Obama arrived at the White House and instantly met the worst financial crisis in modern American history. An astute judge of his own limitations, he had neither the background nor experience to decide on a new course, and so he depended on the same nexus of economic "experts" who had presided over the buildup of economic policies governing banks and derivatives that caused the crisis -- both under presidents Clinton and George W. Bush.
Larry Summers, Robert Rubin, and Timothy Geithner were the central characters who chronicle the excesses of Wall Street and "staying the course" that led to the great wealth divide. Facing an economic train wreck, Obama chose the status quo.
It was a conservative approach for a president whose enormous public confidence belied uncertainty about the economy and his role so early in his presidency. Where he could have turned to critics, like Paul Volker and Joseph Stiglitz, Obama went with Wall Street; a constituency that showed him very little love in the 2012 re-election campaign.
Now, Larry Summers -- by all accounts a brilliant manager inclined to friction as a management style -- and supporters like Rubin are agitating for continuity through a presidential appointment to the Federal Reserve chair. On the other hand, President Obama is looking to his legacy and opportunities to separate himself from troublesome, broad trends in the economy.
On this blog for more than six years now, we tried to trace the web connecting local power brokers to the Growth Machine; from the small cogs of the machine, like county commissioners, to the big cogs, like the bankers, home builders, and Wall Street firms that used mortgage derivatives to generate vast commissions and fees; a wealth creation exercise that plunged the broader economy onto the rocks from which the middle class has not recovered. Larry Summers was right in the middle of it.
The Federal Reserve plays a critical role in the operation of the economy, but it is a role that has been increasingly opaque, guarded, and inaccessible to public scrutiny. The Fed and its totemic leaders, like former Fed chief Alan Greenspan, are part and parcel of story-telling to the American public, helping to calm economic and financial worries instead of plain talking. Through its secrecy, the Fed has fostered impressions that it is an auxilliary of Wall Street and the titans who "know better" because they are immensely wealthy. Summers is the wrong person for the job, no matter how much President Obama is inclined to trust those he has closely worked with instead of reaching out beyond his inner circle.
In the world inhabited by Larry Summers, Robert Rubin and Timothy Geithner, wealth does confer right. (For undefined "work" for Citibank, Rubin walked away with a reported fortune of $500 million.) Surely, President Obama can understand how this dangerous sensibility erodes prospects for reviving the American middle class.
The fact that President Obama is allowing the airing of his next choice for Fed chief is a tacit admission that he is, himself, disturbed by trends fixed by Wall Street titans, their domination of economic policies, and the consequences to American prosperity.
Janet Yellen, the apparent competition to Summers, is no firebrand. Her qualifications are impeccable; among them chiefly, she is not a member of the Wall Street/ Washington revolving door club.
In its editorial today, the New York Times was more diplomatic making the call, for President Obama to choose Yellen over Summers. The public has the chance to weigh in: we hope the President and advisors are not just throwing a bone to public input, like the US Army Corps of Engineers does in Florida with the big actors like Big Sugar smiling in the background like Cheshire cats, but soul-searching as this troubled economy requires.
What has changed in the past week is that the power dynamics around economic policy-making have become more public than normal. Mr. Rubin and his circle — including Mr. Summers; Timothy Geithner, Mr. Obama’s first Treasury secretary; and Gene Sperling, currently a top economic adviser to the president — have dominated economic decisions in both the Clinton and Obama administrations. Most of them were also prominent in Wall Street circles in the George W. Bush years. In the wake of the financial crisis and the Dodd-Frank reform law, the Fed chairmanship has only become more central to the fate of the banks and economy; as a result, they want someone who shares their background and can be counted on to further their views.
Ms. Yellen is not that person, not only, or even mainly, because of policy differences but because she is not part of the fraternity. Indeed, she is reminiscent of other accomplished women with whom Mr. Summers, or his supporters, or both have tangled in the past.
In 1998, Mr. Rubin and Mr. Summers opposed Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, for correctly calling for the regulation of derivatives; in 2009, Mr. Summers squelched the sound recommendation of Christina Romer, then an economic adviser to Mr. Obama, for a larger stimulus. In the first Obama term, Mr. Geithner clashed unhelpfully with Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, and with Elizabeth Warren, then the chairwoman of the Congressional panel overseeing the bailouts.
In the end, the choice rests with Mr. Obama. The facts are entirely on Ms. Yellen’s side. Is the president?