Larry Summers was considered a left-wing candidate for the position of Fed chairman when Ben Bernanke steps down January 2014. Ironically, it is his past of financial deregulation that upset his core left constituency and cost him the job.
“Republicans don’t love Summers, but the left really hates him because he was really responsible for the deregulation of the ’90s,” says Dan Oliver, principal at Myrmikan Capital, a New York-based hedge fund.
As deputy secretary and later treasury secretary, Summers was a key figure in the deregulation of the financial industry in the late ’90s. The initiative culminated in the removal of the Glass–Steagall Act of 1933, which prohibited broker houses to operate as banks as well. Many critics claim it was the deregulation of the ’90s that helped cause the financial crisis of 2008.
“Many divergent interests collaborated to defeat him, most on the left, because they blame him for this deregulation,” Oliver adds.
Being on the left side of the political spectrum, the question arises why Summers would push for deregulation, traditionally a Republican domain.
Oliver believes Summers pushed for these changes as he made millions consulting for big banks during his career in academia.
Ironically, this time around, Wall Street didn’t support him anymore either, as many people thought he would end or modify quantitative easing (QE).
“If you are serious about redistributing wealth from the rich to the poor, QE isn’t working. The theory was not that Summers is anti-inflationary, rather he would figure out a way to get the newly printed money directly to the left constituents, bypassing Wall Street. That’s why Wall Street was so against Summers,” Oliver says.
Consequently, the dollar went down and markets up on Monday as a reaction to the news, released late on Sunday.
Because of the failure to redistribute income, President Barack Obama is likely to use a strategy first publicized by Ben Bernanke in 2002: cut taxes and have the Fed finance these tax cuts without cutting spending.
What might sound counterintuitive at first might be a clever political move, as Republicans are unlikely to object to tax cuts. Then Obama just has to find the right person at the Fed to support the policy.
“Geithner could still do it, Yellen could still do it. Is the next Fed chairman going to preside over rates going through the roof, kill the economy, I don’t think so,” Oliver says.
Oliver believes Geithner could be dark horse in the race according to old wisdom about Fed chairmanship.
“He [Geithner] says he doesn’t want it. It used to be the case that if you lobby for the Fed position you are disqualified from it,” he says.
Either way, QE is going to continue says Oliver, regardless of who is the chairman of the Federal Reserve from 2014 onward, but the position will not be an enviable one.
Because of the imbalances in the financial system, the Fed might be forced to react to shocks and Congress’s budget policy instead of setting policy itself.
“Bernanke had the luxury to have a position to decide: ‘Do we do QE now or later.’ The relative stability afforded him the luxury of options. When the ridges of the economy fly off like in 2008, you react, and at some point that’s going to happen again.”