Opinion

What does Larry Summers really think of QE?

Abby McCloskey Program Director for Economic Policy Studies, American Enterprise Institute
Font Size:

Rumors abound that Larry Summers could be the next chairman of the Federal Reserve. Why? What advantages does he have over the front-runner, current Fed Vice Chair Janet Yellen? Summers’ allies say he is the only one bold enough to stop inflation in its tracks, a feared outcome of quantitative easing, the Fed’s ongoing policy of expanding the money supply.

But it’s unclear what Summers would actually do as Fed chair. He has refused to comment on QE entirely over the last few months, “tap-dancing” around the issue on a June 4th panel with the Wall Street Journal’s Gerald Seib and David Wessel.

With Summers revealing little, probably on purpose, one must deduce his true views on QE. There are three possible approaches he could bring to the Federal Reserve, each with dramatically different implications for monetary policy.

Summers the Keynesian: QE exacerbated

Throughout his academic and public career, Summers generally has supported traditional Keynesian economics, which prescribes expansionary fiscal and monetary policy during an economic downturn. The downward revision of first quarter GDP, slowdown in China, continuing crisis in the Eurozone, and decline in inflation projections make it difficult to imagine a Keynesian economist such as Summers pulling back on QE right now.

It is easier to imagine him pushing ahead to jolt the economy out of its malaise, especially if inflation stays low. Keeping interest rates near zero for longer also would provide fertile ground for one of Summers’ favorite policy prescriptions — more shovel-ready projects.

According to his research with Brad DeLong, fiscal stimulus has the biggest impact at the zero bound. Presumably, Summers could keep the easy money flowing until his comrades in the administration or Congress pass another stimulus package.

More stimulus! Not popular with most Americans.

Summers the politician: QE unchanged

There is a much stronger case that Summers leaves QE unchanged to avoid crashing the market during President Obama’s second term.

The QE debate has been all over the place, and the market has responded to the uncertainty. As a seasoned politician, Summers recognizes the negative way this policy uncertainty reflects on leadership. He is likely to go to great lengths to reduce uncertainty and negative attention for the administration, which would probably include keeping QE flowing. “A valid case for low inflation must have to do with the inefficiencies caused by allowing the monetary standard to vary,” he said in a 1991 panel.

Thus, it is possible, and even extremely likely, that Summers would continue the Federal Reserve’s current policies. His allegedly “hawkish” advantage is overstated — this would be the best possible outcome of a Summers chairmanship.

Summers the heavy-weight: QE tapered

Down the road, holding back inflation will be a major responsibility of the Fed. This very scenario is the reason why Summers is believed by some to be the preferred candidate. But be careful what you wish for. It will be difficult enough exiting QE. Summers’ views and the markets’ fragile condition could make it a disaster.

Soft-spoken Chairman Bernanke has rattled the markets just by talking about tapering. On June 20, the markets had their biggest one-day point drop since September 2011. Bond yields rose to a 22-month high. The market volatility revealed beyond a shadow of doubt just how hooked on QE markets have become. It will take an extremely delicate touch to avoid market panic when tapering actually begins, something Summers is not known for.

Additionally, the Fed chairman needs to be a consensus builder within the Federal Open Market Committee, and Summers (unless he’s a changed man) is notoriously difficult to work with. The trend of Federal Reserve Governors voicing their differences with the QE policy would likely become even more commonplace under a Summers chairmanship, dramatically increasing policy uncertainty and resulting in economic drag.

The Financial Times’ Edward Luce acknowledges and pooh-poos Summers’ lack of charm. Being Federal Reserve chairman is very much a global communications position. Recent evidence shows tact will be critical in calming the markets and presenting a unified front at the Fed. We need someone strong enough to tame inflation — not to kill it and scare the markets.

Which approach would Summers adopt as Fed chair? It is anyone’s guess. If Summers seriously is considering being chairman, I recommend he take his case to the public as soon as possible, providing a clear statement on how he would approach QE and monetary policy writ large.

Absent that, there’s too much uncertainty around Summers’ main selling-point to bypass the front-runner.

Abby McCloskey is the program director of economic policy studies at the American Enterprise Institute.

PREMIUM ARTICLE: Subscribe To Keep Reading

Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign Up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!
BENEFITS READERS PASS PATRIOTS FOUNDERS
Daily and Breaking Newsletters
Daily Caller Shows
Ad Free Experience
Exclusive Articles
Custom Newsletters
Editor Daily Rundown
Behind The Scenes Coverage
Award Winning Documentaries
Patriot War Room
Patriot Live Chat
Exclusive Events
Gold Membership Card
Tucker Mug

What does Founders Club include?

Tucker Mug and Membership Card
Founders

Readers,

Instead of sucking up to the political and corporate powers that dominate America, The Daily Caller is fighting for you — our readers. We humbly ask you to consider joining us in this fight.

Now that millions of readers are rejecting the increasingly biased and even corrupt corporate media and joining us daily, there are powerful forces lined up to stop us: the old guard of the news media hopes to marginalize us; the big corporate ad agencies want to deprive us of revenue and put us out of business; senators threaten to have our reporters arrested for asking simple questions; the big tech platforms want to limit our ability to communicate with you; and the political party establishments feel threatened by our independence.

We don't complain -- we can't stand complainers -- but we do call it how we see it. We have a fight on our hands, and it's intense. We need your help to smash through the big tech, big media and big government blockade.

We're the insurgent outsiders for a reason: our deep-dive investigations hold the powerful to account. Our original videos undermine their narratives on a daily basis. Even our insistence on having fun infuriates them -- because we won’t bend the knee to political correctness.

One reason we stand apart is because we are not afraid to say we love America. We love her with every fiber of our being, and we think she's worth saving from today’s craziness.

Help us save her.

A second reason we stand out is the sheer number of honest responsible reporters we have helped train. We have trained so many solid reporters that they now hold prominent positions at publications across the political spectrum. Hear a rare reasonable voice at a place like CNN? There’s a good chance they were trained at Daily Caller. Same goes for the numerous Daily Caller alumni dominating the news coverage at outlets such as Fox News, Newsmax, Daily Wire and many others.

Simply put, America needs solid reporters fighting to tell the truth or we will never have honest elections or a fair system. We are working tirelessly to make that happen and we are making a difference.

Since 2010, The Daily Caller has grown immensely. We're in the halls of Congress. We're in the Oval Office. And we're in up to 20 million homes every single month. That's 20 million Americans like you who are impossible to ignore.

We can overcome the forces lined up against all of us. This is an important mission but we can’t do it unless you — the everyday Americans forgotten by the establishment — have our back.

Please consider becoming a Daily Caller Patriot today, and help us keep doing work that holds politicians, corporations and other leaders accountable. Help us thumb our noses at political correctness. Help us train a new generation of news reporters who will actually tell the truth. And help us remind Americans everywhere that there are millions of us who remain clear-eyed about our country's greatness.

In return for membership, Daily Caller Patriots will be able to read The Daily Caller without any of the ads that we have long used to support our mission. We know the ads drive you crazy. They drive us crazy too. But we need revenue to keep the fight going. If you join us, we will cut out the ads for you and put every Lincoln-headed cent we earn into amplifying our voice, training even more solid reporters, and giving you the ad-free experience and lightning fast website you deserve.

Patriots will also be eligible for Patriots Only content, newsletters, chats and live events with our reporters and editors. It's simple: welcome us into your lives, and we'll welcome you into ours.

We can save America together.

Become a Daily Caller Patriot today.

Signature

Neil Patel