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Naming a New Fed Chair: '08 Crisis Colors Decision

Naming a New Fed Chair: '08 Crisis Colors Decision

By Alexis Simendinger - August 5, 2013

Past performance is no guarantee of future gain.

That concept, if applied to President Obama’s upcoming decision to pick a new chairman for the Federal Reserve, makes observers wonder if he’ll choose someone who helped him navigate the financial crisis at the start of his presidency (the band-of-seasoned-brothers theory) or turn to someone more removed from his West Wing inner circle and who is a Fed insider.

There’s no doubt the challenges ahead for the central bank will guide Obama’s pick to succeed Ben Bernanke, whose second term as chair ends in January. Fed Vice Chair Janet Yellen has discovered new admirers on Capitol Hill -- Democratic lawmakers who are both persistent and public with their opinions. And fans of former Treasury Secretary Larry Summers, including Obama, are not shy about defending the outspoken former Harvard University president, known for his blunt self-confidence.

On Wednesday, responding to questions from House Democrats during a private meeting on Capitol Hill, the president set tongues wagging by erecting himself as a shield for Summers, who has been the target of left-leaning media critiques. Obama also told lawmakers that Yellen, a widely respected economist, former chair of the Clinton-era Council of Economic Advisers, and a member of the Fed’s Board of Governors before that, occupies a spot on his short list. And he mentioned a third candidate, former Fed Vice Chair Donald Kohn, 70, who was Bernanke’s right-hand man as the financial meltdown began in 2008.

On Friday, the New York Times reported what many had assumed -- that Obama’s team asked former Treasury Secretary Timothy Geithner if he would consider the post. Geithner declined.

Educated in international studies and languages, Geithner forged a strong bond with Obama in 2009 and is close to Summers. Previously he led the New York Federal Reserve Bank during Wall Street’s calamitous era of greed and risk-taking. He returned to New York at the end of Obama’s first term.

All of them -- Summers, Yellen, Kohn and Geithner -- figure in the history of the worst financial crisis since the Great Depression. This fall, senators and their staffs will comb through a nominee’s statements and speeches to gauge his or her views about the Fed’s unprecedented economic rescue program known as quantitative easing, as well as the central bank’s actions before, during and immediately after the crisis.

So here’s a tip for Fed watchers and researchers: Don’t overlook the official findings, plus audio and interview transcripts, from the report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, also known as the Financial Crisis Inquiry Commission. (Full disclosure: This reporter was a member of the FCIC writing team during its final six months.)

Yellen’s 90-minute interview, conducted in 2010 at the Federal Reserve, is here.

FCIC discussions with Kohn, as well as some of his documents, can be found here.

And while the chairman and members of the commission also interviewed Summers, commissioners bowed to executive privilege restrictions imposed by Obama’s White House counsel. In speaking with Summers, investigators explored his opinions about the causes of the financial crisis and his well-known opposition in 1998 and 1999 to the Commodity Future Trading Commission’s push to tighten regulation of the derivatives market. In that context, Summers appears on pages 47-48 of the FCIC report. A non-public record of the commission’s interview with him is stored at the National Archives.

The commission in 2011 concluded that the crisis and what Obama now calls the “rubble” -- that is, millions of people without jobs, lost savings and millions of foreclosed homes -- was never foreordained. The upheaval was not a sudden earthquake. Documented warnings, including data brought to the Fed, were ignored or discounted. The commission’s report described numerous institutions and individuals who recognized a growing storm early on, warned of a potential disaster, and in some cases pleaded in vain with authorities to act.

Commissioners most especially faulted the Federal Reserve for its “pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards.” A majority of the 10 commissioners said the Fed was the “one entity empowered to do so and it did not.”

In the years under Alan Greenspan’s leadership and into Bernanke’s tenure, the central bank donned thick blinders. Greenspan, who dominated Fed thinking during the two decades preceding the meltdown, said in the aftermath of the crisis that regulators could not have anticipated and forestalled the crisis. But Bernanke, Greenspan’s successor and an expert on the Great Depression, told the commission that the Fed could have regulated the mortgage market during the prolonged housing boom. “I think it was the most severe failure of the Fed in this particular episode,” he told the FCIC.

This might all be academic history if the unemployment rate wasn’t stuck above 7 percent in 2013; if economic growth was more robust; if the Fed was not still mopping up five years later; and if another crisis wasn’t a lingering worry.

Going forward, many experts view the Fed nomination as the most important executive decision for the economy that Obama will make during his second term. Asked last week if he agreed with that assessment, National Economic Adviser Gene Sperling, who succeeded Summers in the Obama White House and worked with Yellen during Clinton’s second term, paused before answering.

Declining to discuss the private advice he’s shared with Obama about the next Fed chair, Sperling told RCP, “I wouldn’t rank any single economic decision as the most important, but it’s obviously a very important decision.”

One recent newspaper editorial suggested that Obama’s thoughts about Yellen, the consensus-building insider, and Summers, the crises-seasoned outsider, might hinge on the president’s views about how far away from the window ledge the financial system and a weak economy have moved. Obama has been delivering a series of speeches this summer asserting more stable economic footing.

During her November 2010 interview with the FCIC, Yellen told investigators, “The next financial crisis will be something completely different, and will we have the ability to spot it?”

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Alexis Simendinger covers the White House for RealClearPolitics. She can be reached at asimendinger@realclearpolitics.com. Follow her on Twitter @ASimendinger.

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