The Fed nomination battle is disastrous for Obama

Editor’s note: UPDATE 16 Sep 2013 – With Larry Summers now gone from the nomination process, we are putting this outside the paywall. Note that it is widely known that the only reason President Obama hasn’t chosen Tim Geithner is that his wife does not want to continue on inside the beltway. Could he be convinced to step into the fray? Given his difficulty getting nominated as Treasury Secretary, I doubt it. But let’s keep him in mind since he is Obama’s preferred choice. Two things – despite Summers’ abdication, Yellen’s nomination is not a done deal. In addition, the Syria debacle has further diminished Obama’s stature with the Democrats in Congress and his base. He is now facing open revolt from the liberal wing of his party. The Summers adbication and the decision to seek diplomacy in Syria are big wins for the liberal wing. In sum, the president would be courting disaster with the wrong nomination here. Original post from late July below

I will make this as brief as possible. I have just learned via Twitter that President Obama is reputed to have given a “full-throated” defense of Larry Summers in his meeting with Congressional democrats. It is clear now that Obama wants Summers for the Fed and is trying to overcome resistance to him in the Democratic caucus. My sense here is that he is courting disaster and I want to briefly explain why.

When the President was elected, he got to the White House on a “hope and change” platform. The thinking was that he would change Washington and bring back hope to middle class Americans. That’s one reason he has started making his campaign for the middle class.

But even before the President got into office, he was moving away from this paradigm. In June 2008, Obama confounded civil libertarians by voting for retroactive immunity for telecoms in Bush-era privacy violations in which the telecoms gave the NSA reams of customer meta data. And when it came to picking an economic team, Tim Geithner and Larry Summers were first on the list, even though both had been tainted by past anti-regulatory lapses. So, right from the start, the hope and change moniker – a least on the economic front – was as much about tone as substance.

Having delivered health care reform, a key issue for his base, and having overcome the economic crisis, Obama could look back on his first term as having delivered change. But now, enmeshed in the NSA scandal, the Democratic base is starting to turn against Obama because his statements and tone on civil liberties today are so at odds with his statements in 2007 before he became president (see video). What I am hearing on this issue from people I know who are Obama supporters is an unusual level of shock and outrage. And I think this is an important context for the Fed nomination battle because it sets the tone for all policy debates in its aftermath. That means Obama has to be extra careful about satisfying his base, both in Congress and amongst potential voters.

This makes the Fed issue crucial politically, especially since Yellen’s name has been in the hopper for maybe five months.

I put it this way in the New York Times:

in not selecting Yellen, I believe Obama would be making a major political blunder. Yellen is the obvious candidate given her background, track record, stature at the Fed and the continuity she would provide at this critical juncture. Selecting Summers, who resigned as president of Harvard in 2006 after comments he made were deemed sexist, would send the wrong message to women. Appointing Summers over Yellen also sends a bad message about how the system still works to benefit insiders during the Obama administration.

Let’s remember that we now live in the aftermath of the worst financial crisis in three-quarters of a century — one preceded by what the F.B.I. has called an epidemic of fraud. Yet, only one top banking industry insider has been charged or prosecuted for actions related to this crisis. With that background, not appointing Yellen would be the antithesis of “change you can believe in,” and I believe the president’s political base would see it as such.

But the President apparently doesn’t see the issue this way and continues to press for Larry Summers. There is no logical political advantage to choosing Summers over Yellen. Zero. And from an economic policy perspective, the two are very close. There are only three possibilities for why passing over Yellen for Summers makes sense and these are all non-political reasons. First, Summers is more anti-regulatory and would be more likely to go easy on the banks. Second, Summers is a known quantity, an insider if you will, and Obama likes to take an insular approach, selecting people he knows well for key jobs. Third, some sort of gender bias is at work.

My view: the President will continue to stump for Summers, likely for one of the three reasons I outlined. This will damage his standing amongst likely voters and therefore in the Democratic caucus in Congress. Remember, we live in a polarized gerrymandered Congressional redistricting. That means that Congress, which has to get elected every two years, is very sensitive to issues that resonate with voters or turn voters off. The overtones of anti-regulatory leanings, inside the beltway politics, and gender bias will in my view be something that coalesces to really bring the Democratic base out against the President. As much as I hate politics, I usually have a good ear for these things and that’s what I’m hearing.