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An unprecedented and very public race to succeed Ben Bernanke at the US Federal Reserve is unfolding six months before the end of his term. The two top contenders to head the Fed couldn't be more different.
The stories about Larry Summers are legend.
As chief economist of the World Bank, Summers in 1991 signed a memo that suggested dumping toxic waste in developing countries for economic reasons. The memo, apparently written by a young aide to Summers, was leaked and meant to be ironic. But the public damage was done.
In a speech as president of Harvard University in 2005 Summers mused that the dearth of top female scientists might have to do with "innate differences" between men and women. He later apologized for the remark. A year later he stepped down as Harvard president after this and other issues had tainted his tenure.
These and similar anecdotes about Summers - widely considered to be a leading candidate for the Fed job - have resurfaced due to a very unusual discussion about Ben Bernanke's successor next year. "I have not seen a debate like this, and Larry Summers is the reason for it," says Chris Adolph, political science professor at the University of Washington and author of the recent "Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality."
While the episodes about Summers are different in nature and context, at their core, they all purport to show that Summers is prone to major gaffes and somewhat insensitive: Two characteristics that make him unfit to lead the world's most important central bank, as his many critics claim.
Aside from Summers' perceived personality flaws, opponents also point to what they consider his dismal economic track record. And they have a point: After all, Summers, as treasury secretary under Bill Clinton was one of the key supporters of financial deregulation. He pushed for the elimination of the Glass-Steagall Act which separated commercial from investment banking and for the deregulation of derivatives. Today, these legislative measures are seen as key factors that led to the global financial crisis of 2008.
"Larry Summers has a record as one of the architects of the liberalization," says Giancarlo Corsetti, an economist at the University of Cambridge in Britain.
Later on, as Obama's top economic advisor during the financial crisis, Summers again faced massive criticism for not reigning in Wall Street whose reckless behavior many argue triggered the meltdown in the first place. The resentment against Summers culminated when it was revealed that he earned millions from a hedge fund and Wall Street the year before becoming the president's chief economic advisor.
"In handling the crisis when he was chairman of the National Economic Council under Obama he wasn't too tough on banks," says Wouter Den Haan, professor of economics at the London School of Economics.
Enter Janet Yellen.
If Larry Summers seems like the personification of controversy, then Janet Yellen, the other major contender to head the Fed, is his polar opposite. From her stint as Bill Clinton's top economic advisor to her tenure at the Federal Reserve - first as head of the Fed in San Francisco to her current role as vice chairman of the central Fed - Yellen has eschewed scandals.
And as analyzed by the Wall Street Journal recently, Yellen, who is married to Nobel Prize winnig economist George Akerlof, has an excellent track record in economic prognosticating - not an unimportant trait for a top economist.
Yellen is generally credited with having warned early about the risks for Wall Street, notes Den Haan. "She realized that we were heading toward a financial crisis. That's why I think she is going to be relatively tough on the financial sector." Den Haan adds that since Yellen often emphasizes employment in her speeches, "it's very likely that she is not going to exclusively focus on inflation," but also on employment, should she get the job.
Should Obama however really choose Summers, he better brace himself for a massive backlash not just from many economists, but also from fellow Democrats, says Adolph.
"Many Democrats blame Larry Summers for playing a significant role in financial deregulation in the 1990s, and still more believe that in his role as gatekeeper on economic policymaking in the Obama White House, Summers was the key barrier to larger fiscal stimulus in 2009, and thus partly responsible for the slowest and weakest economic recovery on record in the United States."
While Summers has said that he has learnt from his mistakes and is in favor of tougher regulations of the financial sector, his critics are not convinced. "He was monumentally wrong before, and there's no reason to believe he won't make the same mistakes again," wrote Lisa Gilbert from the US consumer watchdog Public Citizen recently.
Europeans also should have a very keen interest in who becomes the next chief of the US central bank as the Fed is also the world's most powerful bank regulator, says Adolph. "No one will have a bigger say in preventing the next financial crisis than the new Fed chair, and as the economy recovers, that will become a bigger concern."
Adolph adds, in a swipe at the EU, that "ironically, either Summers or Yellen would likely make a better central bank governor than the current ECB leadership, as each seems to get - albeit belatedly in Summers' case - the importance of stimulus to get the economy moving again, while the ECB is still fixated on the unworkable solution of austerity. Assuming Europe continues to muddle along, it's all the more important that the Fed take an active role."