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Analysis
'Confirmability' could be key to Fed race

'Confirmability' could be key to Fed race

Summers may be stalking horse for less mercurial Yellen

by John Kornblum

Thu 29 Aug 2013

As a long-standing US diplomat, I am reluctant to take sides on a complex and controversial nomination which the American President will decide for a mixture of political and personal reasons. But my experience and instinct tell me that, in the fluctuating tussle between Lawrence Summers and Janet Yellen over who becomes chairman of the US Federal Reserve next year, Summers' perceived lead in the approval stakes may be less clear than he would have us believe.

The President appoints, but the Senate approves. ‘Confirmability’ could end up being the most important criterion. Summers could be a stalking horse to help a less mercurial candidate gain easier approval. If I had to bet on it, I would wager euros (not dollars) that, in this intriguing, seemingly two-horse race, Yellen may finish a nose ahead.

In some superficial ways, the race shouldn’t raise more than a yawn. The title is uninspiring, the salary, at $199,500, miniscule by banking standards. But Fed chairmen have always been among the world’s most powerful figures. They stay in office a long time. Eras of economic growth or decline are often defined by their names. William McChesney Martin, Paul Volcker or Alan Greenspan are shorthand for the ups and downs of the American economy.

This is one reason why the debate over Ben Bernanke’s successor is unusually heated. Bernanke’s programme of quantitative easing is credited by many as keeping the US economy on a recovery path, but discussion of next steps has already begun.

The second reason is power. Today’s Washington is even more polarised than usual. The new chairman’s mandate will extend into the next administration, with corresponding influence through personal and political channels.

Although many distinguished bankers and scholars have the qualifications, President Obama has allowed the choice to be reduced essentially to two people. Yellen is solid and steady. She has served loyally as Bernanke’s deputy and could be expected to continue his approach.

Summers could not be more different. He has been an intellectual leader of American economic thought since his 20s. He is articulate, aggressive and hard to manage. He is a member of the inner circle around former Treasury secretary Robert Rubin, who has ensured his people have dominated policy-making under Democrat Presidents for the past two decades.

Yellen is an outsider to this group. And she is a woman. Gender politics are especially important in today’s Washington. With Hillary Clinton rapidly becoming the favourite for the 2016 election, passing over Yellen for the more controversial Summers could be difficult for Obama. We must not forget that Summers was driven from the Presidency of Harvard University after suggesting women couldn’t master maths and science as well as men.

There has been an avalanche of arguments and counter-arguments from the Washington and New York economic establishments. Wall Street versus Main Street as some see it. Summers is well ahead in the lobbying war, underlined by the CNBC report on Monday that the former Treasury secretary is being ‘vetted’ as a prelude to being appointed. (A normal procedure. Both candidates and probably a few others have been vetted for some time.)

This may be no more than the latest milestone in a battle that is rapidly turning psychological. The Senate, not the White House, may end up with the last word.

John Kornblum, Member of the OMFIF Advisory Board, is a former American diplomat to Germany.

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