There’s arguably no economic decision-maker more powerful than the Federal Reserve, America’s central bank, and no one more powerful in the Fed than its chairman. The decision to flood the economy with cash or hike up interest rates can make or break nations. And the man who’s steered America through its worst recession in decades, Ben Bernanke, is on the way out. His term expires in January.
That leaves the job of leading America’s monetary policy up for grabs. Any week now, US President Barack Obama will announce who he wants to replace Bernanke. So who’s in the mix?
Who won’t get the job: Larry Summers
We can take Larry Summers off the list. For months, the money has been on Summers, now the national director of the economic council. He’s one of the world’s most well-known and influential economists, having had one hand (or both) on the levers of American and global economic policy for decades. But he carries a lot of baggage.
He’s been associated with some of the International Monetary Fund’s biggest bungles in recent years, and while he was president of Harvard in 2005, he said a lack of women in the highest echelons of maths and science might be a lack of “intrinsic aptitude”. He’s also been in and out of Wall Street’s investment banks, leading some to depict him as likely to be beholden to big business (a view not helped by his past support for banking deregulation). Nonetheless, Summers was widely seen as Obama’s favoured candidate. Behind closed doors, Democrats say Obama has been giving “full-throated” defences of Summers, as the President believed he wasn’t being given a fair hearing.
But last week, Summers pulled out, citing in a letter to the President a confirmation process that would be distracting and “acrimonious”. The White House issued a statement reluctantly accepting his withdrawal:
“Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom, and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today. I will always be grateful to Larry for his tireless work and service on behalf of his country, and I look forward to continuing to seek his guidance and counsel in the future.”
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In the lead-up to Summers’ withdrawal, four Democrats of the 12 who sit on the Senate Banking Committee had voiced public reservations about his candidacy. The committee must approve the candidate before a vote on the issue goes to the full Senate.
The leading contender: Janet Yellen
Before Summers pulled out, the race was seen to be between him and Janet Yellen. She’s now the leading contender.
Yellen’s been leading the Federal Reserve in some capacity or other since 2004. In a world with few high-ranking female economists, she’s been chair of the Council of Economic Advisers, another advisory body to the US President, and has been a professor of economics and management at Harvard University. She’s generally considered a monetary “dove” (someone more concerned with unemployment than inflation), and it’s expected she would be more or less in lock-step with Bernanke in how to tackle the crisis.
Yellen is not well-known outside of economic circles. Nonetheless, the steady hand she’s likely to provide means she’s generally quite a popular choice on Wall Street. And Asian financiers, who some argue are now America’s true bankers, have always preferred her over Summers. Nearly 500 tenured economists have signed an open letter to the President asking for her to be picked.
But Obama seems reluctant. A much-quoted research note from Morgan Stanley yesterday had this to say:
“The longer the President has taken in delaying an easy choice [picking Yellen], the more clearly he shows his reluctance to do so. According to the early talk, this was all about the ‘comfort zone’ of the President, in that he was familiar with Summers but Yellen had not spent time in the Oval Office. However, Don Kohn, no denizen of the inner circle of the White House, also appears on the short list, so the objection must run deeper … [The White House] can pull the trigger on Yellen with no notice. If they do not want to do it, though, they have to expand the list and do more interviews. This can be quick or it can stretch on. It probably stretches on.”
If it is Yellen, she would be the first female Fed chair, though far from the first worldwide. There are currently 17 female central bank heads, out of 177 central banks in total. Australia has never had a female RBA governor.
The Fed insider: Don Kohn
Seventy-year-old Don Kohn formally “retired” from the Fed in 2010, though he’s been working with the Bank of England since 2011. More even than Yellen, Kohn is a Fed insider, having worked there for close to four decades. The Washington Post described him as “Bernanke’s No. 2 during the financial crisis”. He’s been at the Fed since Alan Greenspan’s day; Greenspan was perhaps the most powerful Fed chairman ever, and he and Kohn got along.
Mind you, Greenspan’s come in for some flak since the credit crunch, accused of having held interest rates too low for too long, thus inflating the credit bubble. And like Yellen and Greenspan, Kohn is considered a “dove”.
Kohn rivals Summers in experience. And like Summers, having been too close to the controversies of the past means he’ll have some hard questions to answer from the Senate should he be picked. In a closed-door meeting with Democrats a few months ago, Obama reportedly said he was considering Kohn for the role. Obama has never been rumoured to say anything similar about Yellen, so it’d be foolish to discount Kohn.
The off chance: Timothy Geithner
Another name you’ll read in the papers is that of recently retired Treasury Secretary Timothy Geithner, who has worked closely with Obama and Bernanke in steering American economic policy in recent years. In January, Geithner said he didn’t want the job. Which should lay the matter to rest. But, well, it hasn’t. Plenty of commentators think Obama can change Geithner’s mind.