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Larry Summers should not be appointed to the Fed

There are increasing rumors that Larry Summers rather than Janet Yellen might be chosen to substitute Ben Bernanke as the head of the Fed. Dean Baker has summarized all the correct reasons for not doing so. As he says:
"Summers was a key actor in the Clinton economic team that pushed for bigger and less regulated banks. He was there for the repeal of Glass-Steagall. He was also among those hectoring Brooksley Born, when the then head of the Commodity Futures Trading Commission argued that it would be a good idea to regulate derivatives. And he famously ridiculed as Luddites those warning of the risks of financial deregulation at the Fed's Greenspanfest in 2005."
I'm less keen than Dean on the issue of US trade deficits, since in my view global imbalances are actually too small (the US would need to stimulate global demand and actually run higher deficits, which given the role of the dollar would have no significant impact on the American economy).

Also, the Money Illusion blog notes the Summers rumors, while also including a particular quote from Summers that is instructive. Summers said:
"In the model I understand, inflation is mostly driven by demand, and when you increase demand, you increase inflation. And if you don’t increase demand, you don’t increase inflation. But if you’ve solved demand, you’ve solved your problem."
This is basically a result of the believe in the natural rate. Inflation results only from a level of activity that is beyond the natural rate. The Money Illusion is correct in pointing out that this confuses changes in quantities with changes in prices. However, this is in fact probably a problem with all the candidates to the position of Fed chairperson, since they are all from the mainstream.

That's why even Krugman [which the Money Illusion thinks doesn't have the right personality to chair the Fed, why because Summers does?] wants to increase inflationary expectations to raise demand. The confidence fairy is very pervasive.

PS: The Money Illusion has a list of the candidates that would be even better than Yellen (preferred to Summers), namely: "Lars Svensson, Mark Carney, Michael Woodford, Christina Romer, Robert Hetzel, Nick Rowe, anyone from the Reserve Bank of Australia, even the janitor ... Greg Mankiw ... [and] I could even add Krugman." I don't know the janitor, but it seems reasonable. If I had to choose one it would be Jamie Galbraith. Hope springs eternal!

PS: Pablo Bortz (h/t) pointed out this post by Yves Smith that somehow I missed.


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