Much of the debate over who will be the next U.S. Federal Reserve chairman has focused on whether gender politics or the future of Fed monetary policy will be more determinative.
Of the two leading candidates, Janet Yellen, the Fed’s vice chairman, favors staying the course on the central bank’s loose money policy, known as quantitative easing. Larry Summers, the former Mr. Everything, including Treasury secretary, National Economic Council director and Harvard University president, apparently prefers to begin winding down the program.
Both narratives miss the mark by a wide margin. As should be apparent to any reader of Mark Leibovich’s “This Town,” a vivisection of Washington culture, the Yellen-Summers debate is merely the latest example of a decades-long tug-of-war between those inside The Club -- for whom Summers is the obvious choice -- and those excluded from it. The Outsiders are eager to loosen The Club’s viselike grip on power in Washington and hence favor Yellen.
Both candidates are immensely qualified, if resumes mean anything. (An obvious question, though, is why the field of candidates for such an important position has been narrowed to Summers and Yellen, with President Barack Obama recently tossing into the mix Donald Kohn, a former Fed governor?)
Thanks to his longtime friendship with Robert Rubin, Washington’s Teflon Don and kingmaker -- almost all of Obama’s top economic advisers are Rubin acolytes -- Summers is a charter member of The Club. Rubin and Summers met in 1986 when Summers was one of the youngest tenured professors in Harvard’s history. Rubin was then an arbitrageur and powerful leader of the fixed-income department at Goldman Sachs Group Inc.
The two were introduced by Jacob Goldfield, a brilliant Goldman trader who knew Summers from Harvard. (Goldfield dropped out of Harvard Law School to join Goldman.) Goldfield arranged for a first lunch in Rubin’s conference room at 85 Broad Street, Goldman’s former stolid headquarters in downtown Manhattan.
“It’s easy to see why Bob and Larry developed a close working relationship,” Goldfield told me a few years ago. “Bob liked bright people who would challenge him. Larry greatly valued Bob’s judgment and appreciated his astonishing ability to form a consensus on difficult decisions.” Rubin followed up the lunch with an invitation for Summers to give a lecture at Goldman on the efficient-market hypothesis.
Summers and Rubin also shared an interest in politics. Even though he is a Democrat, Summers served a stint on President Ronald Reagan’s Council of Economic Advisers. Meanwhile, Rubin learned about The Club from one of its chief defenders, Robert Strauss, the former Democratic National Committee chairman who helped get Jimmy Carter elected president in 1976.
In 1988, Summers and Rubin were unpaid economic advisers to former Massachusetts Governor Michael Dukakis’s failed presidential campaign. There, they met two other charter members of The Club: Gene Sperling, now serving a second stint as director of the National Economic Council -- a job both Summers and Rubin previously held, and Roger Altman, another Rubin protege, deputy Treasury secretary and founder of Evercore Partners Inc., the Wall Street banking boutique. “It’s amazing how much goes back to that Dukakis campaign,” Sperling told me.
Rubin and Summers have been scratching each other’s back ever since. In 1991, Rubin put Goldman’s considerable resources at Summers’s disposal for a particularly prescient article he wrote about the potential for a devastating financial crisis and the need for the Federal Reserve to step in as a lender of last resort.
By then, Summers had left Harvard to become the chief economist at the World Bank. With President Bill Clinton’s election in 1992, Summers was off to the Treasury, where he first served as undersecretary for international affairs. When Rubin became Treasury secretary in January 1995, he promoted Summers to be his deputy. In February 1999, Time famously put Rubin, Summers and Fed Chairman Alan Greenspan on the cover with the headline, “The Committee to Save The World.” In July 1999, Summers succeeded Rubin as Treasury secretary.
Again with an assist from Rubin, who was and is a board member of the Harvard Corp., the university’s secretive governing board, Summers became president of Harvard in July 2001. He lasted almost five years before controversy enveloped him and he was pushed out.
Then it was time for Summers to make some money. Through Rubin’s auspices, Summers became a board member and investor at Taconic Capital Advisors LP, a New York hedge fund run by several of Rubin’s old Goldman partners, including Frank Brosens, who many at Goldman think covered for Rubin when an insider-trading scandal hit the firm’s arbitrage group in the late 1980s, according to the research I did for my 2011 book about Goldman.
In 2008, Summers signed on as a one-day-a-week adviser to D.E. Shaw, another New York hedge fund, and was paid $5.2 million for his time. That same year, in April, Goldman paid Summers $135,000 for one speech.
In recent years, according to news reports, Summers has served as a paid adviser to Citigroup Inc., where Rubin decamped in 1999 after leaving Treasury. The bank paid Rubin some $120 million for 10 years of work. During the financial crisis, the bank received $45 billion in federal bailout money.
And on and on. The bottom line, of course, is that Summers is in The Club and Yellen is not, despite her substantial credentials as a Fed governor and a former professor of economics at the University of California at Berkeley.
It’s not a male-female thing. Having worked for both Rubin and Summers at Treasury (and other places), Sheryl Sandberg, the billionaire chief operating officer of Facebook Inc., is also in The Club and would be welcomed into a senior position in the Obama administration in a nanosecond, if she were interested.
Just before Bernanke was reappointed for a second term as Fed chairman in 2010, rumors circulated in Washington that Summers wanted the job. He was still director of Obama’s National Economic Council, and I was writing a profile of him for Vanity Fair. I asked if he wanted to be Fed chairman. His response was a classic example of obfuscation, because of course he wanted the job, as we now know. Summers rattled off Obama’s unfinished economic agenda, and then no doubt recalling his own scare with cancer while in his late 20s, he told me: “All my energy is really in this, and I think I’ve sort of learned in life to live in the moment a bit.”
The real issue for Obama, who clearly remains in thrall to Summers and his substantial intellect, isn’t whether he picks Summers or Yellen. It is whether Bob Rubin and The Club will continue to dominate economic appointments and preside over a recovery that favors the rich.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres & Co., Merrill Lynch and JPMorgan Chase.)
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