Larry Summers isn’t popular in the blogosphere. But he’s got friends in high places.

July 25, 2013

As far as I can tell, there's almost no one in the economics blogosphere who wants to see Larry Summers named as Ben Bernanke's replacement. The bulk of opinion ranges from relative indifference between the two candidates ("as we know there's no real daylight between Yellen and Summers") to extremely strong anti-Summers opinions ("Larry Summers will destroy the economy") -- with much of the latter being driven by Summers's record on financial regulation. Tyler Cowen is almost alone in holding up the pro-Summers end of the argument.

(Photo by Jerome Favre/Bloomberg)
(Photo by Jerome Favre/Bloomberg)

The result is that if you're just reading the economics blogosphere, you're getting a skewed picture. The dominant thinking seems to be, How could the White House possibly name this guy that nobody likes? The key thing to remember here is there are other zones of influence too, and some of the most important ones are much, much friendlier to Summers.

The world of economic and Wall Street heavyweights who've worked or fundraised at high levels in Democratic administrations tend to be very pro-Summers. That's true inside the White House, where longtime Summers allies like Jason Furman and Gene Sperling are central to the process. But it's also true outside the White House's walls, where significant "formers" like Tim Geithner and Robert Rubin are strongly admiring of Summers. These people, by virtue of their experience and their relationships with the key decisionmakers, carry a lot of weight.

From what I can tell, opinions in the monetary-policy community proper are a bit more mixed than either the administration or the econo-sphere. In particular, there's much more divergence among different candidates, with various people favoring dark horses like Alan Blinder or William Dudley.

That said, there's an obvious lean towards Yellen in a Yellen-Summers race, as they feel she's more experienced and knowledgeable about monetary policy. There is also an annoyance with the idea that because both candidates are worried about unemployment, both would pursue equivalent monetary-policy paths with equivalent skill. The trick for the Federal Reserve going forward, many contend, is managing the extremely tricky communications challenge as they begin to pull back -- and Yellen, they note, has actually been leading the Fed's communications committee, and so is deeply immersed in these questions and has been for some time.

As for the Federal Reserve proper, there's not going to be some kind of poll of Fed staff. Bernanke will be (and probably already has been) consulted, and his opinion will hold great weight inside the White House. In terms of other Fed players, expect people who were close to Obama or the White House economics team and were subsequently sent to the Fed -- like Dan Tarullo and Jeremy Stein -- to be influential here. I don't have good enough sourcing in this world to say confidently where they come down.

Congress is interesting. Hill progressives are quite skeptical of Summers -- again, largely because of financial regulation -- and have made their voices heard on that fact in recent days. That said, some surprising Republicans are on Summers's side, including Richard Shelby, the GOP's ranking member on the Senate Appropriations Committee* -- and the White House almost certainly believes it'll be easier to keep progressives than attract Republicans. It's a bit harder to say how Yellen would fare before Senate Republicans.

Then there's the all-powerful "market." Opinion here is more mixed, which means that your view of the market's reaction to either candidate depends enormously on who you talk to. But one thing to note is that Democratic administrations often get much of their market information from market participants involved in Democratic politics. Some observers worry that this could be giving the White House a skewed view of the market's feelings.

If the White House is gauging market reactions to Summers by asking Bob Rubin and Larry Fink and Roger Altman and Steve Rattner for their views -- all of whom know and like Summers immensely -- they're going to walk away with a view of market opinion that's different from the one they'll get if they're, say, polling the big macro hedge funds. But they don't know those hedge funders quite as well, and they're going to be careful calling any big investors they don't know well because those investors might try and trade on any signals they glean about the selection process.

Of course, the information the president will weight most heavily is the information he gathers directly. Obama knows Summers well, and really likes him. Obama and Yellen have no relationship to speak of. That's perhaps the most important zone of influence of all.

Looking back, I was overly pessimistic on Summers's chances over the last few months because I was overweighting opinion in the econo-sphere and the monetary policy community and underweighting the importance of Summers's allies and his experience in the White House.

It's useful to remember that White Houses -- particularly second-term ones -- know who they know, and they tend to rely on testimony from sources they already trust. So don't be fooled by the weight of opinion in the econ blogosphere. Even if you're not hearing many strong cases for Summers, the White House is.

 

Correction: This post originally said Shelby was the top Republican on the Senate Banking Committee. That was true. He's moved to being the top Republican on the Appropriations Committee, and is now just a "senior member" on the Banking Committee.

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Neil Irwin · July 25, 2013