September 21, 2021

News Analysis: Quiet Rivalry Over the Next Fed Leader Comes Out of the Shadows

This time is different.

As President Obama considers potential successors to the current Fed chairman, Ben S. Bernanke, a debate about the merits of the chief contenders has exploded into public view, with supporters of Janet Yellen, the Fed’s vice-chairwoman, seeking to mobilize support in her favor and against her chief rival, Lawrence H. Summers, formerly the president’s chief economic policy adviser.

The White House sought to lower the temperature on Friday by putting out word that the president was unlikely to announce a choice before the autumn. But a combination of circumstances seems likely to fuel continuing debate.

Mr. Summers, 58, is a provocative figure among key Democratic constituencies. He was a chief architect of financial deregulation during the Clinton administration and later resigned the presidency of Harvard University after making remarks about women that set off a storm of controversy. Ms. Yellen, 66, would become the first woman to lead the Fed, or indeed any major central bank.

Beneath those political currents, there are also indications that Mr. Summers, now a professor at Harvard, and Ms. Yellen disagree about the central issue confronting the central bank: how much longer and how much harder to push for economic growth.

Ms. Yellen is an architect of the Fed’s efforts to reduce unemployment while Mr. Summers and some of his key supporters have said the Fed’s latest round of bond-buying is doing little good and may even be doing considerable harm.

A group of mostly liberal Senate Democrats, including Richard Durbin of Illinois, the No. 2 leader, and Patty Murray of Washington, another member of the leadership, signed a letter to Mr. Obama this week calling for Ms. Yellen’s nomination in part because of her commitment to seek faster job growth. It is highly unusual for a group of senators to publicly endorse a specific candidate for such a high-level position.

“Janet Yellen has impressed a lot of us in the Senate with her experience and her focus on getting workers back on the job,” said Ms. Murray, the Senate budget committee chairwoman. “She would certainly be a great and historic choice.”

The letter did not mention Mr. Summers, and it is not clear how many of those senators would oppose his nomination. The White House declined to comment, but officials said at least some of those senators had indicated they would ultimately support Mr. Obama’s choice.

“The key here isn’t that people would vote against Summers, rather it’s that at a time when every confirmation can be long and painful, hers would be smooth — at least on the Democratic side,” said one senior Democratic aide.

Republicans cautioned that Ms. Yellen might struggle to win their support.

“We do hope that the president will nominate someone to the Fed that will exercise modesty in regard to what they feel the central bank’s role is,” said Senator Bob Corker, a Tennessee Republican. “I’d like to see someone who is not dovish. Someone who is more towards the center as it relates to monetary policy.”

Mr. Summers questioned the benefits of the Fed’s efforts to stimulate the economy in a 2012 paper written with Brad DeLong, an economics professor at the University of California, Berkeley. The paper, presented at a Brookings Institution conference, also noted potential costs including, “distortions in the composition of investment, impacts on the health of the financial sector, and impacts on the distribution of income, and the historically clear tendency of low-interest rate environments to give rise to asset market bubbles.”

He made similar remarks at a private investment conference in April, according to a summary obtained by The Financial Times, declaring that the Fed’s bond purchasing “in my view is less efficacious for the real economy than most people suppose.”

Robert Rubin, the former Treasury secretary who has served as a mentor to Mr. Summers in his political career and is among those pressing for his nomination as Fed chairman, criticized the Fed’s policies even more sharply on a panel at the Aspen Institute last month. His remarks suggested that the challenge confronting the next leader of the Federal Reserve was not to direct an attack, but instead to manage a retreat.

Annie Lowrey, Jeremy W. Peters and Michael D. Shear contributed reporting.

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G-20 Ministers Aim for More Job Growth

“Growth and creating jobs remains our priority,” the statement from the finance ministers and central bank governors of the Group of 20 countries said.

It added that the governments in the organization, which collectively represent about 90 percent of the world’s economic activity, “are fully committed to taking decisive actions to return to a robust, job-rich growth path.”

Previous communiqués issued after such meetings had also indicated policy support among some member governments to focus on balancing budgets, not just spending to get out of recession. In this light, Saturday’s statement suggested the weight of policy consensus in large governments was shifting toward continued stimulus.

While not openly critical of austerity measures like the across-the-board automatic federal budget cuts in the United States, the statement suggested most governments see recovery as too weak to risk reducing spending on unemployment benefits, job training, education and other public sector outlays.

Not even Germany objected to the new wording, said a senior Treasury Department official who attended the two days of meetings in Moscow.

“The debate between growth and austerity seems to have come to an end,” the official said.

The benefits of the American pro-growth fiscal policies tapered only after the automatic cuts known as sequestration kicked in earlier this year. The efforts of the G-20 to coordinate economic policy are intended to help the world recover from the recession that began in 2007.

The officials also discussed strategies for ending central bank monetary stimulus, like the bond-buying program known as quantitative easing in the United States, without causing turmoil on financial markets.

Anton Siluanov, the finance minister of Russia, which is hosting the meeting, spoke in a final news conference about the tremor that American monetary policy is sending through emerging markets like Russia.

A suggestion last month by Ben S. Bernanke, the chairman of the Federal Reserve, that the United States economy may recover sufficiently this year to wind down the bond-buying program caused a sell-off in emerging market bonds.

With United States Treasury rates rising in response to Mr. Bernanke’s comment, investors no longer saw the benefit of taking the extra risk of putting money in government bonds issued by wobbly emerging markets like Russia.

“We had an experience where just a comment that quantitative easing could end wound up seriously affecting developing economies,” Mr. Siluanov told journalists.

The joint statement sets the stage for a G-20 summit meeting in St. Petersburg in September. It suggested that leaders including President Obama would similarly play down concerns about deficits in light of continued weakness in the global economy during an uneven recovery: demand remains weak in China and Europe while growth in the United States is anemic.

The officials discussed efforts to stimulate demand in China. Beijing has removed a floor on interest rates banks can charge, which could lower rates and encourage business activity and spending.

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High & Low Finance: The Time Bernanke Got It Wrong

You could see that this week when Ben S. Bernanke, the Fed chairman, made his semiannual pilgrimage to Capitol Hill to discuss the state of the economy. Lawmakers voiced concern about possibly excessive regulation of banks, but not about the clearly inadequate capital the big banks — and many small ones — had before the crisis.

Some of them seemed to be upset that the Fed’s policies had caused stock prices to rise. Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, seemed to think that all current economic problems could be traced to President Obama’s excessive spending.

He was upset that the “Federal Reserve has regrettably, in many ways, enabled this failed economic policy through a program of risky and unprecedented asset purchases.”

Mr. Bernanke, who is probably nearing the end of his tenure running the Fed, seemed to have had such criticisms in mind last week when he assessed “the first 100 years of the Federal Reserve” at a conference in Cambridge, Mass.

In analyzing the Fed’s failures during the Depression, he seemed to be taking clear aim at some of his current critics — and perhaps at other central banks that were far less aggressive after the credit crisis.

First, he appeared to address the idea, popular in some circles, that we need a new gold standard.

“The degree to which the gold standard actually constrained U.S. monetary policy during the early 1930s is debated,” he said, “but the gold standard philosophy clearly did not encourage the sort of highly expansionary policies that were needed.” He said policy makers, following flawed economic theories, concluded “on the basis of low nominal interest rates and low borrowings from the Fed that monetary policy was appropriately supportive and that further actions would be fruitless.”

Was that a criticism of the European Central Bank under Jean-Claude Trichet, which lowered interest rates but did little else as the euro zone crisis grew? It certainly helped to explain why Mr. Bernanke felt the need to embark on quantitative easing and to focus on longer-term interest rates as well as short-term ones.

Then Mr. Bernanke pointed to “another counterproductive doctrine: the so-called liquidationist view, that depressions perform a necessary cleansing function.” That was the view pushed in the early 1930s by Andrew Mellon, the Treasury secretary, to such an extent that it angered even President Herbert Hoover, who did not, however, seem to think he could overrule the secretary. Now the comments could be read as a reproach to those, in the United States and Europe, who push for austerity above all else.

“It may be that the Federal Reserve suffered less from lack of leadership in the 1930s than from the lack of an intellectual framework for understanding what was happening and what needed to be done,” Mr. Bernanke concluded.

It seems to me that something similar could be said for the Fed before the debt crisis erupted. The intellectual framework it used simply could not cope with the idea that financial stability can itself become a destabilizing factor, as investors and bankers conclude that it is safe to take on more and more risk.

For a time, the period before the collapse was known as the “Great Moderation,” a term that Mr. Bernanke helped to publicize in a 2004 speech. Low levels of inflation, long periods of economic growth and low levels of employment volatility were viewed as unquestioned proof of success.

And what brought on that success? In 2004, Mr. Bernanke, then a Fed governor, conceded good luck might have helped, but his view was that “improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

In 2005, three Fed economists, Karen E. Dynan, Douglas W. Elmendorf and Daniel E. Sichel, proposed an additional explanation for the Great Moderation: the success of financial innovation.

“Improved assessment and pricing of risk, expanded lending to households without strong collateral, more widespread securitization of loans, and the development of markets for riskier corporate debt have enhanced the ability of households and businesses to borrow funds,” they wrote. “Greater use of credit could foster a reduction in economic volatility by lessening the sensitivity of household and business spending to downturns in income and cash flow.”

Floyd Norris writes on finance and the economy at

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Economix Blog: In Europe, a Dispute Over Facts and Fairness



Thoughts on the economic scene.

Part of Europe’s problem is that Europeans can’t agree on some basic facts about the continent’s financial crisis. Consider the striking results of a recent poll by the Pew Research Center:

Pew Research Center

In most large European countries, a plurality of people say Germans are the hardest-working Europeans, with a substantial share also saying that Greeks are the least hard-working. Greeks, on the other hand, say Italians are the least hard-working — and view themselves as the hardest working.

Pew explains:

The crisis has exposed sharp differences between some Europeans. Germany is the most admired nation in the E.U. and its leader the most respected. The Germans are judged to be Europe’s most hard-working people. And the Germans are the strongest supporters of both European economic integration and the European Union.

Greece is the polar opposite. None of its fellow E.U. members surveyed see it in a positive light. In turn, Greeks are among the most disparaging of European economic integration and the harshest critics of the European Union. And they see themselves as Europe’s most hard-working people.

James Surowiecki’s column in this week’s edition of The New Yorker touches on similar themes:

Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

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New Treaty to Save the Euro May Also Divide Europe

In a day of historic, seemingly tectonic shifts in the architecture of Europe, all 17 members of the European Union that use the euro agreed to the new treaty, along with six other countries that wish to join the currency union eventually. Three stragglers, the Czech Republic, Hungary and Sweden entered the fold later, after a strong diplomatic push.

Twenty years after the Maastricht Treaty, which was designed not just to integrate Europe but to contain the might of a united Germany, Berlin had effectively united Europe under its control, with Britain all but shut out.

Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.

“It is a very good outcome for euro area members, and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Mr. Draghi said early Friday morning.

The support of Mr. Draghi and the bank to continue to buy the bonds of troubled large countries like Italy and Spain is crucial to buy time for their economic adjustment and restructuring, to reduce their debt and avoid a collapse of the euro.

The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. President Nicolas Sarkozy of France said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations.”

Mr. Cameron said, “What was on offer wasn’t in British interests, so I didn’t agree to it.” He conceded that there were risks with others going ahead to form a separate treaty, but added, “We will insist that the E.U. institutions, the court and the Commission work for all 27 nations of the E.U.”

The prime minister seemed to be betting that his unhappy coalition partners, the Liberal Democrats, would not bolt over the issue, and that calculation seemed to be right. On Friday, the party’s leader, Nick Clegg, said that as much as he regretted the turn of events, Mr. Cameron’s demands had been “modest and reasonable.”

The European Council president, Herman Van Rompuy, said that in addition, the leaders agreed to provide an additional 200 billion euros to the International Monetary Fund to help increase a “firewall” of money in European bailout funds to help cover Italy and Spain. He also said a permanent 500 billion euro European Stability Mechanism would be put into effect a year early, by July 2012, and for a year, would run alongside the existing and temporary 440 billion euro European Financial Stability Facility, thus also increasing funds for the firewall.

The leaders also agreed that private-sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.

Mr. Sarkozy said that the institutions of the European Union would be able to police the new pact, though Britain may dispute that.

Chancellor Angela Merkel of Germany, who pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets, said the decisions made here would result in increased credibility for the euro zone. “I have always said the 17 states of the euro zone need to win back credibility,” she said. “And I think that this can happen, will happen, with today’s decisions.”

European financial markets strengthened mildly on word of the agreement. The Euro Stoxx 50 index, a barometer of euro zone blue chips, gained 1.5 percent, while broader barometers rose slightly, and stocks rose in early trading in the United States as well. The euro’s value strengthened to $1.3369, up from $1.3338 on Thursday. In the bond market, the borrowing costs of the euro region’s two most closely watched debt-ridden economies, Italy and Spain, were little changed.

President Obama said on Thursday that the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”

Jack Ewing contributed reporting from Frankfurt, and Mark Landler from Washington.

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