocates (or Summers’ enemies) inside the process have played things very cleverly over the past 24 hours. As of Sunday evening, I think all of Washington went to bed with the sense that Yellen was the prohibitive favorite and also that people were not particularly interested in this story…But then yesterday afternoon, someone put it out to Ezra Klein that things had changed and Summers had suddenly become the overwhelming favorite. Wording it that strongly is important, because that becomes news in a way that “actually Larry is still under consideration” would not. And putting it out there in the press in that way is really bad for Summers’ chances of getting the job. After all, lots of people hate Larry Summers! Once “everyone tell the world how you feel about Larry Summers” becomes a legitimate topic, it turns out people don’t feel good about him.
While the horse race for Fed Chair is interesting to follow, I honestly don’t care too strongly one way or the other–I think both are extremely qualified candidates. I lean toward Yellen because
1) she would be an historic appointment
2) she was more prescient than most in 2007 about the impending financial crisis
3) she has more experience as a monetary policymaker.
It will be interesting to see who ends up with the job–I think the smart (safe) play for Obama would be to go with Yellen; however, the Obama administration has continued to surprise me with their (occasional) lack of political savvy (debt ceiling, sequester, and fiscal cliff negotiation), so I wouldn’t be too surprised to see them go with Summers in the end.