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July 26, 2013

Should Obama pick Larry Summers to head the Fed?

Right now, President Obama is grappling with one of the most important decisions of his second term: whom to appoint to be the next chairman of the U.S. Federal Reserve. That person will play an outsized role in determining how the economy works over the next several decades. With rumors circulating that former Treasury Secretary Larry Summers is now the frontrunner, overtaking previous favorite Janet Yellen of the current Fed board, it’s important to understand everything the next chair will have to accomplish.

The next chair of the Federal Open Market Committee, as the powerful body that controls the U.S. money supply is formally known, will face three major issues during his or her tenure. The first, and most urgent, is to determine how to navigate our economy out of the current doldrums. The second is to decide how aggressively to enforce the new set of financial reform rules that emerged from the financial crisis. And the third, crucially, is to find a way to rebuild monetary policy and the Fed so that the United States won’t see a repeat of the current crisis. Yellen is clearly the superior candidate on all three counts.

The current Fed chair, Ben Bernanke leaves behind no new paradigm for how to run monetary policy after the crash. Bernanke has been like a fireman, using a range of unorthodox tools to keep the economy from falling apart. The next chair, however, will be like a fire marshal, determining how we rebuild the U.S. economy so that it is as “fireproof” as possible.

Economists are debating what it would take to reset the Fed’s policy to prevent a run of lost decades for the United States. Some argue that the Fed will need to make some dramatic changes to the way it does business, such as by setting policy according to the total amount of spending in the economy or promoting a higher rate of inflation. This will give the Fed more room to react the next time there is a recession.”


Read full Politico article here

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