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Can a couple dozen Democratic senators and the New York Times editorial board be wrong?
You bet they can. Both are advocating Janet Yellen’s appointment to be the next chair of the U.S. Federal Reserve, claiming that those who prefer Larry Summers as the Fed’s big cheese are closet sexists in bed with the banking lobby.
These advocates, along with a host of left-leaning pundits, say they are concerned about Summers’s involvement in financial markets, as a paid consultant to megabank Citigroup, hedge funds like DE Shaw, and other financial institutions, while clucking about what a shame it would be for President Obama to pass up the chance of nominating the first woman for the top Fed post. Sen. Diane Feinstein (D-Calif.) has made clear her preference for Yellen, telling CNN, “a woman as head of the Fed, a qualified woman, would be a positive thing for this administration.” Even the Wall Street Journal has fanned the flames, headlining one article,” Summers Faces Hit on Potential Fed Nod Over His Wall Street Ties.”
As the president watches this wave of commentary crash over his head, he should be asking himself: Since when does Wall Street experience — for pay, no less — disqualify someone for chairmanship of the Fed?
In fact, it shouldn’t. Summers’s recent immersion in the markets could be a huge asset to the Fed. Those of us who were intimately involved in the 2007-08 financial crisis and its aftermath (full disclosure: I was chief economist at a large hedge fund during that time) understand well that the Fed surely would have benefited from more market experience before and during the crisis. Even Ben Bernanke, the outgoing chairman, has acknowledged that the Fed should have acted more quickly to recognize and respond to the cascading financial crisis surrounding the March 2008 collapse of Bear Stearns and, six months later, the collapse and bankruptcy of Lehman Brothers. Financial market experience would have helped to produce a more proactive response, especially after the Bear Stearns crisis.
Both episodes nearly brought the global financial system to its knees. Markets approached total collapse as counterparties withdrew cash from one other. There was a virtual run on major U.S. investment banks from Morgan Stanley to Goldman Sachs. Even the mighty JP Morgan was at risk, notwithstanding the subsequent denials of its high-flying CEO and chairman, Jamie Dimon.
And the Fed did make mistakes. The September 2008 collapse of Lehman Brothers defined systemic risk. Yet the Fed was still acting as if it was a normal recession, holding the federal funds rate at 3 percent, while “quantitative easing,” its later controversial bond-buying program, had not even been imagined. Meanwhile, the impression left by the Bear Stearns rescue made market players too slow to reduce risk, thereby helping precipitate and intensify the Lehman collapse.
Had the Fed better understood the extent of the virulent crisis in 2008 — perhaps a former Treasury secretary with both real-world and academic experience could have helped — the substantial costs engendered by the imminent financial collapse, including the severity of the Great Recession that followed, might have been mitigated.
The other candidate for Fed chairman, Janet Yellen, is a well-respected academic economist and a much-admired member of the Federal Reserve System community. She would make a good Fed chairman. Summers, by virtue of the breadth of his market, government, and academic experience, is more likely to make a great Fed chairman.
We surely could use (another) one.
John H. Makin is resident scholar at the American Enterprise Institute (AEI), where he writes AEI’s monthly Economic Outlook.
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