Lawrence Summers drops out of running for Fed chief

Former Treasury Secretary Lawrence Summers has removed his name from contention to be the next head of the Federal Reserve.
(Mark Wilson / Getty Images)

WASHINGTON — With political opposition mounting against him, former Treasury Secretary Lawrence H. Summers pulled his name from consideration as the next chairman of the Federal Reserve, an abrupt turn of events that underscored President Obama’s weakness in Congress.

The unexpected decision, disclosed Sunday, left some financial analysts recalibrating the odds of changes in the central bank’s policies, which have major global implications.

Economists and other experts were stunned.

“Wow, a big tree just fell in the forest,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.

As Obama’s chief economic advisor in his first term, Summers was considered the president’s top choice to succeed Fed Chairman Ben S. Bernanke in January. But doubts had grown in recent days over whether Summers could be confirmed by the Senate, and in the end, it was the president’s fellow Democrats who doomed the nomination.

Summers’ withdrawal from consideration for what is arguably the most powerful economic policy-making job in the world opens the door for the other leading contender, Janet L. Yellen, the Fed’s vice chairwoman and a close ally of Bernanke.


If nominated and confirmed, the former UC Berkeley economist would be the first woman to head the 100-year-old central bank. She probably would continue policies aimed at keeping interest rates low, probably for longer than Summers would have, experts said.

Obama, in accepting Summers’ decision to withdraw, praised his former aide.

On the day the White House began marking the five-year anniversary of the financial crisis with a briefing and a report, the president lauded Summers for “his expertise, wisdom and leadership” that Obama said helped the nation’s economy return to growth.

“I will always be grateful to Larry for his tireless work and service on behalf of his country, and I look forward to continuing to seek his guidance and counsel in the future,” Obama said in a statement issued by the White House.

Yet many of Summers’ sharpest critics, especially liberal Democrats, saw him as having a hand in creating the very conditions that led to the worst financial crisis since the Great Depression and as being a symbol of the administration’s policies they believe are too cautious and too favorable to business.

And women’s groups that supported Obama were outraged that he might pass over a highly qualified candidate in Yellen.

Obama, already needing Democrats’ support for his policy toward Syria and facing a confrontation in the next few weeks with Republicans over the budget, couldn’t afford such a rift within his party.

Liberal groups had argued that Summers’ support for some key deregulatory decisions in the late 1990s — including the repeal of the Glass-Steagall legislation that forbade federally insured, deposit-taking institutions from acting as investment banks — had helped lead to the 2008 financial crisis.

Many viewed with suspicion Summers’ close connections with Wall Street firms — he previously worked for hedge fund D.E. Shaw and has been doing consulting for Citigroup Inc. since leaving the White House in 2010.

Moreover, though most experts and others viewed Summers as a brilliant economist, many also regarded him as brusque and difficult to get along with.

The public campaigning, mostly against a Summers’ nomination, was highly unusual in the history of the Fed. It partly reflected people’s feelings toward Summers as well the Fed’s increasing importance.

The central bank has flooded the financial system with cash to bolster the weak economy and help drive down interest rates, sparking concerns of creating more bubbles and higher inflation, although inflation has remained low.

But it was political reality that pushed Summers to withdraw.

Senior Obama administration officials said that Summers was concerned about a contentious battle in the Senate Banking Committee and that the White House had told him confirmation would be tough to secure.

Summers said as much in his withdrawal letter to Obama, which was made public.

“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration or, ultimately, the interests of the nation’s ongoing economic recovery,” Summers wrote.

A Senate Democratic aide, who was not authorized to speak publicly and requested anonymity, said it had become increasingly clear that there were not enough votes to confirm Summers in the Banking Committee.

Several members of the committee, including Sen. Sherrod Brown (D-Ohio), had voiced strong support for Yellen. Another committee member, Sen. Jeff Merkley (D-Ore.), had called a potential Summers nomination “disconcerting.”

And on Friday, a spokeswoman for Sen. Jon Tester (D-Mont.), a centrist on the committee, said Tester would vote against Summers if he were nominated.

With Democrats holding only a 12-10 advantage on the committee, Obama would have had to drum up at least four Republican votes to send the nomination to the full Senate. That would have been a tall order, given Summers’ major role in the Obama administration’s early economic policies, including the huge 2009 stimulus law that Republicans ardently opposed.

“I think the president clearly wanted to pick him, but the Senate confirms,” said Chris Krueger, a senior policy analyst at financial services firm Guggenheim Partners in Washington. “At the end of the day it was simple math, and the arithmetic just did not add up.”

Sen. Bernie Sanders (I-Vt.), who has accused the Fed of being too cozy with Wall Street, said he applauded Summers for withdrawing.

“What the American people want now is a Fed chairman prepared to stand up to the greed, recklessness and illegal behavior on Wall Street, not a Wall Street insider whose deregulation efforts helped pave the way for a horrendous financial crisis and the worst economic downturn in the country since the Great Depression,” Sanders said.

Only a few days ago, Yellen was seen as an underdog and appeared to have lowered her expectations that she would get the nod, given Summers’ close working relationship with Obama and strong lobbying for Summers by some current and former White House insiders, including onetime Treasury Secretary Timothy F. Geithner.

Obama strongly defended Summers during a meeting with House Democrats in July. A group of 38 female House Democrats had written to Obama before the meeting urging him to nominate Yellen. More than a third of Senate Democrats also wrote to Obama in July pushing for Yellen.

Women’s groups have lobbied strongly for Yellen, partly motivated by comments Summers made when he was president of Harvard in 2005. At the time, he suggested women were underrepresented in science and engineering because they lacked the aptitude of men. Controversy over the remarks led Summers to resign from the job a year later.

Yellen now is the leading contender for the nomination, said one administration official, who was not authorized to speak publicly and requested anonymity.

If Yellen is named and confirmed, she will take over at a key time for the Fed, which is preparing to start withdrawing its massive support for the economy.

The Fed could take its first step in that direction Wednesday when policymakers meet to discuss a possible tapering of its $85 billion a month in bond purchases. Markets around the world, especially emerging nations such as Brazil and India, have been nervous about such a pullback.

The Fed under Bernanke has taken extraordinarily aggressive measures to drive down interest rates to help a weak economy and reduce unemployment, but some officials are worried about inflation risks.

Yellen, a former president of the Federal Reserve Bank of San Francisco, has expressed strong concerns about the devastating effects of unemployment and the weak labor market. Analysts said she may be more prone to prolonging the Fed’s easy-money policies than Summers would have been.

Analysts quickly tried to size up what a Fed under Yellen’s leadership might do.

“We are assuming based on her speeches, that interest rates will remain lower for longer,” economist Rupkey said. “Short-term interest rates are going to remain at zero for longer than you ever would have imagined.”

Times staff writer Christi Parsons in Washington contributed to this report.