The case for Larry Summers

July 31, 2013

There's a problem with reporting on the Fed chair race: Janet Yellen's supporters will talk on the record. Larry Summers's supporters, by and large, won't.

Larry Summers has his allies. Here's what they're arguing. (Photo by Jerome Favre/Bloomberg)
Larry Summers has his allies. Here's what they're arguing. (Jerome Favre/Bloomberg)

That's in part because his key supporters are concentrated in and around the Obama administration, and they stay out of the media almost as a matter of course. But their reticence has led to a real imbalance in the debate. The case for Yellen is clear, and made often. Here, most recently, is Alan Blinder's persuasive salvo. The case for Summers is largely being made behind closed doors — though in the rooms that really matter.

This post is the product of numerous conversations with Summers's supporters who, to my continuing frustration, typically refuse to be quoted even when they're just saying nice things about their former colleague. Given the centrality of their testimony to this process, however, it's important to know what they're arguing. So here are the key points they make — points I'm passing along, to be clear, without endorsement:

— Summers is a better dove because he's a better hawk. Everyone agrees that Summers and Yellen both believe the Fed needs to keep supporting the economy for some time to come. But Summers's supporters believe he'll be able to keep that support going longer, if necessary.

There are two versions of this argument. One is that Yellen will tighten prematurely, because her reputation as a dove will make it harder for her to convince the market that she really will begin tightening when the time comes, and so she'll need to move from promising future tightening to actually tightening sooner than Summers would. Another is that investors won't trust Yellen's promises to tighten, and so the market will lose some confidence in the Fed and a risk premium will begin building — which would be even worse than an actual tightening.

To put it another way, Summers's supporters think the fact that he's a more credible hawk will let him be a better dove.

Yellen's supporters, it's worth saying, scoff at this argument, which they consider too clever by much more than half, and they particularly note that Summers's sparse record on monetary policy and the controversy surrounding his appointment will unnerve the market, leading to the exact risk premium that his supporters fear.

— Summers will be a more engaged regulator. This is the most surprising feature of the case for Summers. Outside the White House, the knock on Summers is that he's a tool of the banks — he helped with the financial deregulation of the 1990s, and he was skeptical of the Volcker rule during Dodd-Frank, and he's taken millions of dollars in consulting and speech fees from Wall Street.

This drives his supporters crazy. They see the 1990s as basically irrelevant. They think Summers made good points about the difficulty of enforcing the Volcker rule. They think his Wall Street experience is a plus, as it means he actually understands the industry. They say he was a strong supporter of aggressive bank regulations inside the Obama administration.

And they see Summers as an informed, confident and engaged financial regulator — something they worry Yellen wouldn't be. The argument here isn't that Yellen's heart wouldn't be in the right place, but that her focus would be elsewhere. Yellen is a monetary economist. She's at the Fed because she loves monetary economics. Summers, meanwhile, has a broader range of demonstrated interests, including financial regulation and the housing sector. There's no chance Summers is going to let those areas languish, as past Fed chairs have done.

— Summers knows how to manage a crisis. This White House is particularly attuned to the idea that the economy can fall apart at any moment. Summers, they think, knows what to do when that happens. He was at the center of the Clinton administration's efforts to fight back the various emerging-markets crises of the 1990s (remember "The Committee to Save the World"?). He was core to the Obama administration's efforts to fight the financial crisis in 2009 and 2010. Few people on earth are as experienced at dealing with financial crises — both of the domestic and international variety — as Summers.

Yellen was president of the Federal Reserve Bank of San Francisco during the worst of the crisis, a voting member of the all-important Federal Open Markets Committee in 2009, and she became vice chair of the Fed in 2010. So she's hardly a stranger to crisis managements. But Summers's supporters don't think her experience quite matches Summers's role as a key player in multiple financial crises across more than two decades.

— He's really brilliant. Yes, you've heard this before. But it's worth fleshing out what people mean when they say it.

In 2008, Brad DeLong — who favors Summers for the Fed — wrote a blog post about working with Summers that tracks closely with the testimony I've heard from others.

You can bring him up to speed on anything in fifteen minutes. And if you can be interesting enough to keep his attention for half an hour, he will start throwing out hypotheses and what-ifs and suggesting connections you would never have thought of.

Summers rubs a lot of people the wrong way. But the part of Summers that rubs people the wrong way — or at least one part of Summers that rubs people the wrong way — is exactly what his admirers love about him. The experience of taking an idea to Summers, they say, is the experience of having the smartest person you've ever met focus intensely and seriously on what you just told them and then give you 10 reasons you never thought of for why it's idiotic or won't work or needs revision. And those 10 points are good points. And if you absorb them, and integrate them, you end up with something much better. The people who enjoy that process quickly come to rely on it as a necessary step in their work.

Some people hate the Summers experience. But those who don't find it exhilarating, even addicting. It breeds a loyalty far stronger than what's typical in government. Summers's supporters don't just like him. They think he's special, a once-in-a-generation mind that makes the minds around him better.

That's not to say he's smarter than Yellen, of course. What Summers has is an unusually aggressive, outward facing, broad intelligence. The disagreement between the two camps is whether the better guide to how Summers will perform at the Fed is the many people who don't enjoy the Larry Summers experience or the many people who do enjoy it.

— Backlash to the gender issue. This isn't part of the case for Summers, exactly, but it's part of the psychology of his supporters right now. People involved in the White House's Fed search really, really don't like the implication that they're sexists. They see the allegation that gender is playing a role here as absurd and offensive and an effort to back them into making a choice based on political correctness rather than the merits. It's a bit hard to gauge this, but my sense is the intense anger over the allegations is hardening people's positions, as they don't want to submit to a pressure campaign they consider deeply unfair.

Update! A Summers admirer goes on the record! When people tell stories of Summers' abrasive qualities, they sometimes mention his relationship with Lee Sachs.

Sachs, a top Treasury official from 2009 to 2010, was one of the administration officials Summers managed to "alienate," reports Noam Scheiber. "Summers favored a distinctly unbecoming approach—including a need to taunt his sparring partners as they went back and forth. 'Lee, you’re losing this argument!' Summers would thunder. 'You’re getting crushed!'”

But Sachs left the administration with deep respect for Summers. He thought Summers improved the quality of his work, even if he could be a bit abrasive doing it. He even hired Summers as a consultant to his firm Alliance Partners. And he e-mails:

We all worked quite well together. Sure, we argued – sometimes strenuously. But at the end of the day, whether you agreed with him or not, the group almost always came to a better conclusion for having had those debates with Larry. And once a decision was made, he was loyal to it and supportive of the conclusion.  I and most others who worked with him have the utmost respect for Larry and consider him a friend to this day.

Tales of Summers' abrasiveness are legion. But Sachs isn't alone in believing the good of working with Summers far outweighs the bad.

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Dylan Matthews · July 31, 2013