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In the early 1990’s America experienced a bout of recession due to the moves by the U.S. Federal Reserve to raise interest rates and Iraq’s invasion of Kuwait in the summer of 1990, the American housing market collapsed as a result of which banks that specialized in home mortgages went bankrupt, during this period “Time” magazine featured Alan Greenspan, Robert Lubin and Larry Summers on its cover and called the “three man army” as the “Committee To Save the World”. Now, more than a decade later, Summers is poised to take over from Ben Bernanke as the Fed Chairman, Bernanke’s term expires this January and Lawrence Summers or Larry Summers as he is known is Obama’s choice to take over the most coveted administrative positions in the world.

In March 2009, a newly elected Barack Obama faced a dilemma to bail out the Auto giant Chrysler or let it go bankrupt, the President opted to consult Lawrence Summers, then National Economic Council director who explained with no equivocation the implications to the U.S. economy if the auto major was not bailed out by the government, Obama was convinced by the explanation and Chrysler received $ 12.4 billion in tax payer’s money that helped to save the company and thousands of jobs. Whitehouse officials describe the relationship between Obama’s bond with Summers to that of a patient with a doctor who helped him survive a heart attack or soldiers who have served the battle together.

Summers Vs Yellen or Inflation Vs Unemployment

According to media reports, Obama administration is considering appointing Mr.Summers as the next chairman of the Federal Reserve, but another candidate, considered for long to take over the reins from Bernanke is  Janet L. Yellen, according to an article published in the New York Times last week, Obama is keen on keeping inflation in check, Yellen on the other hand has been quoted in the past saying the Fed’s priority should be on reducing unemployment, even if that causes inflation to rise slightly above the expected levels.

David Forrester, a forex and fixed income strategist at Macquarie Bank says “Yellen is a Fed insider and a part of the Federal Open Market Committee (FOMC) when Q.E was being implemented, while Summers questions the efficacy of QE” he said, while adding that there was likely to be a structural shift in U.S. monetary policy if Summers is appointed as the next Fed chairman.

Janet Y Yellen is the “dark horse” to head the chair and analysts argue that she might not “fit in” with the scheme of things in Obama’s financial team. However, there is severe pressure on the American President to appoint more women to senior positions, her experience in the treasury and her gender will add to her chances of heading the Fed.

Conflict of Interest

Commenting on the crashes in the stock markets, Summers once quipped “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable and they get you where you are going better. But the crashes are much more spectacular”

Critics opine that Summer’s Wall Street ties will be detrimental and will create suspicion whether he is the right man for the job, currently he is serving as a paid consultant to Citigroup Inc., consults for a number of financial firms including stock exchange operator Nasdaq OMX Group Inc., hedge fund D.E. Shaw, venture capital firm Andreessen Horowitz and asset management and advisory firm Alliance partners. Considering the Fed’s duty to regulate banks and mitigate financial risks, critics argue that it makes no sense to even consider Summers as a potential candidate for the Fed’s chair. Among the top contenders for the position, Mr.Summers has by far the most personal wealth and Wall Street experience, before his tenure in the Obama administration he had accumulated more than $ 7 million from private practice which included paid speeches, private consultation to being a faculty in the Harvard. But his huge wealth, Wall Street connections could be put him in an awkward position, especially since Chairman of the Federal Reserve would oversee the writings of several key legislations including the Dodd Frank Act. The “blue eyed” boy of the Wall Street even shot down a proposal by Senator Dodd and others to limit Wall Street bonuses.

Wall Street experience is not unusual for a Fed chairman, departing chairman Ben Bernanke has never been employed with the Wall Street, spending most of his career at the Princeton while his predecessor Alan Greenspan was the President of a consulting firm and worked in investment banking in the earlier part of his career.

But Robert McTeer, former President of the Bank of Dallas had a different opinion, “Larry Summers has been a public servant for a long time, in the Treasury, as the economic advisor to Obama and as the President of Harvard, and he’s obviously given up lot of income to do that over the years” he said.

Senator Ted Kaufman said “This Revolving door is a problem, and it will be a problem for Summers. The other side of the coin though is you need someone in this position who has the knowledge and experience. That’s always the trade-off”.

It would be interesting to see if Obama would prefer Summers with whom he has a close relationship or with Janet Yellen who is known to be a deliberate, thoughtful and inclusive leader, it’s up to the President to decide if he relents to the Wall Street’s pressure or side with the American people.

http://www.internationalfinancemagazine.com/article/Will-Revolving-Door-Stand-as-an-Obstacle-to-Feds-Chair.html