As many, including myself, had predicted, Janet Yellen has been nominated by President Obama to be next chairman of the Federal Reserve. Her nomination was almost a done deal when Larry Summers withdrew himself from the race. Since investors predict that Yellen will continue Ben Bernanke’s accommodative monetary policies, stocks rallied across America and emerging markets when the nomination was officially announced.
Several days ago, I had written a post about the candidates that were in consideration to become the new FED chairman after Ben Bernanke. The two leading candidates were Federal Reserve Vice Chairwoman Janet Yelen and renowned economist Larry Summers. But on Sunday, Larry Summers stated to President Obama that he would be dropping out of the race.
“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery,” stated Larry Summers in his letter to President Obama
That sounds so noble but let me translate that for all of you.
“There is no chance of me becoming the next FED chairman so I’m throwing in the towel” is what Larry Summers really meant to say. If you think I’m being too cruel, allow me to explain.
The process for electing the chairman of the Federal Reserve is as follows: the President elects a nominee which is then voted on by the Senate Banking Committee. On Friday, senator Jon Tester of Montana became the fourth Democratic senator on the Senate Banking Committee that stated that they would not support Larry Summers. The other three dissenting Democratic senators are Elizabeth Warren from Massachusetts, Sherrod Brown from Ohio, and Jeff Merkley from Oregon. The reason why so many liberal Democratic senators dislike Larry Summers is because they believe that his policies of deregulating the financial markets in the 1990s (as President Clinton’s Treasury Secretary) caused the economic crisis of 2008. In order for the Senate Banking Committee to vote in favor of Summers, Obama would have to lobby votes from Republican senators and that is something he doesn’t have the time or leverage to do right now.
Thus, with Summers out of the picture, Janet Yelen appears to become an even greater favorite to become the next and first FED chairwoman. Her resume checks many boxes. She has experience with working in the FED, she would be the first woman FED chairman, and her support of quantitative easing is supported by Wall Street investors. Now recall that quantitative easing is the FED policy of pumping money into financial markets. Summers had at times spoken against this policy. Therefore it wasn’t a big surprise that the stock market increased following the news that Summers had dropped out of the race. It must be a horrible day for any person if you decided to give up on your dream and the financial markets rejoice.
A final candidate for the job is Fed Vice Chair Donald Kohn. Additionally, Timothy Geithner, the former Treasury Secretary under Obama’s first term, was also listed as a possible candidate. However, Geithner had turned the job down. Thus, Janet Yelen appears to likely be the next FED chairman.
In honor of Larry Summers, we remember him one last time by taking a look at his most memorable moments courtesy of Bloomberg.
“There are children who are working in textile businesses in Asia who would be prostitutes on the streets if they did not have those jobs.” -Larry Summers
The Federal Reserve (FED) is the bank of all banks within the United States. It serves as the lender of last resort to banks within the nation, influences interest rates, controls the supply of money in the economy, and much more. The decisions the FED makes, let alone the topics they discuss in their meetings, have a huge impact on not just the American economy, but the entire global economic system.
Since 2006, the FED chairman has been this guy. Ben Bernanke. Or as I like to think of him; Captain Picard with a badass beard.
At the end of this year, Bernanke’s final term as FED Chairman will end and it will be up to President Obama to select his successor.
Why does this all matter? The reason why who becomes the next FED chairman is so crucial is because of the policies they will choose to enact. In response to the financial crisis of 2008, Bernanke decided to employ an operation called Quantitative Easing (QE), where the FED pumped money into the economy by continuously buying bonds. However, since the economy has steadily improved over the past several months, Bernanke is looking to draw down QE.
Enter the potential candidates. The first contender is Janet Yelen.
Janet Yellen is currently the vice chairwoman at the FED. So she’s Bernanke’s right hand woman. Because of her experience in central banking and her familiarity with the rest of members of the FED, she is seen as the front-runner for the position. Many believe that she will represent a continuation of Bernanke’s ideas and policies and thus think that Yellen is a safe bet candidate. Of course she would make everyone feel safe. I mean look at her. If I ever ran into this woman, I can be positive that she would bake me cookies with milk and then tuck me into bed.
On the other hand is Larry Summers.
Larry Summers is a widely acclaimed economist. His past positions include serving as Secretary of Treasury under Bill Clinton, the National Economic Council under Barack Obama in 2009, and as chief economist at the World Bank; not to mention President of Harvard. The most important factor, however, is that President Obama adores him. When several media outlets discussed how Summers is impulsive, has trouble working with others, and has a history of being misogynistic with female coworkers (smooth), President Obama made a statement in his defense. Summers is also seen as a person who tends to think outside the box and is experienced when it comes to dealing with crises. He not only served in the National Economic Council in 2009 after the economy tanked in 2008, but he was also the Treasury Secretary during the late 90s when Asia was in the midst of a financial crisis and Russia and Mexico had a currency crisis. These experiences would serve crucial at a time when the US economy is susceptible to the threat of a deepening crisis in Europe and to economic uncertainties across the world. Many believe that based on Summers’ track record, it might be possible for Summers to scrap or reform Bernanke’s current policies and come up with new FED actions.
In my opinion, Janet Yellen seems to be the more logical choice. She has an ample amount of experience working in the FED and has most likely earned the respect of other FED members. Though I don’t doubt Summers’ intellectual capabilities, it is important to point out that Summers’ actions as Treasury Secretary under President Clinton paved the path for financial deregulation which many state is the reason the 2008 crash occurred. So far, President Obama has said that he still has not made up his mind about the decision. Only time will tell and if you’ve been following the news lately, you will know that Obama has a lot on his plate right now.
“In fact, the world needs more nerds.”