Robert E. Prasch — The Next Chair of the Federal Reserve Must be a Regulator

If we go by the rumors circulating in the financial press, the Obama Administration is on the verge of selecting a proven failure – Lawrence Summers – to be the next Chair of the Federal Reserve System. This is the man, let us recall, whose greatest success in office was to work for the repeal of Glass-Steagall in 1999 and the nudge along the passage of the Commodity Futures Modernization Act of 2000 (which forbade any agency from regulating Credit Default Swaps). These profoundly mistaken decisions provided the nation’s largest and most irresponsible financial institutions with the bulk of the permission they needed to leverage up their balance sheets, hide the risks inherent in the mortgage-backed securities they were pushing onto unsuspecting investors, all while enabling them to become Too Big To Fail (and, as no less than the Attorney General of the United States has affirmed, Too Big To Prosecute)....

New Economic Perspectives

The Next Chair of the Federal Reserve Must be a Regulator

Robert E. Prasch | Professor of Economics at Middlebury College

Of course, Wall Street will get the Fed chairperson that it wants, since Wall Street provides a large share of campaign finance for the Democratic Party. The GOP is somewhat less beholden to Wall Street since they are also heavily funded by other wealthy donors. So count on President Obama caving to the financial sector.

From what I have been reading, Larry Summers is well-known to the White House and Democratic insiders, while they hardly know Janet Yellin at all. This gives Summers a big leg up politically.

And if Obama chooses Summers, Wall Street is not going to say no. The only big issue with Summers is his approval by the Senate, where he would likely run into more GOP opposition that Yellin due to his support of the President's "Keynesian" policies while serving in the administration. Of course the progressive base would be livid, but that has never bothered the president before and he seems to see that as positive, proving his bipartisan centrist credentials and showing him to be a Very Serious Person.

See also Bill McBride at Calculated Risk, Comments on Janet Yellen, and Brad DeLong at Grasping Reality With Both Invisible Hands, Ezra Klein And Evan Soltas: "If The President Is Making Any Calls Himself, He Is Making Very Few Of Them" and Illegitimate And Unfair Larry Summers Bashing: The Smart And Thoughtful Matthew Klein Gets One Wrong

Looks like the choice is going to be made chiefly politically by White House political operatives weighing the pros and cons against a political calculus of donations and votes.