Beyond pointing out that I don’t want either of them to mow my lawn, I’ve remained neutral in the debate over Yellen vs. Summers for Fed chair. I continue to think they’re both fine choices and that the differences between what they bring to the job and how they’d run the Fed are far more narrow than you’d think from the frenzy of the past few weeks. So far, the main thing we’ve learned is that Washington really loves a horse race and that the White House has misplayed this (I can’t imagine they wanted this public fight right now).
If I’ve put any bit of my thumb on the scale, it’s as follows, as quoted in the Times the other day: “’All else equal, I would not lightly dismiss the opportunity to break a glass ceiling,’ said Jared Bernstein, a former Obama economic adviser…who lauded both Mr. Summers and Ms. Yellen on their merits.”
But in the interest of fairness, I also wanted to weigh in briefly on ways in which Larry Summers views on financial market oversight, a critical part of the job of Fed chair, have been misrepresented in some accounts. I am well aware of mistakes he made in the Clinton years in this regard, but he learned from those mistakes, and frequently quoted Keynes’ line: “When the facts change, I change my mind.” In his subsequent writings and in my work with him on these issues as a member of the President’s economics team in 2009 and 2010, I heard views quite different from those now being ascribed to him.
First, before he joined the administration and well in advance of the collapse of Bear and Lehman, Summers made an observation and a suggestion that might surprise some of those who see him as representing Wall St. Regarding the proliferation of securitization and hedging through derivatives, he wrote in late 2006 that “…innovations that contribute to risk spreading in normal times can become sources of instability following shocks to the system as large-scale liquidations take place.”
About a year later, when neither the Fed and nor other bank regulators were acting, Larry was insisting on the need for measures to protect the system and the flow of credit, arguing for something that ultimately became, from my perspective, one of the more important pieces of the Dodd/Frank reforms: increased capital buffers in lending institutions. He suggested the regulators push banks to increase their capital by diluting the shares of current owners (my italics, below). Again, his advocacy of this position is quite inconsistent with those who believe he would place the banks or their shareholders’ interests above that of the broader economy.
The essential element, if there is to be more transparency in the financial system without a major credit crunch, is increased levels of capital. More capital permits more recognition of impairments and makes asset transfers easier by increasing the number of potential purchasers. It is preferable for the economy that banks bolster their capital positions by diluting current owners than by shrinking their lending activities. A critical element of regulatory policy should be insisting on increased capital in existing financial institutions.
I well recall his views on this issue of increased capital when he raised questions about certain regulations that I and others were pushing for, like the Volcker rule. But his challenges were nuanced. It was not that he didn’t believe in more oversight, or thought that banks with insured deposits should blithely trade their own books. It was that he believed that the financial “innovators” would always be numerous steps ahead of the regulators.
So, I asked, where does that leave us? We should just give up?
No, he said. We should pursue simple rules like ample capital and liquidity cushions, rigorous clearing house rules for transparency in derivative trades, caps on banks as measured by their percent of total assets.
I’m not saying he’s right, though these are sensible rules. I’m saying that he was no opponent of bank regulation when I worked with him. In fact, he complained—publicly, as I recall—that the banks had four lobbyists for each member of Congress.
As I’ve noted before, Larry was a strong ally in arguments for continued fiscal stimulus when others on the team were ready to pivot to deficit reduction. He supported the rescue of GM and Chrysler, and, in an argument that I thought was particularly important, recognized that we needed to consider not just the big two, but the downstream supply networks that employ many more workers than the factories at the end of the line.
To be clear, I don’t believe he has an edge over Ms. Yellen on these regulatory issues, and certainly not on stimulus (let the record show that Janet Yellen has done extremely important work on monetary stimulus in recent years; she is one of the few national policy makers actively targeting the unemployment rate). Various accounts suggest she spotted the housing bubble before most others, though she did not set off alarms about it. My sense from their work is that both candidates recognize the dangers posed by under-regulated financial markets; as far as Larry’s concerned, I can confirm that from personal experience.
Beyond that, and there are admittedly a lot of unknowns beyond that, we simply won’t know how good an oversight job they’ll do until we see them in action.
Which, for the record, makes them no different than any other Fed nominee in recent memory (with hindsight, the fact that Greenspan was an Ayn Rand disciple should have been a clue that he’d ignore bubbles, but precious few made that case at the time). The biggest difference is that this time around, we’ve been given the dubious gift of too much time to walk around the showroom kicking the tires.