by Dan Kervick, New Economic Perspectives
It was deeply gratifying to learn today that Lawrence Summers has withdrawn his name from consideration for Chair of the Federal Reserve Board of Governors. Summers was a key architect of the late 20th century neoliberal economic system that failed catastrophically in 2007 and 2008, and he was implicated in some of the most notorious regulatory misjudgments of that era.
There is no evidence that Summers has substantially altered the economic philosophy that animated him when he was helping to design and implement that system, so if he had acceded to the job of Fed Chief he would have been well-positioned to block stronger financial regulation and extend the unreconstructed regime of too-big-to-fail banks, loose rules, hegemonic financial sector growth and systemic financial instability that he helped create.
Summers’s professional behavior is also a perfect reflection of the compromised, go-go ethos of crony capitalism that has sunken deep roots in our political culture during the past three decades, with its easy back-slapping familiarity and mutually lucrative relationships between government officials and the lords of finance, and its unobstructed two-way flows of personnel between the biggest financial institutions and the government agencies concerned with regulating them. Summers has shown a very healthy appetite for financial sector cash, and had continued the hearty meal right under the public eye, even while being actively considered for the Fed position.
It’s disheartening that Summers was ever the President’s top choice, and the fact that he is out by no means assures that needed reforms and progressive changes will be made. But the era of Greenspan, Rubin and Summers has now receded one giant step further back into the annals of history and the insider power structure of that era has taken a heavy political hit which has diminished its aura of invincibility and can help prevent its key remaining figures from doing further damage in the present and future.
For weeks, we were assured by political insiders that the Summers nomination was unstoppable. But that was wrong. Summers was defeated in the end because a rising group of 21st century Democrats who appear to have learned some of the lessons of 2007 and 2008 decided to stand up against a moribund machine of party insiders who remain committed to a failed 20th century model. There is reason to hope that some kind of paradigm shift is now on the horizon, and that this victory will embolden these emerging figures and their supporters to take a leading role in defining their party’s political future.
There is now no good excuse for President Obama not to appoint Janet Yellen to the Fed Chair position. Yellen was the best candidate yesterday, and remains the best candidate today. Apart from her well-documented record of smarts and sound judgement about the ongoing state of the economy, she has abundant and varied central banking experience in the US system – unlike most of the other candidates whose names are often thrown around by pundits. She served on the Board of Governors from 1994-1997; then as President of the San Francisco Fed form 1994 to 2010, with a stint on the Federal Open Market Committee; then back to the Board of Governors as Vice Chair since 2010. And although she is a Democrat, she also has a record of steering clear from the cronyism and feather-bedding of the party hacks, and seems perfectly willing to impose tough rules where they are needed.
The Fed needs a professional and conscientious central banker with deep systemic and institutional knowledge of the way the US’s centralized banking system is actually organized and functions, one who is neither dazzled nor intimidated by big bankster star power, and who doesn’t seem to have succumbed to the billionaire boys’ club ethos of money-making and income one-upmanship that characterizes so many of the crony politicos-on-the-make who have been running things for the past three decades.
Is Yellen likely to push forward aggressively with some major structural overhaul of US finance? Possibly not. However she does firmly support ongoing regulatory progress and won’t stand in the way of more aggressive regulatory reforms if the rest of us can get them enacted. She is to all appearances a prudent and professional central banker with a career devoted to governance, not money-making and personal advancement, and seems to have an unsentimental view of financial high-rollers. She won’t take the position that the US economy will crumble if the mega-banks are shackled with more rules and constraints. As the chief of the Board of Governors, she will govern.
Yellen is the best-prepared person out there to lead the Fed in its proper role: prudent and responsible governance of the banking system. But some pundits of an antidemocratic and elitist bent, and others who don’t understand the institutional structure of the Fed and its operational constraints, mistakenly look to the Fed to do much more. They want a Fed that crosses the Rubicon of democratic political boundaries, takes full charge of our economy and drives it forward into dynamic growth and full employment through the sheer exercise of monetary power.
But the Fed neither can nor should play such a role in a democratic society. The role of the central bank in a democratic society is only to serve as a rudder to stabilize the financial system, while accommodating the strategic direction set by the people and the elected branches of government. The central bank should by no means set national economic policy, and the Fed chair should not be any kind of “maestro” seeking to conduct the whole economy or comprehensively guide the perceptions and expectations of its participants.
The progressive agenda must be to restore the role of popular democratic agency in charting our national economic direction and strategy, expressed through an accountable US Congress. We need to seize that control back from unelected corporate warlords and bankster bosses, and also from the Fed fanboys who want to undermine the capacity of elected leaders and build the central bank up into the hegemonic center of national macroeconomic policy.