By shopping Larry Summers as a potential Federal Reserve chairman and then letting him withdraw from the fray when he ran into congressional opposition, President Obama did something potentially dangerous: He politicized what should be the most un-political job in Washington.
The Fed chairman is not required to be popular with politicians, or a congenial manager or even a nice person. The chairman is there to make excruciatingly tough decisions in times of crisis. The only real requirements for the job are a deep knowledge of economics and a willingness to make enemies when that’s necessary to protect the soundness of the economy. Whatever else one might say about Summers, he has amply demonstrated those qualities throughout his career.
During the weeks when the White House left Summers dangling in the wind, his familiarity with (and support for) Wall Street somehow became a liability. It was argued that these qualities might make him an insufficiently tough regulator, but there’s little evidence to support that claim. As Treasury secretary in the late 1990s, Summers was an early, passionate critic of Fannie Mae and the risks it posed for the economy. He pushed a crackdown on money-laundering that scared the banks, and upset some of the countries that were “named and shamed,” such as Israel, Panama, the Philippines and Russia. Somehow, critics came to see Summers’s financial experience and expertise as a negative.
Then there was the personality issue. Summers certainly can be abrasive. But Paul Volcker, Alan Greenspan and Ben Bernanke weren’t exactly lovable characters. They were aloof, strong-willed, socially awkward and occasionally overbearing. History will record that all three were excellent Fed chairmen.
Politicians of the day mounted a furious campaign against Eugene Meyer, Hebert Hoover’s choice for the Fed. The attacks were scurrilous, focusing on Meyer’s Jewish ancestry and his successful career on Wall Street. The financial historian Liaquat Ahamed quotes Sen. Smith W. Brookhart of Iowa, who called Meyer a “Judas Iscariot …one who has worked the Shylock game for the interests of big business.” Meyer proved to be a courageous Fed chairman who fought the Great Depression as aggressively as he could. (Meyer later showed his devotion to noble, if not always money-making, causes by purchasing The Washington Post.)
What was truly strange about the whispering campaign against Summers among liberal Democrats was that it devalued the Obama administration’s success in combating the financial panic of 2009. It’s easy to forget how close the markets were to freezing up when Obama was elected. By backstopping the banks through the Troubled Asset Relief Program and pumping in $825 billion in stimulus, the United States avoided the kind of meltdown that had happened in other countries when financial bubbles burst. These moves were necessary, but unpopular. A more politically attuned leadership at the Fed and White House might have held back.
The gradual recovery of the U.S. economy has been the product of good policy decisions. Ahamad’s book, “Lords of Finance,” is a story of how in the 1920s, smart people make bad choices, with catastrophic consequences. They raised interest rates when they should have lowered them; they imposed heavy reparations on Germany that could only have harmful effects on the global economy; they stuck with a gold standard that exacerbated the financial imbalances that led to the Great Depression.
The Federal Reserve, like our judicial system, is supposed to be above political pressures and reflexive ideas. It’s an institution where independence and expertise truly matter. The one thing that shouldn’t count with the Fed job is popularity with Congress. Yet Obama, who is said to have favored Summers for the job, applied precisely that political yardstick by making him run in a monetary version of a beauty pageant.
Obama has an unfortunate history of this kind of government by trial balloon. He floated Susan Rice as a potential secretary of state until the attacks on her became so intense that she withdrew. She’s now national security adviser, but scarred. Then the White House surfaced Chuck Hagel for secretary of defense. He was confirmed, barely, but was perhaps irreparably damaged in the process.
A president can be forgiven for politicizing state and defense, but not so the Fed. Maybe it’s too late to revive Summers’s nomination, and Janet Yellen or Donald Kohn may prove worthy alternatives. But the run-it-up-the-flagpole process that Obama has been using is a mistake. It weakens both the White House and its nominees. In the case of the Fed, it sends the worrying signal that this is now a political job.