What a difference a week makes. A week ago, a carefully orchestrated series of leaks signaled that President Obama was on the verge of naming Larry Summers to succeed Ben Bernanke as chair of the Federal Reserve. Those leaks came from senior administration officials, including Obama himself. Now, a massive backlash from Senate Democrats makes Summers' appointment something of a long shot.
A lot of the news coverage has suggested that this controversy was mainly about gender -- Fed Vice Chair Janet Yellen, the previous front runner, being shoved aside by the upstart Summers, preferred candidate of the old boys and a man famously insensitive to women. But though gender was key in triggering the backlash by offended Yellen supporters, it is not the core part of the story.
Under Fed Chairman Ben Bernanke and vice-chair Yellen, with the strong backing of other progressive Fed governors such as Daniel Tarullo and Sarah Bloom Raskin, the Fed has championed the aggressive use of monetary policy to promote economic recovery, as well as tougher banking regulation. Traditionally the most conservative and Wall Street-friendly of government agencies dealing with the economy, the Fed has become one of the most progressive, at least compared to the Obama Treasury.
This independence has unnerved Wall Street moguls like Robert Rubin, as well as Obama's senior economic advisers, all of whom are Rubin protégés. The idea of installing Summers to lead the Fed would put the bank back in friendly hands, at a time when the government is belatedly increasing bank capital standards, cracking down on abuses with derivatives, and the idea of breaking up the biggest banks has growing bipartisan support. Rubin has also expressed alarm that the Fed's liberal monetary policy under Bernanke could be courting inflation.
But over the past week, the scheme to install Summers unraveled. Along the way, Rubin and Company resorted to a couple of other ploys to keep the job from going to Yellen. The White House planted two news stories suggesting that Federal Reserve Governor Sarah Raskin was under consideration for the number two job at Treasury, as deputy to Secretary Jack Lew.
This is improbable, since Raskin is a much tougher regulator than Lew, but it would give a prominent job to a woman and a liberal, and thus provide some political cover for passing over Janet Yellen for the top Fed job in favor of Summers. Raskin admirers cautioned that the White House was hoping to use Raskin as a token and that she would have little real power. The shift would also leave the Fed with only one female governor, Yellen, who would be likely to leave if passed over for the top job in favor of Summers. Apart from the merits of naming Raskin or Raskin agreeing to make the move, the scheme did not rescue Summers from increasing indignation.
Late in the week, a group leading Senate Democrats circulated a letter to President Obama urging the appointment of Yellen -- the subtext was: Not Summers). The Rubenistas then began floating the name of former Fed Vice Chairman Roger Ferguson, a man who is very close to Wall Street, as the latest alternative to Yellen. Ferguson, currently CEO of TIAA-CREF, is African American, but not female. This ploy also gained no traction.
It's increasingly clear that the game here is to block Yellen. If Wall Street and its allies in the Administration can't get Summers, at least they want somebody who, like Summers, will safely look after their interests. Their problem with Yellen is that in addition to being highly qualified, she is genuinely independent. She has never been in the pay of Citigroup or Goldman, and the good old boys have no chits to call in.
An irony in this whole saga is that Obama has lately been emphasizing the need to rebuild the middle class -- and a Fed led by Janet Yellen would be more likely to serve that goal than one headed by Larry Summers.
By week's end, Obama had backed off the plan to nominate a Fed chair in the immediate future. (Bernanke serves until January.) The president confirmed this shift in a wide ranging interview with the New York Times last week (this part of the transcript is not quoted in the Times news story, but is available online:
NYT: On the economy, the Fed is obviously an important player. You've got a big decision ahead of yourself in terms of the chairman. What are you looking for in a chairman? And there were reports yesterday that you are very close to naming Larry Summers as the new Fed chairman. True?
MR. OBAMA: I have not made a final decision. I've narrowed it down to some extraordinarily qualified candidates.
NYT: Do you want to say who?
MR. OBAMA: No. (Laughter.)
NYT: I tried.
MR. OBAMA: And what I'm looking for is somebody who understands the Fed has a dual mandate, that that's not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.
And when unemployment is still too high, and long-term unemployment is still too high, and there's still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let's make sure that we're growing the economy, but let's also keep an eye on inflation, and if it starts eating up, if the markets start frothing up, let's make sure that we're not creating new bubbles.
NYT: And do you have a timeline in mind for announcing that?
MR. OBAMA: I think you can anticipate that over the next several months, an announcement will be made.
But these reversals do not necessarily mean that Yellen is the front-runner again. If Rubin, Summers and their allies run true to form, they will be frantically looking for a plausible woman candidate who is closer to Wall Street than Yellen. Obama may also react negatively to a public campaign to force him to make the Yellen appointment. His anti-Yellen advisers will be warning him that capitulating to this pressure will make him look weak.
The intriguing question now is whether Obama feels more jammed and embarrassed by supporters of Summers, who pressed the president to go way out on a limb for a Summers appointment that was inevitably risky and encumbered by lots of baggage, or by supporters of Yellen pressing him to correct the blunder.
One parallel that comes to mind was the campaign by liberals to press Obama to name Elizabeth Warren chair of the Consumer Financial Protection Bureau. In the end, the job went to someone as progressive as Warren, Richard Cordray, but not to Warren (who is better off and more influential in the senate). But, in general, campaigns to force a president to make a particular appointment face rough going.
What other possible women? There are really none as qualified and talented as Yellen, an economist who has served both as Vice Chair of the Fed Board of Governors and, before that, as president of the Federal Reserve Bank of San Francisco. One possible name is Laura Tyson, a widely respected economist who formerly headed the National Economic Council under Clinton, and who is close to both the Rubinites and to the liberals. However, Tyson since leaving government has joined several corporate boards including Morgan Stanley, and as a friend and supporter of Janet Yellen, she would be unlikely to stab Yellen in the back.
But as this drama continues to unfold, watch for leaks of other possible women candidates who are closer to Wall Street than Yellen. The issue here is not just that Yellen is female; it's that she is immensely talented, public-minded, and independent of Wall Street. It would be a shame if progressives succeeded in blocking Summers only to lose Yellen.
Robert Kuttner's new book is Debtors' Prison: The Politics of Austerity Versus Possibility. He is co-editor of The American Prospect and a senior Fellow at Demos.