The rumors that Larry Summers is next in line to run the Federal Reserve are heating up again. And so, too, are criticisms of Summers.
This week, more than 350 economists sent an open letter to President Obama urging him to appoint Janet Yellen, the current vice chairman of the Federal Reserve. The letter took an implicit shot at Summers by noting that “there is less and less room in modern public policymaking, especially at the FRB, for a single leader to dominate discussion." (I can’t imagine who they have in mind.)
But other critics have taken more explicit shots at Summers not because of what he’s done in White House conference or the classroom, but because of what he’s done in the corporate board room and on the trading floor.
Larry Summers has had a rather amazing career, and owns one of the more impressive résumés in the Western world (or the Eastern world, for that matter). professor at Harvard, White House economic adviser, Treasury secretary, president at Harvard, White House economic official again. He also has spent time in the private sector. Summers had a brief, lucrative part-time gig last decade at hedge fund D.E. Shaw. And in recent years, amid writing columns for the Financial Times and Reuters (for which he is presumably paid, though not much), and serving on the boards of nonprofit groups (Teach for America, the Center for American Progress), he has worked with businesses. But they’re more Sand Hill Road than Wall Street. He’s on the board of Square, the mobile payments company, and last December joined the board of Lending Club, the peer-to-peer lending company, and is a senior adviser to the venture capital firm Andreessen Horowitz. He also has an active speaking career, which means companies and trade organizations are paying him lots of money. He also consults to Nasdaq and Alliance Partners, the Wall Street Journal reports.
This welter of activities is an issue for some critics. As Heidi Moore put it in The Guardian: “Here is the problem: Summers lacks distance from Wall Street. In fact, as we speak, he is a paid servant to Wall Street.” This, she continues, is “a lot of baggage for a Fed chairman, who makes controversial decisions every few months about the future of the financial system.” In more pointed terms, economists Jeff Sachs and Lawrence Kotlikoff wrote in Forbes, “Summers is one of the boys, and the bankers know that Summers will do their bidding, at the expense of everybody else.”
By contrast, the resume of Janet Yellen is less encumbered by such potential conflicts. Like the current Fed chairman, Ben Bernanke, she has spent her career entirely in academia and government.
Here’s the thing. In the 100-year history of the Fed (happy birthday, central bank!) it has generally been run by people who were creatures of the financial system. The Fed has typically not been run by disinterested academics whose understanding of financial markets is derived from the consumption of dissertations and working papers. “Bernanke was actually an exception,” says Richard Scylla, the eminent New York University financial historian. The first Federal Reserve chairman, Mariner Ecclees, “wasn’t a Wall Street guy, but he was a banker on a fairly large scale from Utah.” William McChesney Martin, who ran the Fed for a stunning 19 years, from 1951 to 1970, was a stockbroker and the first paid head of the New York Stock Exchange in the 1930s. “The only two who had a mostly nonfinance or nonbusiness background were Bernanke and Arthur Burns,” Sylla said. Burns, who was appointed to the Fed by Nixon, had been a professor at Columbia University, and was something of a disaster.
The Fed has typically not been run by disinterested academics.
In the past, Summers has said that working with Wall Street trading firms can grant one greater insight into the functioning and psychology of financial markets. That’s true. And serving on the board of a payments technology company and a peer-to-peer lending club can also come in handy while running the Fed. But such experience is hardly necessary. Paul Volcker, who ran the Fed heroically from 1979 to 1987, was a highly effective central banker. And he spent virtually all his career as a government bureaucrat—as an official at the Treasury Department and the New York Fed. “He was at Chase for relatively short periods earlier in his career,” said William Silber, a professor at New York University’s Stern School of Business and author of Volcker: The Triumph of Persistence. “He didn’t spend much time in the private sector. The real experience he got dealing with financial markets was between 1969 and 1974 when he was undersecretary of the Treasury.” That period included the tumult of the U.S. leaving the gold standard, the oil shock, and the rise of inflation.
Volcker’s successor, Alan Greenspan, by contrast, was almost purely a creature of the private sector. And as befits someone who came of age in the middle decades of the 20th century, he dealt with industry broadly—not only with the financial services industry. He worked in research at Brown Brothers Harriman, and spent more than three decades running an economic consulting firm, Townsend-Greenspan & Co. His only stint in government prior to joining the Fed was a three-year hitch in Gerald Ford’s White House.
It’s hard to draw any hard and fast conclusions about the backgrounds of recent Federal Reserve chairmen and their relative solicitousness to Wall Street and the financial markets. The simple truth is that the central bankers we’ve had for the last 34 years—appointed by Democrats and Republicans—have tended to do what is in the markets’ best interest. Central banks are known as “bankers’ banks.” In part that’s because it is where banks go to get money, and in part it is because they supervise, regulate (or in Greenspan’s case, don’t regulate), look after, and bail out banks. Yes, the Federal Reserve has a dual mandate of maintaining price stability (battling inflation) and promoting full employment (stifle your laughter). But in the modern era, a great deal of what the Federal Reserve does is tend to the needs, whims, and desires of the vast and growing financial markets. When Bernanke speaks to Congress, or to a trade group, or to journalists, he’s really speaking to bond traders around the world. The Federal Reserve may control short-term interest rates. And it can influence long-term rates. But the people who actually set them in the markets, and who wag the tail of monetary policy, are sitting on trading floors in New York, London, Tokyo, and Hong Kong. And because they use leverage and are prone to sending markets and economics into chaos, the bankers will always command an excessive amount of attention from the Federal Reserve.
All of which is to say that I don’t think Summers’ buckraking should disqualify him from the Fed, or that similar efforts by academics and former government officials to build some wealth through cushy consulting and speaking gigs should disqualify them from future posts at the Fed, or anywhere else. The reality is that anyone who gets into that position—academic, bureaucrat, or banker—is going to be too solicitous of the financial industry for our tastes.