Column: Fed’s Independence, Not Summers’ Fate, Is Cause for Concern
Shed no tears for Lawrence H. Summers, forced out of contention for the Federal Reserve chairmanship by liberal Democratic opponents who thought he was too close to Wall Street.
Though brilliant, the Harvard economist has nonetheless ticked off too many people in his long and brash career, not only on policy grounds but also because of his famously caustic personality. Note to future careerists: Niceness counts.
Nor should you pity President Obama, who reportedly favored Summers. The president is reaping what he sowed. He started the unseemly squabble among Democrats by awkwardly announcing that the current chairman, Ben S. Bernanke, had “already stayed a lot longer than he wanted or he was supposed to.”
That was in June, when Bernanke was still in the middle of a second four-year term to which Obama had appointed him and had not yet publicized his own intentions.
Obama defended Summers in closed-door meetings with congressional Democrats but never mustered the gumption to nominate him and bring his party into line.
No, the real victims here are the Federal Reserve and its chairmanship, both of which are supposed to be above politics but have been dragged deep into the same political muck that stains every other institution in this polarized capital. The question is how much Fed independence, actual and perceived, has been harmed, and for how long.
Of course, the Fed has never been completely apolitical. President Richard Nixon pushed his handpicked Republican Fed chairman, Arthur Burns, to engineer a boom for his 1972 re-election campaign. The 1978 Humphrey-Hawkins Act, passed by a Democratic Congress and signed by Democratic President Jimmy Carter, put the Fed in charge of value-laden (i.e., political) trade-offs by requiring it to minimize both inflation and unemployment.
Meanwhile, the Fed’s role as a financial regulator has grown, subjecting it to constant lobbying from interest groups and their allies in Congress.
In 2010, Republicans mounted an unjustified but successful partisan attack on Obama’s nomination of Peter Diamond to be one of the Fed’s seven governors.
Still, the Fed managed to avoid undue politicization. Chairman is the key job, and all chairmen since August 1979 — Paul A. Volcker, Alan H. Greenspan and Bernanke — served at least part of their tenure after being reappointed by a president of the opposite party.
In all that time, the closest Senate confirmation vote was 70 to 30 in favor of Bernanke’s reappointment in 2010.
Now Summers’ withdrawal under fire suggests the Fed’s top position may be subject not only to fierce wrangling between the parties but within them. He never got a hearing, just a lot of flak about what he or his competitor, Janet Yellen, might do in office.
Supposedly Summers would have unduly tightened monetary policy, perhaps even more than the bond-buying “taper” Bernanke is already weighing. Says who? Last I checked, Summers hadn’t tipped his hand about monetary policy and was waging an op-ed campaign for greater infrastructure spending, out of concern for jobs.
Critics blame Summers not just for being abrasive (fair enough) but also for supporting financial deregulation as President Bill Clinton’s Treasury secretary, which allegedly led to economic meltdown years later. Worse, Summers never admitted the mistake or apologized for it, as Michael Hirsh emphasized in a National Journal rendition of the critics’ arguments. Ergo, Summers would still be pro-Wall Street now.
I did not know that atoning for policy judgments that were made in good faith, but can be questioned in hindsight, was a precondition for the Fed chairmanship. If it were, Bernanke would have been disqualified due to his backing of low-interest-rate policies at the Fed under Greenspan — which many blame for the housing bubble.
In early 2007, Bernanke declared that the subprime mortgage crash was “likely to be contained.” Whoops.
Still, as chairman, Bernanke’s been good to great. Probably that’s because he’s a first-rate economist who doesn’t ruminate on the past but judges the issues before him according to the best available data — a description that also fits Summers, and Yellen, for that matter.
The Summers fight was a power struggle, not a serious policy debate. Progressives were determined to roll the White House and, inexplicably, the White House let them.
Neither side seemed too concerned about the political independence of an institution whose essential attribute is a capacity to resist demands for easy money, if necessary — parties and elections be damned.
As two distinguished Harvard economists put it in a 1993 paper: “Insulating monetary policy from the political process ... helps enforce the low inflation equilibrium. Without some degree of political independence, it would be impossible to appoint a central banker more inflation averse than a majority of the voters, which is a socially desirable goal.”
Their names? Alberto Alesina and Lawrence H. Summers.
Charles Lane is a member of The Washington Post’s editorial board.