Larry Summers is smart enough to have decided to avoid a battle over the chairmanship of the Federal Reserve. Despite the support of embattled U.S. President Barack Obama, the former Treasury chief faced opposition from both liberal Democrats and plenty of his dismal scientist peers. Summers says it’s better for the economic recovery not to have the fight. That may be true – unless his exit from the race opens new fissures.
The former White House aide was Obama’s favorite for the job. But to be confirmed, Summers would have needed the Senate’s blessing. With even Democrats divided on his candidacy – some seeing him as a deregulator and friend of the financial sector who might put bankers first – the conflict would have depleted the president’s political capital when he is already pushing for unpopular military action in Syria and bracing for a tough vote on the nation’s debt ceiling in October.
A messy confirmation, even if ultimately successful, could also have roiled markets. For now, Wall Street expects Fed Vice Chair Janet Yellen to get the job – and that she will continue down the policy path set by current Fed Chairman Ben Bernanke. Yellen would probably have an easier passage through Congress, with Democrats supporting her more fully than they would Summers.
But Summers’ withdrawal from the race doesn’t guarantee that kind of smooth transition. The president highly values his inner circle, so Tim Geithner, another former Treasury secretary, can’t be ruled out of contention – though he has said several times he doesn’t want the job. Former Fed Vice Chair Roger Ferguson is another possibility, and he might be inclined to end the central bank’s monetary stimulus more rapidly than Bernanke or Yellen. Obama has mentioned Donald Kohn, yet another vice chair, as a candidate too.
Detractors accuse Summers of having an outsized ego. Despite the lure of the top job at the Fed, his powers of reasoning seem to have been the greater force this time. He may even enjoy one small consolation. The timing of his revelation has robbed many of his critics in the media of an otherwise quiet Sunday evening.