I'm Not Wild About Larry

When it's time for a new Federal Reserve chief, Yellen is a far smarter pick than Summers

  • Yellen: Sam Hodgson / Bloomberg / Getty Images; Summers: Jerome Favre / Bloomberg / Getty Images

    Left: Janet Yellen; right: Larry Summers.

    The second most important job in America will be up for grabs in the next few months, as President Obama nominates a replacement for Federal Reserve Board Chairman Ben Bernanke, expected to step down in January after serving as the country's banker in chief for "a lot longer than he wanted or he was supposed to," as the President put it. More than anyone else, the Fed chair controls where money flows and how the financial system works. As the economy struggles to move from lackluster growth to something more robust, it's a decision that matters hugely. Many names have been tossed about, but the two most visible contenders are Fed vice chair Janet Yellen and former Treasury Secretary Larry Summers. While both are capable, Yellen should get the job, for these three reasons.

    First, her personal commitment to making the financial system safer fits the most likely challenge of the coming years. While Summers proponents argue that we need a central banker who has handled a financial crisis firsthand, another Lehman-style meltdown probably isn't in the cards anytime soon. The bigger slow-burn problem is that banking remains as unmoored from the real economy as it was before the financial crisis. Tackling that--and avoiding another full-blown crisis--requires reform. Banks are making record profits, but they are making them from riskier trading operations, not from plain-vanilla lending to real people. Yellen wants to boost margin requirements on riskier derivatives trades, give regulators more power to police financial institutions and require big banks to hold more capital. Summers, who was the architect of some of the financial deregulation that contributed to the crisis, is unlikely to play hardball with Wall Street. That's a problem at a time when many smart economists are beginning to think that the financialization of the U.S. economy--and the disproportionate share of the pie being held by Wall Street--is a key reason behind slower-than-normal growth.

    Second, Yellen is the safe pair of hands. "She was one of Bernanke's chief lieutenants and architects of quantitative easing," former Fed vice chair Alan Blinder, now a professor of economics at Princeton, told me. "She represents continuity of policy," which is especially important given that the main role of the Fed chief in the near term will be getting the bank out of its biggest ever asset-buying spree without roiling the markets. It's uncharted territory, but many in the investment community are willing to place their bets on Yellen, who is "an outstanding economist, a levelheaded leader, and often cited in the New York Fed's dealer survey as one of the most effective communicators of Fed policy," says BNP Paribas economist Julia Coronado in a note about the Fed horse race. Conversely, Summers, who is known for being "combative" and "undiplomatic," might have trouble navigating an exit when he has to get consensus on policy decisions from six other Fed governors. A Yellen appointment "would certainly be the smoothest in terms of market volatility," says Coronado.

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