Former Treasury Secretary Larry Summers has withdrawn his name for consideration to succeed Ben Bernanke as Federal Reserve chairman. Summers called President Barack Obama on Sunday to notify him of the decision:
“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,” Summers was quoted as saying in a letter to Obama following the call.
Summers and Federal Reserve vice chairwoman Janet Yellen were the top two contenders for the job and it was widely speculated that Summers was Obama’s choice. With Summers out, Yellen looks to be a shoo-in.
Summers has found controversy throughout his career. He served as the 27th president of Harvard University from 2001 to 2006, and resigned this position after a no-confidence vote by Harvard faculty that resulted in large part from Summers’ conflict with Cornel West, financial conflict of interest questions regarding his relationship withAndrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end” and less to patterns of discrimination and socialization.
Summers criticized West, head of the Department of African and African-American Studies, for allegedly missing three weeks of classes to work on the Bill Bradleypresidential campaign, and complained that West was contributing to grade inflation. Summers also claimed that West’s “rap” album was an “embarrassment” to the university.
Harvard and Shleifer, a close friend and protégé of Summers, paid $28.5 million to settle a lawsuit by the U.S. government over the conflict of interest Shleifer had while advising Russia’s privatization program. The U.S. government sued Shleifer because he bought Russian stocks while designing the country’s privatization program.
During Summers’ presidency at Harvard, the school entered into derivatives contracts (interest rate swaps) transactions totaling $3.52 billion. Summers approved the decision to enter into the swap contracts as president. By late 2008, those positions had lost approximately $1 billion in value, a setback that forced Harvard to borrow significant sums in distressed market conditions to meet margin calls on the swaps. In the end, Harvard paid $497.6 million in termination fees to investment banks and has agreed to pay another $425 million over 30-40 years. The decision to enter into the swap positions has been attributed to Summers.
Summers is perhaps best known for his role in the deregulation of the derivatives market. On May 7, 1998, the Commodity Futures Trading Commission issued a Concept Release soliciting input from regulators, academics and practitioners to determine “how best to maintain adequate regulatory safeguards without impairing the ability of the OTC (over-the-counter) derivatives market to grow and the ability of U.S. entities to remain competitive in the global financial marketplace.” On July 30, 1998, then-Deputy Treasury Secretary Summers testified before Congress that “the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.” Summers offered no proof that the contracts would not be misused by financial institutions.
Instead, Summers stated in his testimony that “to date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need.” In 1999, Summers endorsed the Gramm-Leach-Bliley Act that removed the separation between investment and commercial banks, saying, “With this bill, the American financial system takes a major step forward towards the 21st century.” We all know what happened with the derivatives markets in 2008, and the moral hazard/too big to fail issues with the banking industry that we still struggle with today.
With Summers out of the way, Yellen is the logical choice to succeed Bernanke. She is the Fed’s current vice chairwoman, and has very similar views to Bernanke. With her approval as Fed chairwoman, it will be business as usual at the Fed.
Continuity is valuable, especially at such a critical time in the economic recovery, and with the challenges the Fed now faces with unwinding its stimulus program —QE (quantitative easing) round 3, through which it has been purchasing $85 billion each month in bonds over the past year. Under her leadership, the Fed should approach the tapering process gradually, hopefully causing the least amount of financial stress to the system and economy.