Blocking Larry Summers

What a difference a week makes. A week ago, a carefully orchestrated series of leaks signaled that President Obama was on the verge of naming Larry Summers to succeed Ben Bernanke as chair of the Federal Reserve. Those leaks came from senior administration officials, including Obama himself. Now, a massive backlash from Senate Democrats makes Summers' appointment something of a long shot.

A lot of the news coverage has suggested that this controversy was mainly about gender -- Fed Vice Chair Janet Yellen, the previous front runner, being shoved aside by the upstart Summers, preferred candidate of the old boys and a man famously insensitive to women. But though gender was key in triggering the backlash by offended Yellen supporters, it is not the core part of the story.

Under Fed Chairman Ben Bernanke and vice-chair Yellen, with the strong backing of other progressive Fed governors such as Daniel Tarullo and Sarah Bloom Raskin, the Fed has championed the aggressive use of monetary policy to promote economic recovery, as well as tougher banking regulation. Traditionally the most conservative and Wall Street-friendly of government agencies dealing with the economy, the Fed has become one of the most progressive, at least compared to the Obama Treasury.

This independence has unnerved Wall Street moguls like Robert Rubin, as well as Obama's senior economic advisers, all of whom are Rubin protégés. The idea of installing Summers to lead the Fed would put the bank back in friendly hands, at a time when the government is belatedly increasing bank capital standards, cracking down on abuses with derivatives, and the idea of breaking up the biggest banks has growing bipartisan support. Rubin has also expressed alarm that the Fed's liberal monetary policy under Bernanke could be courting inflation.

But over the past week, the scheme to install Summers unraveled. Along the way, Rubin and Company resorted to a couple of other ploys to keep the job from going to Yellen. The White House planted two news stories suggesting that Federal Reserve Governor Sarah Raskin was under consideration for the number two job at Treasury, as deputy to Secretary Jack Lew.

This is improbable, since Raskin is a much tougher regulator than Lew, but it would give a prominent job to a woman and a liberal, and thus provide some political cover for passing over Janet Yellen for the top Fed job in favor of Summers. Raskin admirers cautioned that the White House was hoping to use Raskin as a token and that she would have little real power. The shift would also leave the Fed with only one female governor, Yellen, who would be likely to leave if passed over for the top job in favor of Summers. Apart from the merits of naming Raskin or Raskin agreeing to make the move, the scheme did not rescue Summers from increasing indignation.

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