Lawrence Summers, Harvard academic, former Treasury Secretary and one of the most famous names in economics, has pulled out of the race to become the next Chairman of the Board of Governors of the Federal Reserve Bank. The position of chief of the US Central Bank is perhaps the most important in the global economy and Summers fought hard to get it. But he fell short, issuing a letter (see below) over the weekend in which he formally removed himself from the race. The reaction to this news would only have added to the sour taste in Summers’ mouth—markets soared. Summers was regarded as hawkish on government spending and interest rate policy, but now he is out of the running, the hope is that a more dovish individual will get the job, such as Janet Yellen, the present Vice-Chairman of the Fed. The market view is that a more lenient Fed is good for growth, both in the US and abroad. The problem for Summers was his history and his reputation of being a deregulator, a suggestion that he has always rejected. His critics note that he was Treasury Secretary in 2000 when the Glass-Steagall Act was rescinded, an alteration that allowed conventional high street banking and speculative investment banking to take place under the same roof. He was also a stern critic of the Volcker Rule, introduced after the banking crisis by the former Fed Chairman Paul Volcker, which aimed at reducing the risk posed by banks to the economies that host them. This deregulatory past was too much for the more Liberal members of Congress who sit on the committee with oversight of the Chairmanship appointment, several of whom made it clear that they would not vote for Summers. As one expert observer told the Prospector: “He's probably spared himself, the President and the office of Fed Chairman the embarrassment of an 'acrimonious' and failed confirmation hearing”. There are broad economic consequences from this. As Jonathan Portes, Director of the National Institute of Economic and Social Research told the Prospector: "Summers' withdrawal means that Yellen is clearly both the most likely and the best qualified candidate.” He added that: “This is good news for the US and world economies she has consistently argued that even the US recovery… has been disappointing, and that more aggressive policy action is required.” There is a further element in all of this. Summers was President Obama’s pick, and he didn’t get him. It is revealing that the President should have pushed for so conservative a candidate—it suggests that Summers’ outlook coincides broadly with that of the President. Janet Yellen is not necessarily the preferred candidate of the White House. But after being knocked back over striking Syria and now having had his pick for the Fed Chairmanship blocked, might the President chose this moment to flex some muscle and push for a third candidate, with views closer to his own?
