Throughout the Federal Reserve’s 100-year history, the Senate has generally deferred to the president’s choice of leader for the central bank. If Larry Summers is picked for the job, however, the debate around his nomination would be unlike any that has come before.
For reasons that make a great deal of political sense, some Republicans and more Democrats will resist the nomination. Such a roll of the dice by the Barack Obama administration could have short-term unsettling consequences for financial markets. Over time, whatever the outcome, the Summers nomination process will be viewed as a lesson in why and how American democracy works.
There are two entirely reasonable, specific questions that must be answered. First, how much has Citigroup paid Summers? Any number above $200,000 will grab national attention.
Second, Summers should be asked what he would do as Fed chairman if Citigroup were to face again the kind of difficulties it encountered in 2007-2008. Would he want to apply the resolution powers created by Dodd-Frank and are now under development by the Federal Deposit Insurance Corp., which are intended to impose losses on creditors? (I’m a member of the FDIC’s systemic resolution advisory committee, but I’m not involved in drawing up or implementing these rules.) Or would he side again with the view championed by Geithner in 2008-2009 that Citigroup’s shareholders and creditors must be protected at all costs?
Peggy Noonan and George Will have both argued brilliantly that crony capitalism and too-big-to-fail financial institutions are a potentially large political liability for the Democrats. The Summers nomination would be a golden opportunity for a Republican politician to take up this point on the national stage.
The big political win for the Republicans would be to tarnish Summers as being too close to the big banks. Once that stamp is on his record, they have nothing to lose if he becomes Fed chairman. And the only way to get the message across is to vote against him in committee and on the Senate floor.
In 2010, Bernanke received the most lukewarm support of any Fed chairman when he was reconfirmed by a vote of 70-30. Paul Volcker was reconfirmed in 1983 by a vote of 84-16. Summers may struggle to match even Bernanke’s level of support.
Some feel that such an expression of Senate disfavor would undermine the credibility of the Fed, including its political independence. But this autonomy is based ultimately on its legitimacy. In other words: Do Congress and the public understand and believe in what the central bank is doing?
The Summers hearing will bring much more scrutiny to Fed thinking, as well as to the way it works with the administration and big political donors such as large banks. More transparency, including on how regulatory decisions are made, ultimately will benefit U.S. democracy.
(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”)