It can be complicated to understand exactly why Larry Summers would not be a good choice for Fed Chairman. In this post, Paul Krugman does a good job of explaining it.
Aren’t they all Democrats?
Obama is a Democrat, Summers is a Democrat, and Summers worked under Bill Clinton. Since Summers’ name came out in the press there has been strong resistance from the public, and also from within the Democratic Party. If Summers is such a good Democrat, what is the foundation of this political divide?
It is the subtleties that matter
In Krugman’s post, he outlines an exchange in 2005 between Summers and Raghuram Rajan (who is much more fiscally conservative). However, in the case of this exchange Krugman agreed with Rajan’s assessment of the instability that investment banks, armed with ever more complex financial instruments, introduced into the economy. Summers was dismissive of this, basically giving the investment banks the benefit of the doubt and arguing that financial innovation was like innovation in any other industry.
[Never give the investment banks the benefit of the doubt, and never follow anyone else who does.]
Do they truly “get” the investment banks?
Eugene Fama and Paul Krugman disagree on many issues. They disagree on the causes of the financial crisis and also disagree on the solution. However, one point where they tend to come together is in their mistrust of investment banks and skepticism on the benefits of complex financial innovation. They also agree that much of the work investment banks do is socially unproductive or counterproductive. Even back in the late 1990s with the hedge fund Long Term Capital Management, the grandfather of all these derivative strategies, Fama expressed concerns. They both agree that banks should have higher capital requirements moving forward. They both agree that if you give investment banks money, much of it will likely go out the back door in Wall Street bonuses. They both agree the financial positions in the federal government should not be stocked with ex-Goldman Sachs executives. They both could have told you that Jon Corzine (a Democrat) is not to be trusted. They both understand that most of this financial “innovation” is just as likely to destabilize the economy as it is to stabilize it under the false guise of better “risk sharing.”
More than anything you want the next chairman of the Fed, regardless of their political affiliation, to have a good understanding of this. I get the sense that Janet Yellen is this type of person.
Those that are still cozy with the investment banks
On the other side are “Country Club Republicans” and “Goldman Sachs Democrats” who are united by the fact that they still don’t quite understand how vicious and malicious the investment banks really are. They truly are psychopathic institutions. I get the sense that this political camp is just a little mesmerized by the sinister power and command the investment banks wield. This is exactly the camp where Larry Summers falls.
Their relationship with the investment banks is along these lines:
“I know I’m supposed to regulate you, but I also think you’re kind of cool in an evil sort of way. Plus I know I’ll need you at some point in the future for a cushy job or for contributions.”
This is not the sort of person we want at the helm of the Fed right now.