The Populist Rebellion That Tripped Up Larry Summers

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This post first appeared in The Nation blog on Sept. 15, 2013.

This photo combo shows Fed Vice Chair Janet Yellen, left, and former Treasury Secretary Lawrence Summers. (AP Photo/Eugene Hoshiko, J. Scott Applewhite)

When it became clear that members of President Obama’s own party would not support a nomination of Larry Summers to serve as the next chairman of the Federal Reserve, something — or someone — had to give.

On Sunday, Summers gave up.

The former Treasury secretary, whose Clinton-era assaults on Glass-Steagall protections and opposition to the regulation of derivatives were blamed by critics for weakening safeguards against financial turbulence, withdrew his name from consideration for Fed’s top job.

Remarkably, the decision came exactly five years after the financial meltdown of September 2008.

Progressive critics of Summers had argued for months that he was not the right candidate to tame the big banks — or to address the fundamental challenges facing the U.S. economy.

But Obama continued to consider the man who served as his director of the National Economic Council.

Now the president must find another nominee.

Obama is said to be considering several candidates. With Summers out, speculation will focus on the possibility that Federal Reserve Vice Chairman Janet Yellen, who has drawn significant support from key Democratic senators, may be chosen to replace outgoing Federal Reserve chair Ben Bernanke. But former Fed vice chairman Don Kohn is also thought to be in the running. And the president could consider others.

Obama does not have a lot of time, however. The selection must come before Bernanke is set to exit early next year.

The Summers withdrawal was a shocker. But it came for a reason.

Though he had friends in the White House, Summers faced mounting opposition from Democrats in the Senate and from grassroots progressive groups. The prospective nominee was criticized by women’s organizations for controversial statements made during his tenure as president of Harvard. He was criticized for revolving-door Wall Street ties. And in the most dramatic show of anti-Summers sentiment, key Democratic senators began to signal in recent days that they could not confirm a man who has so frequently opposed needed regulation of the financial sector of the U.S. economy.

“The truth is that it was unlikely he would have been confirmed by the Senate,” said Senator Bernie Sanders, the Vermont independent who caucuses with the Democrats. “What the American people want now is a Fed chairman prepared to stand up to the greed, recklessness and illegal behavior on Wall Street, not a Wall Street insider whose deregulation efforts helped pave the way for a horrendous financial crisis and the worst economic downturn in the country since the Great Depression.”

Sanders has long argued that the Senate should get more serious about checking and balancing the Federal Reserve.

The Fed is a staggeringly powerful institution, with the resources and influence to define the direction of the U.S. economy, the character of the nation’s “too-big-to-fail” banks and the extent to which unemployment issues are addressed.

Unfortunately, the Fed has a long history of serving Wall Street, while neglecting the rest of the country. Be they Democrats or Republicans, be they theorists or doers, past Fed chairs have tended to embrace the thinking of the free-market fundamentalists and free-trade absolutists who have created an economy characterized by declining wages and expanding income inequality.

The trouble is that, as Franklin Delano Roosevelt explained almost eighty years ago, “We have always known that heedless self-interest was bad morals; we know now that it is bad economics.”

At an uncertain moment for the economy of the United States, and more importantly for the great mass of citizens whose depend on that economy, the choice of a new Fed chair took on a higher degree of significance in the eyes of senators from both parties. So critical, for so many Americans, that at least some Democrats began placing principle before party loyalty.

That’s why, as the speculation rose about the prospect that President Obama would select Summers, Democratic senators started announcing that they would vote with Republican critics of the administration to block confirmation of Summers.

As with Supreme Court nominations, nominations to chair the Fed must be confirmed by the Senate. That might not be a problem for many prospective nominees, even in a filibuster-frenzied Capitol. But when a significant number of populist Democrats indicated they would oppose Summers, prospects for getting from nomination to confirmation started to look tougher.

The objections expressed by key Democrats had historical and contemporary roots:

During Bill Clinton’s second term, Summers worked with then–Fed chair Alan Greenspan and then-Treasury Secretary Robert Rubin to block moves by Brooksley Born, who headed the Commodity Futures Trading Commission, to regulate the derivatives market. When that market began to deal in to include the toxic instruments that led to the 2008 financial market crisis.

A year later, Summers led the fight to gut Glass-Steagall rules, which had provided an additional measure of protection against bank meltdowns.

Early in Obama’s presidency, Summers resisted sufficient stimulus spending to jump-start the economy.

Summers has always been a militant free-trade advocate, and he showed little interest in efforts to renew American manufacturing.

Summers’s tenure at Harvard has remained a subject of clear controversy, with serious objections being raised with regard to his statements about women. The National Organization for Women complained about “Summers’ own history of misogyny — as president of Harvard he opined that women might lack an ‘intrinsic aptitude’ for science and engineering.”

“In short, Summers is simply the wrong person, male or female, to lead the Fed,” argued NOW.

Like many progressive organizations, NOW expressed discomfort with the approach Summers has taken to core economic questions. “Summers’ deregulatory zeal contributed directly to the Bush-era economic crash. Summers cannot be trusted to lead an institution that can do great good — but also great harm — to the economy overall and to women’s economic security in particular,” read a NOW action alert urging support for Yellen.

Progressive and populist Democrats who were in positions to do something about a possible Summers nomination shared the popular concern that the former Treasury secretary simply had not shown an inclination to steer the fed toward policies that are beneficial to the great mass of working Americans.

A key objection was that Summers defaults toward approaches that simply have not worked.

“I start from a position of being extraordinarily skeptical that his background is appropriate for the role of the head of the Fed,” said Oregon Senator Jeff Merkley, a Democrat on the Banking Committee. “If you nominate someone who is a life-committed deregulator to be in a regulatory position and if you believe regulation is necessary to prevent fraud, abuse, manipulation and so forth, then there’s a lot of questions to be asked: Why is this person appropriate?”

If a Summers nomination were to come to the Banking Committee, it was expected that Merkley would vote “no.”

Montana Senator Jon Tester, a Democratic committee member, emerged last week as a definite “no.” His office announced that “Senator Tester believes we need a consensus builder to lead the Federal Reserve. He’s concerned about Mr. Summers’ history of helping to deregulate financial markets.”

Ohio Senator Sherrod Brown, a Banking Committee Democrat who circulated a letter praising Yellen and urging the White House to consider nominating her, was also expected to vote “no.” Brown said that his letter—which attracted signatures from top Senate Democrats such as Illinois Senator Dick Durbin and California Senators Dianne Feinstein and Barbara Boxer — was pro-Yellin, rather than anti-Summers. “But,” he added, “there is obviously a lot of opposition here to Summers.”

That counted up to three probable “no” votes on a committee where the Democrats have only a two-seat advantage over the Republicans. Some Republicans were likely Summers backers, however. That prospect turned attention toward Senator Elizabeth Warren, D-Massachusetts, a committee member who reportedly told the administration that she had “serious concerns” about the prospect of a Summers nomination.

In August, Warren and Sanders circulated a letter that raised questions for whoever is nominated to chair the Fed.

Sanders and Warren argued that “the next Fed chair will have an opportunity to get our economy back on track and to help rebuild America’s middle class. But that will require the right temperament and a willingness to take on Wall Street CEOs when necessary. It is critical that the next Fed chair make a genuine, long-term commitment to supporting those who don’t have armies of lobbyists and lawyers to advance their interests in Washington — working and middle-class families.”

To test that commitment, the senators asked:

1. Do you believe that the Fed’s top priority should be to fulfill its full-employment mandate?

2. If you were to be confirmed as chair of the Fed, would you work to break up “too-big-to-fail” financial institutions so that they could no longer pose a catastrophic risk to the economy?

3. Do you believe that the deregulation of Wall Street, including the repeal of the Glass-Steagall Act and exempting derivatives from regulation, significantly contributed to the worst financial crisis since the Great Depression?

4. What would you do to divert the $2 trillion in excess reserves that financial institutions have parked at the Fed into more productive purposes, such as helping small- and medium-sized businesses create jobs?

These were (and remain) remains questions, especially for Summers — who, presumably did not to want to wrestle with the “repeal of the Glass-Steagall Act” issue raised in Question 3.

He will not have to do so. But it should now be clear that whoever is nominated to replace Bernanke will have to take seriously not just those particular questions but the greater concern about whether the Fed will serve Wall Street or Main Street.

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