That 1999 Time magazine cover is finally catching up with Lawrence Summers.
That was the year Summers was celebrated along with Alan Greenspan and Robert Rubin as “The Committee to Save the World” for their free-market solutions to Asia’s financial crisis. The timing always struck Asians as odd, given that they were still picking up the pieces from a meltdown made worse by the trio’s ill-conceived and overbearing remedies.
That baggage is but one reason many in Asia favor Janet Yellen over Summers as the next Federal Reserve chairman. After conversations with current and former policy-makers, economists and investors in this region, it’s clear to me that Yellen is seen as a better choice to grab the monetary baton from Fed leader Ben Bernanke when his term ends Jan. 31.
“Personally, continuity and predictability would be my preferences, which favor Yellen,” says Jose Camacho, the Philippines’ finance secretary from 2001 to 2003. “There are already enough uncertainties in the world to be concerned about.”
The biggest is when and how Bernanke’s successor will end the Fed’s quantitative-easing experiment. Bank of Korea Governor Kim Choong Soo, for example, worries about a bond-market rout akin to one in 1994 triggered by then-Fed Chairman Greenspan’s sudden increases in interest rates. Those jumps helped precipitate Asia’s 1997 meltdown as a surging dollar strained currency pegs.
At first, Asia resented Bernanke’s monetary onslaught. Hot money flooded the region, fueling asset bubbles. Now Asia worries about a clumsy exit. Summers, who has expressed doubts about the effectiveness of quantitative easing, might scrap the policy faster than the other Fed candidates being bandied about. That concern has pushed economists such as Charlie Lay of Commerzbank AG in Singapore into the pro-Yellen camp.
In this environment, Lay says, “Asia wants to see continuity and a gradualistic approach from the Fed with an overriding wish to avoid excessive volatility.”
No, the Asian central banks that hold more than $3 trillion in U.S. Treasuries won’t panic if President Barack Obama chooses Summers. Even detractors admit Summers is a brilliant economist and thinker. As supporters such as Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., point out, few financial experts anywhere have more experience dealing with crises of all shapes and sizes.
Yet the prickly Summers faces some major image problems. Tens of millions of Asians — and more than a few policy-makers — are still seething over his role in forcing painful austerity measures on governments in the late 1990s. He and his boss at the time, Treasury Secretary Rubin, applied a blunt, one-size-fits-all reform approach that Indonesians, Malaysians, South Koreans and Thais haven’t gotten over; the Time cover hardly helped.
Why should the White House care what Asia thinks? For one thing, the Fed is now the world’s central bank. Traveling around Asia, it’s easy to see the global economy as a vast network of interconnected strings, all controlled from above by Bernanke. From Seoul to Singapore, investors care more about what happens in Washington than at their local monetary authorities.
Obama should consider how this dynamic feeds into his pivot toward Asia, which is becoming the crucial market for U.S. goods and services. It’s rarely a good move to export financial chaos to your biggest customer — or, for that matter, your banker.
Asia is now America’s financier. Were Asia to lose faith and sell dollars, Fed policies would go awry, as would Obama’s ability to manage America’s massive debt load. The United States can be proud of its large and entrepreneurial economy, so long as it understands that Asia holds the mortgage.
Asian policy-makers see Yellen as less beholden to Wall Street than Summers is — he made millions from Citigroup Inc., Nasdaq OMX Group Inc. and hedge fund D.E. Shaw & Co. LP. She is also perceived as more supportive of the regulation needed to avoid another crisis; Summers helped trim back those safeguards.
“For the financial-stability role, I am confident that Janet could manage the appropriate policy skillfully,” says Tetsuya Inoue, chief researcher for financial markets at Nomura Research Institute Ltd. in Tokyo.
Most important, under the open-minded, deliberative Yellen, Fed board decisions would be a consensus of very smart people, not just the call of one larger-than-life person. “Apart from Larry Summers’ overbearing personality, Yellen has 13 years of experience in the realm of monetary policy, whereas Summers has a grand total of zero,” says Hans Goetti, Singapore-based chief investment officer for Asia at Finaport Investment Intelligence.
Both Yellen and Summers are plenty qualified to run the Fed. Yet, fair or not, the region that holds the deed to the world’s biggest economy seems more comfortable with Yellen. Amid the din of commentary surrounding the choice, that’s one opinion Obama might want to heed.