Why Obama might tap Summers for Fed despite harsh criticism from left

Chip Somodevilla/Getty Images - Larry Summers, a former economic adviser to President Obama, is one of the candidates under consideration to be the new leader of the Federal Reserve.

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As Summers’s candidacy has vaulted to the forefront this summer, his record has produced two vastly different assessments. Critics cannot believe Obama would nominate Summers, who they say helped sow the seeds of the financial crisis while in the Clinton administration, insulted women as president of Harvard University and alienated colleagues at the White House.

“Why would the president look to someone with a deregulatory background who didn’t fight for the middle class and who doesn’t have the personality for wrestling with ideas in a way that’s valuable for Fed chair?” said a vocal critic, Sen. Jeff Merkley (D-Ore.). “I have no answer for that. No one I know has an answer for that.”

The answer, according to many people who saw their relationship up close, is that Obama developed great faith in the man who was his top economic adviser as he confronted historic crises at the beginning of his presidency.

Where others see Summers as combative, likely to cause clashes at fragile moments, Obama sees an urge to consider every option in the face of a crisis, according to longtime advisers. In a future crisis, Summers is someone who would apply the same brand of forceful intervention that was the hallmark of Obama’s own response, they said.

And where others see little regard for Main Street, Obama sees a focus on how the government can do more to bolster the economic prospects of poor- and middle-class Americans, and someone who would carry those concerns to the Fed, which has vast powers over interest rates and the financial system.

“He was just a huge resource to the president at a time when it was desperately needed,” said David Axelrod, Obama’s longtime political adviser. “The president then and now, I believe, had very high regard for Larry, and, because he saw it firsthand, I’m sure he has no doubt that Larry has the depth and intellectual acuity to handle the job.”

As Summers’s name has circulated as a leading candidate in recent weeks, the White House has discouraged speculation about whom Obama is going to pick, saying he is considering a range of candidates and will not decide until the fall.

Summers’s chief rival for the job is Fed Vice Chairman Janet Yellen, an architect of the Fed’s current policies to reduce unemployment. She faces wide backing and virtually no criticism. Summers, meanwhile, has drawn his support mainly from current and former Obama aides.

Crisis fighter

One summer day a little over four years ago, Summers was summoned to the Oval Office. Bernanke’s term as Fed chairman was soon expiring, and Obama was considering naming Summers to the job — one that he long coveted.

But in a short and unemotional conversation, Obama told him he was reappointing Bernanke. Not only did he want continuity at the Fed, but the president said he needed Summers by his side in the White House as he tried to lift the economy out of a deep recession, according to people familiar with the conversation.

Obama had come to rely on Summers, who had fought financial panics in Latin America and Asia in the 1990s as a top official in the Treasury Department, to help him manage an overwhelming series of crises.

As director of the National Economic Council, essentially the mastermind of economic policymaking within the White House, Summers was the principal writer of the president’s stimulus plan to restart economic growth. He worked with then-Treasury Secretary Timothy F. Geithner on a proposal to stabilize the banks. He was the architect of a plan to help struggling homeowners. And he helped shape the decision to bail out the auto industry.

“Larry was advising the president that what was really needed was overwhelming force on all fronts,” said Chicago Mayor Rahm Emanuel, Obama’s first chief of staff. “Larry was the point person to help take a lot of individual concepts and ideas and put them into a coordinated music sheet.”

People who know Summers say that as Fed chair — usually the first responder in a foreign or domestic financial crisis — he would apply the same principle.

“He’s for overwhelming force and with the presumption that, certainly in a financial crisis, the government is a central part of the solution,” said a former senior administration official who is still in touch with Summers and who spoke on the condition of anonymity to discuss Summers’s views before a nominee is announced.

But while they often agreed with him on substance, some colleagues recoiled at his style. Summers fostered endless debates and was tough — make the wrong decision and “you’ll get killed,” he was apt to say.

Summers faced similar complaints of brusque behavior at Harvard, drawing intense criticism for comments he made about women’s aptitude for math and science. He resigned as president of the university in 2006 after many clashes with the faculty

“A Fed chair not only has to have good views on substance but also the managerial skills and personality to win over a large committee,” said Christina Romer, who was chairman of Obama’s Council of Economic Advisers. “Based on both his tenure at Harvard and his work as NEC chair, it is not clear how strong Larry is on that second dimension.”

But many of his colleagues say the style, however frustrating, usually led to better outcomes. What’s more, it is at the core of who he is.

His brother, psychiatrist Richard Summers, recalled how in the weeks before Summers came to the White House, he was on a family vacation in Jamaica, barefoot and in a bathing suit, when he began grilling his children, nieces and nephews on what to do about General Motors, which was on the verge of collapse.

One of the teens said GM should be saved, and Summers asked, what about other companies? Another said it would not be fair to rescue the automaker, and Summers asked, what about the workers?

“Whatever they said, he would say, ‘Yeah, that’s a good point, but what about this?’ ” Richard recalled. “He would bring up the problem.”

Targeting unemployment

As a young economist, Summers helped shape the idea that it can take many years for jobs to return after a financial crisis. In the White House, that left him deeply skeptical about the swift rebound many of his colleagues were expecting.

Summers became outspoken in urging the president to go beyond his initial policies and take new steps to stimulate job growth — and to resist the wave of anti-spending fever building in Washington and across the country.

Those conversations nurtured a shared concern between Obama and Summers about the long-term prospects for millions of jobless Americans.

In a meeting with the president and other advisers, Summers warned that even after the economy recovered, large swaths of the population would be left without jobs. This was largely because of the diminished job prospects awaiting less-educated Americans, particularly men and racial minorities.

“This is what scares me the most for the long run,” Obama responded in the meeting, according to a participant.

Summers said historians would judge today’s leaders not on their response to the crisis but on whether they did what was necessary to confront this longer-term challenge, according to the participant.

Today, people who know Summers say he is preoccupied with the question.

“You get the sense Larry thinks very deeply that our system cannot survive if we have large levels of inequality and large groups of the population that do not have access to jobs,” said Pascal Noel, a former senior policy adviser to Summers in the White House.

Associates of Summers say he would bring a similar perspective to the Fed, following the path set by Bernanke in emphasizing the need to keep unemployment low, as long as inflation remains in check.

The Fed has a legal mandate to maximize employment and keep inflation contained — aims that can sometimes be at odds but recently have been in sync: Unemployment remains high, but inflation is running low.

“I think he would say that at present the danger in monetary policy would be to be too restrained rather than to be too expansionary,” said Steve Rattner, who worked with Summers at the White House. “He’s been very clear that he thinks the risks on the jobs side are far greater right now than the risks on the inflation side and that policy should follow that obvious state of affairs.”

But investors have bet recently that he would take a different approach. The Fed, which has been pushing hard to reduce interest rates, drive growth and lower unemployment, has signaled that it plans to let up a bit on its efforts later this year.

Analysts say markets are worried that Summers, who has said little about monetary policy but has sounded a skeptical note in the past about the impact of some of the Fed’s efforts, might hit the brakes faster.

As a result, investors have been dumping bonds, increasing interest rates and potentially crimping lending and growth. A report last week from the banking giant Barclays warned that a Summers nomination “could lead to an increase in volatility and the risk of a further sell-off.”

Regulatory record

Summers has aroused such strong opposition mainly because of positions he took in the 1990s, when he blocked proposals to regulate the exotic financial instruments known as derivatives and supported eliminating Glass-Steagall, the Depression-era legislation that limited risk-taking by conventional banks.

Critics say that after those policies helped lead to the 2008 crisis, Summers apparently did not learn the lesson. He initially opposed, for example, a proposal by former Fed chairman Paul Volcker to require banks to split off their trading arms. He also faced criticism for policies that seemed to value bank profitability over helping struggling homeowners.

“He seemed to me to carry the deregulatory notions inside the White House,” said Merkley, the Oregon senator critical of Summers who helped turn the Volcker proposal into law. After leaving the White House, Summers’s decision to work as a consultant for financial-sector clients such as Citigroup and the hedge fund company D.E. Shaw have added to that image.

But Obama is unlikely to harbor such concerns, according to people close to both men. They say the two have bonded over ways the financial system can better serve average Americans.

In early deliberations over the financial regulatory plan known as Dodd-Frank, Summers captured the president’s imagination with a colorful analogy that emphasized the need for a new agency to protect consumer interests, saying banking regulators could not be trusted to do the job, according to participants in the meeting.

“You wouldn’t have the FAA be in charge of ensuring the profitability of the airlines,” Summers said. “You wouldn’t have the FDA be in charge of protecting the financial health of pharmaceutical companies.”

The Consumer Financial Protection Bureau became a linchpin of the president’s plan.

Summers was also a major advocate of new requirements that banks hold more emergency funds in reserve — a position he had been pushing years before the crisis. Such higher capital requirements can restrain excessive speculation and bubbles — which Obama has said must be an important goal of the next Fed chairman.

People familiar with Summers’s thinking say that maintaining adequate capital would be a key element of his approach to bank oversight as Fed chairman.

Less appreciated, associates say, is how he would encourage banks and other financial companies to serve lower- and middle-income workers by more tightly regulating fees and by ensuring that banks are lending to needy communities and deserving borrowers.

“The president has a deep, abiding interest in making sure the financial system works for everyone, and I think Larry shares that basic conviction,” said Michael Barr, a former senior Treasury Department official who is an expert on the impact of financial regulation on low-income Americans. “Larry is deeply concerned with the plight of low- and moderate-income households and would work creatively using the tools available to him to try to make the financial system work better for them.”

 
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