Yellen vs. Summers: Who would be a better Fed chair?

July 25, 2013

Janet Yellen or Larry Summers: Who has the right skills to be Fed chair?  (Federal Reserve/Flickr)

The president’s decision on whom to nominate to be the next Federal Reserve chair increasingly appears to be coming down to Larry Summers and Janet Yellen. Ezra describes well what appears to be the state of play here: The president, or at least the people close to him, are leaning toward Summers, but are in the midst of assessing just how stiff the blowback will be if the polarizing former treasury secretary gets the nod.

But let’s back up a minute. What are the traits we really want in a successful Federal Reserve chair, and what do we know about Summers’s and Yellen's capabilities, and limits, on each?

First things first: No one is really qualified to be chairman of the Federal Reserve until they’ve done the job for a while, and some not even at that point (cough G. William Miller). It is in many ways an impossible job, requiring a person to be simultaneously a skilled economist, crisis manager, politician, administrator, and regulator;  Bernanke himself was in some key respects underqualified when he was first nominated for the job in 2005.

That is not a problem either Yellen or Summers would face. Both are, on paper, extraordinarily qualified, having spent many years at the highest levels of economic policymaking. But what do we know about their specific skills and weaknesses on each of those frontiers? Here’s some analysis, based on years of closely watching both Summers and Yellen and conversations with those who have worked for or with them.

Economist. Above all else, the Fed chair needs to make the right calls: When to hike interest rates, when to buy more bonds or fewer. And that requires excellent macroeconomic judgment. Both Yellen and Summers are accomplished academic economists with a long track record of publishing journal articles on macroeconomic topics.

Yellen is one of the key engineers of the Fed’s current strategy of pairing monthly bond purchases with “forward guidance” to explain to markets the future path of policy. Summers has been largely quiet about his views on the proper direction of monetary policy in recent years, no doubt in part to maintain viability as a possible nominee for Fed chair (though the Financial Times reported today that he expressed skepticism about the effectiveness of quantitative easing at a private conference recently). Add it all up, and we just don’t know in advance how a Summers Fed might differ from the Bernanke Fed, though we do know that Yellen is almost certain to maintain continuity with the strategy she helped put in place.

Crisis manager. When the financial feces hits the fan, the chairman of the Federal Reserve invariably plays a crucial role cleaning it up, as Bernanke knows all too well. The White House, according to Ezra’s reporting, tends to view Summers more favorably on this count. It is true that he was a key member of the team that led the response to international crises in the late 1990s (his presence on the famous Time magazine “Committee to Save the World” cover may seem cringe-inducing now, however).

Source: Time Magazine
Source: Time Magazine

Yellen was at the San Francisco Fed during the darkest days of the Fed’s response to the current crisis, not among Bernanke inner circle in Washington and New York making the nitty-gritty, middle-of-the-night decisions on whether to bail out this investment bank or that insurance company.  People who have worked with her describe her as exceptionally careful and deliberative—usually desirable qualities in a central banker. The question is whether, if a crisis hits during a Yellen chairmanship, she can make the fast decisions with imperfect information that are inherent to responding to a crisis. It’s worth adding that Bernanke had no real relevant experience in this area before becoming chair, and acquitted himself remarkably well.

Politician. The Fed chair must navigate the shoals of politics, representing their institution on Capitol Hill and with the White House. Summers has more experience in this aspect of the job, having served as treasury secretary and chief White House economic adviser. That doesn’t necessarily mean he will be better at it; he has a frequently abrasive personality that has earned him plenty of enemies on the Hill over the years. There has already been a surprising amount of blowback from senators to his potential nomination in the last few days, including a tweet from Sen. Jeff Merkeley (D-Ore.) that a Summers nomination would be "disconcerting."

But it’s also worth noting that Yellen has had a lower profile than Summers over the last 15 years, and thus been less subject to the kind of partisan maw that a Fed chair finds themselves in the middle of. In three years as vice-chair of the Fed, Yellen has not testified before Congress a single time. Indeed, the last time she did testify, in her confirmation hearing to become vice-chair in July 2010, she initially bungled her response to the first question. Sen. Richard Shelby pointed out that many of the banks that Yellen regulated as president of the San Francisco Fed had failed, and asked what role did she think a breakdown in regulation played in those failures. She began her answer, “Working with other regulators, I think that our regulatory oversight was careful and appropriate,” prompting Shelby to interrupt her, seemingly astounded that she was defending pre-crisis bank regulation. Yellen recovered fine, acknowledging the failures of pre-crisis bank regulation, but it was a small example of how she would need to work on navigating minefields in testimony if named Fed chief.

In short, Summers has pre-existing sour relations with some lawmakers, but also less of a learning curve.

Administrator. The chairman of the Fed is the ultimate authority over a sprawling, complicated Federal Reserve system, encompassing 12 banks and 18,000 employees, responsible for everything from regulating banks to managing the payments systems through which trillions of dollars flow each day.

Yellen has a clear edge on experience, having served as president of the San Francisco Fed and vice-chair of the Fed system; in that role she has had particularly responsibility for overseeing “reserve bank affairs,” such as reviewing and approving the banks’ budgets.

Summers has administered large organizations, namely the Treasury Department and Harvard University, but his experience at Harvard, where he resigned under pressure, is probably not a line on his resume he wishes to emphasize. Incidentally, for the Fed economists and other staff who work directly for the chair, either would likely prove a demanding boss; both have reputations as expecting much from their subordinates.

Regulator. Much of the immediate criticism to a possible Summers nomination, particularly from the left, has boiled down to this: He was part of the Clinton-era deregulatory zeal of the late 1990s that helped cause the financial crisis. And that’s true! But as Ezra reports, the sense in the White House is that Summers is a changed man, and is inclined toward a more restrictive view of what financial firms should be able to do (and how much capital they need to hold) than he was in the past.

One reason to give them some benefit of the doubt: Summers was a key White House staffer as the Obama administration pushed the Dodd-Frank financial reform act, so if he had been a force for loosening the law in internal debates, the president and his inner circle would be well aware of it.

Yellen, meanwhile, is known more for her role shaping monetary policy than as an architect of bank regulatory policies at the Fed (which is more under the purview of Governor Dan Tarullo), and would likely embrace continuity with the Tarullo/Bernanke strategy of pushing for higher capital requirements and other restrictions on mega-banks.

The post-crisis Fed chair faces a harder job now than when Bernanke took it on eight years ago. And in making his choice, President Obama will have to weigh which of these roles--and which type of background--really matters.

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