When Montana Democratic senator Jon Tester announced last
Friday that he would vote against Larry Summers’s putative candidacy for Fed
chairman if it came before the Senate Banking Committee, he put a dagger in
Summers’s Fed career before it even started. Tester would have made it four
Democratic nay votes in committee, and it is highly unlikely that Republicans
would have taken up the slack to push through a Summers nomination.
So over the weekend, Summers wisely withdrew from the horserace, telling President Obama that the confirmation process would be too political and acrimonious.
Some Democrats blame Summers for financial deregulation during the Clinton-Rubin 1990s. Other Democrats simply want Janet Yellen to be the first female Fed chair. And Republicans blame Summers for authoring the $1 trillion Obama stimulus-spending plan that piled on new debt without generating a real economic recovery.
But actually, President Obama doomed this candidacy months ago with his repeated rebuttals to attacks on Summers. A buzz then developed that a Chairman Summers would be Obama’s guy, sort of the way Arthur Burns was Dick Nixon’s guy years ago. And that turned out to be a disaster.
Fed chairmen have to be independent, ready to make tough decisions. So what would have Obama said to Summers about higher interest rates and slower money growth in the next couple of years? Would Summers have had the independence to pull it off?
We’ll never know. But we do know that stocks markets rallied big time on the Summers withdrawal. Markets think Janet Yellen will be an easy-money dove and that Summers would have been the tight-money hawk. But stocks have no way of knowing this, because neither Yellen nor Summers have suggested a rules-based monetary policy that will prevent serious financial crises while stabilizing inflation and maximizing growth.
In the 1980s and 1990s, a rules-based monetary strategy worked very well. Economists have called the period the Great Moderation. Yet as bright as they are, Yellen and Summers are Big Government and Big Fed fine-tuners, meddlers, and tinkerers. And that’s exactly what we don’t need from the next Fed chair.
Instead, we need a rules-based approach that will guide the Fed through the difficult period of shrinking a $3.7 trillion balance sheet and a $2.2 trillion volume of excess bank reserves, and raising the zero interest rate.
Can this be done in an orderly manner? Or will financial markets panic over this return to normalcy?