We’ve seen this movie before. There is widespread frustration with the performance of the economy. Traditional policy approaches are not delivering hoped-for results. A relatively unpopular president is loathed to an unusual extent by a frustrated opposition party that lost the previous presidential election while running a pillar of its establishment. And altered economic conditions have led to the development of new economic ideas that reflect a significant break with previous orthodoxy.
In July 1998, Larry Summers appeared before a Senate committee to argue that a financial product, called an over-the-counter (OTC) derivative, did not need to be regulated. He said that there were only two potential reasons for financial regulation—“to protect retail investors from unscrupulous traders” and “to guard against manipulation in markets”—neither of which, Summers concluded, were applicable to OTC derivatives. Summers, who served as Treasury secretary from 1999 to 2001, eventually won the battle over derivatives regulation.
Two things are happening today in economic news. First, Janet Yellen is likely to be confirmed Monday evening to head the Federal Reserve. And second, Larry Summers, whom many of the president's advisers favored for the Fed post, published this buzzy op/ed in The Washington Post that sheds light on how he would be thinking about the economy, and monetary policy, if he were the one about to ascend to the big job.
Last month I argued that the U.S. and global economies may be in a period of secular stagnation in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates. Since the start of this century, annual growth in U.S. gross domestic product has averaged less than 1.8 percent. The economy is now operating nearly 10 percent, or more than $1.6 trillion, below what the Congressional Budget Office judged to be its potential path as recently as 2007. And all this is in the face of negative real interest rates for more than five years and extraordinarily easy monetary policies.
Lawrence H. Summers, the former Treasury secretary and senior White House economic adviser, has withdrawn as a candidate for Federal Reserve chairman in a startling development that raises urgent questions about who will lead the central bank when Chairman Ben S. Bernanke steps down in four months.
Reports have surfaced that former White House Economic Adviser Larry Summers might be the next chairman of the Federal Reserve, but presumed controversies about the alleged front runner have sparked some opposition to the choice.
The word among Federal Reserve watchers right now is that the choice is down to Janet Yellen or Larry Summers as Ben Bernanke’s replacement. I can’t find anyone who really thinks it’ll be Roger Ferguson, Tim Geithner, Alan Blinder, or some other dark horse.