Decision on next Fed chief a rare political battle

JACKSON HOLE, Wyo. — Bette Midler wouldn’t normally be expected to trumpet her opinion on who should be the next chairman of the Federal Reserve.

This time is different.

A battle over what’s arguably the world’s most powerful economic post has turned into an unusually public struggle over two renowned economists — Fed Vice Chair Janet Yellen and former Treasury Secretary Larry Summers.

Chairman Ben Bernanke is expected to step down when his second term ends in January, and the contest to succeed him is sure to spark chatter at this week’s annual meeting of central bankers in Jackson Hole, Wyo. While the principals have kept mum, their warring camps have waged a battle that’s riled Congress, spawned opinion columns and sparked commentary from notables like the Divine Miss M.

Midler recalled that before the 2008 financial crisis, Summers resisted efforts to regulate the kinds of risky investments that helped ignite the crisis.

Sample Midler tweet: “HUH. The architect of bank deregulation, which turned straight-laced banks into casinos and bankers into pimps, may be next Head Fed: Summers.”

That’s just the public campaign.

There’s also been a whisper campaign suggesting that Yellen might lack the gravitas to be chairman — a job requiring enormous skills of persuasion as well as credibility with fellow Fed officials and global leaders. Yellen’s supporters regard such assertions as a sexist attack on someone who’d be the first woman to lead the Fed.

The Economist magazine described a rancorous battle of “name calling and innuendo.”

Participants at the Jackson Hole gathering, held in the picturesque shadows of the Grand Teton Mountains, will meet in a conference room to mull topics like “The Natural Rate of Interest, Financial Crises and the Zero Lower Bound.”

The hallways and grounds of the lodge are where conversation will likely take up the juicier succession battle — something the Fed, which will turn 100 in December, has never before witnessed. The selection of a chairman has long been a matter handled privately by a president and his most senior advisers.

“Most presidents strive for a smooth, quiet transition that doesn’t put markets on edge,” said David Jones, an economist and author of several books on the Fed. “Now, we have this knock-down, dragged-out fight, and nobody knows what will happen.”

The selections of the three most recent chairmen — Paul Volcker, Alan Greenspan and Bernanke — followed a familiar script: A search team quietly interviewed candidates. And then the president made his decision, typically after the White House had privately checked to be sure Wall Street had no strenuous objections.

Until a few weeks ago, Yellen, the No. 2 Fed official, was seen as the front-runner, though some thought President Barack Obama might urge Bernanke to stay for a third term. That would give the administration a seasoned hand to manage a perilous shift: The Fed’s eventual move to raise interest rates from ultra-lows and sell much of its $2 trillion-plus investment portfolio — while convincing Wall Street that the economy and the stock market won’t suffer in the process.

Yet Summers eventually emerged as a strong contender with the backing of senior Obama officials, perhaps including the president. Summers had served in the Clinton Treasury Department, helping manage the Mexican currency crisis in 1995 and the Asian currency crisis in 1997-98. And he built ties to Obama while leading his National Economic Council during the president’s first two years in office.

By contrast, Yellen isn’t well-known outside central bank circles and has yet to play a leadership role during a global crisis.

Her supporters argue, though, that Yellen has played a key if less publicized role at the Fed. She has been its representative at international finance meetings and has helped develop the Fed’s plans for responding to a future global crisis.

Summers and Yellen both declined through spokesmen to speak publicly about the Fed post. At Jackson Hole, Yellen will moderate discussions but isn’t scheduled to address the conference. Summers, who has attended in the past, isn’t here this year. Neither is Bernanke, who has given major speeches at previous Jackson Hole gatherings.

The conference begins with a dinner Thursday night and will end Saturday evening.

Asked about the chairmanship at a news conference this month, Obama defined the main qualification as “somebody who understands they’ve got a dual mandate” of pursuing low inflation and maximum employment.

On rate policy, Yellen’s views are well-known. Investors think she’d maintain Bernanke’s drive to support the economy through bond purchases and other steps to keep borrowing rates low until the economy has strengthened further.

“She’s the candidate of continuity,” said Bob Doll, equity strategist at Nuveen Asset Management.

Still, analysts say they’d be surprised if Summers, as Fed chairman, strayed from the Bernanke-Yellen approach. Republicans have often attacked Bernanke’s low-rate policies by arguing that rates kept too low for too long could destabilize markets and trigger high inflation.

Where Yellen and Summers might differ is on regulation. The Fed is charged with overseeing the nation’s biggest banks and implementing stricter rules imposed by the Dodd-Frank Act, which aims to curb the abuses that helped ignite the 2008 crisis.

Both have backed tighter regulation. But Summers’ critics argue that he’s established ties to big banks and might be overly sympathetic to their priorities. After leaving the Obama administration after 2010 and returning to Harvard to teach, Summers has been a paid consultant for financial institutions including Citibank.

And as Treasury secretary, Summers backed legislation that erased boundaries between commercial and investment banking. Critics believe that change let banks make riskier bets that led to the crisis.

Shelia Bair, former head of the Federal Deposit Insurance Corp., has endorsed Yellen. “She was not part of the deregulatory cabal that got us into the 2008 financial crisis,” Bair wrote in a commentary.

Summers’ supporters say his thinking on deregulation has evolved since the crisis. They note that he supported tighter rules that ended up in Dodd-Frank.

“Larry was strongly supportive of our efforts to put tough new rules in place to reform the financial sector and protect consumers,” said Michael Barr, a law professor at the University of Michigan, who as an assistant Treasury secretary helped craft the Obama administration’s response to the 2008 crisis.

His allies also contend that a Fed chairman with experience on Wall Street, like Summers, may be better equipped to monitor it.

Analysts don’t expect any reversal of the tighter regulation brought by Dodd-Frank — whether Summers or Yellen is chosen to lead the Fed.

“The memories of the crisis are too fresh for a change,” said Brad Hintz, banking analyst at Sanford C. Bernstein & Co.

This summer, about a third of Senate Democrats signed a letter urging Obama to choose Yellen. When the president was pressed by congressional Democrats about a possible Summers chairmanship, he defended him. Obama said the criticism of Summers struck him as an example of someone “getting slapped around in the press for no reason” before any nomination.

The decision may come down to which person Obama feels most comfortable with. That edge could go to Summers, given his long-standing relationship with the president.

Then there’s the gender issue. A Summers pick would mean Obama had bypassed someone who would have broken a barrier if she’d become the first woman to lead the Fed. It would also mean he had chosen someone who upset women when he questioned their innate skills in math and science — comments that contributed to Summers’ forced resignation as Harvard’s president in 2006.

While Yellen is credited with building consensus as head of the San Francisco regional Fed bank and then on the Fed’s board, Summers has gained a reputation for being brusque and too eager to force others to accept his views. That holds the potential for disunity on the 19-member Fed committee that sets rate policies.

Obama has said he’ll make his decision in the fall. He’ll then face the prospect of resistance from Senate Republicans who have grumbled about the Fed’s low-rate policies. Bernanke was approved by the Senate for a second four-year term in 2010 despite 30 negative votes — the most ever received by a nominee for Fed chairman.

Any sign that a confirmation might be in jeopardy could spook investors.

“If politics gets in the way of confirmation of the president’s choice, then we could see a major undermining of market confidence,” said Diane Swonk, chief economist at Mesirow Financial.