Summers out of running for Federal Reserve chief

For Lawrence H. Summers, President Barack Obama's preferred candidate to lead the Federal Reserve, the messy debate over a military attack in Syria was the final sign.

After weeks of opposition to his candidacy from an array of progressives, the president's inability to rally congressional Democrats on Syria persuaded Summers that his most important audience - the Senate, which must confirm a Fed chairman - probably could not be won over.

He concluded that the White House was also unlikely to overcome opposition to his candidacy from many of the same Democrats, who view him as an opponent of stronger financial regulation, according to supporters who insisted on anonymity to describe confidential conversations with him.

"Clearly Obama couldn't bring his own most enthusiastic supporters to back him on an issue of national security," one supporter said. "How was he going to corral them for Larry?"

Summers' decision, which he shared with the president in a phone call Sunday followed by a letter, was described as reluctantly made and reluctantly accepted. Summers wanted the job and Obama wanted to pick him. But the public opposition of three Democrats on the Senate banking committee, the first step in the confirmation process, surprised the White House and forced a calculation that this was a battle the administration could not afford to fight.

The embarrassing setback reveals an administration increasingly hamstrung by occasional opposition of liberal Democrats, not just its familiar Republican opponents. It adds to the rocky nature of Obama's fifth year, following the failure of a gun-rights bill, the stalling of an immigration overhaul and the lack of progress on a budget deal, on top of the back-and-forth over whether to conduct airstrikes in Syria to punish the Assad regime for a poison gas attack that killed hundreds of civilians.

The withdrawal of Summers also leaves great uncertainty around the selection of a new Fed chairman, one of the most important economic policy decisions Obama will make in his second term. The successor to Ben Bernanke, the current chair, will shape how much longer and harder the Fed pushes to boost economic growth and reduce unemployment. The next Fed chairman will play a leading role in determining how forcefully the government seeks to constrain the financial industry. White House officials have described Janet Yellen, the current vice chairwoman, as a finalist, and her candidacy has received widespread attention, but it remains unclear how seriously Obama is considering her. He does not know her well and White House aides have seemed unenthusiastic about her, despite the substantial support she enjoys from Democrats and outside economists.

If Obama does not name her - or Timothy F. Geithner, the former Treasury Secretary and Fed official who is well-liked by the president but said to be uninterested in the job - many Fed watchers say they are uncertain where the president will turn.

Bernanke plans to step down at the end of January, leaving ample time for the Senate to confirm a successor, but the unusually public and contentious nature of the selection process has unsettled financial markets, creating a degree of artificial urgency.

In a statement released by the White House on Sunday afternoon, Obama said he had accepted the decision by his friend, while he praised him for helping to rescue the country from economic disaster early in the president's term.

"Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today," Obama said in the statement.

He added: "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."

For Obama, the withdrawal ends an embarrassing summer that began when the president declared in a televised interview this spring that Bernanke would depart, opening the replacement process to public scrutiny before a nominee was even named.

Summers had long been viewed by the president and his economic advisers as the presumptive replacement for Bernanke.

While Obama said repeatedly that he had not made a final decision, aides said privately that he trusted and respected Summers, a relationship forged in the crucible of the financial crisis. Obama himself fueled the speculation by defending Summers to lawmakers and entertaining questions about him from the news media.

Obama and his advisers regarded Summers as a singular talent: an economist deeply steeped in economic theory, but intellectually nimble, with a gift for pragmatic problem-solving. Some of them believed those skills would be particularly important in the coming years as the Fed begins to unwind its huge stimulus campaign, an unprecedented effort with unknowable complications.

The White House had made some efforts to build support for Summers on Capitol Hill. Earlier this year, Obama had asked Rob Nabors, then his chief congressional liaison, to work with Summers, and Summers himself sought meetings with a number of senators.

The White House also tried to quiet critics of Summers, but with little success. In a meeting with the House Democratic Caucus in July, Obama offered a strong defense of Summers' contributions to the economic health of the country, contending he was being unfairly maligned by critics.

But some congressional aides said the White House had made little effort in recent weeks to solicit support for Summers - and that they seemed unaware of the depth of opposition.

Strikingly, the White House had not contacted some Democrats on the Senate Banking Committee, the first step in the confirmation process. Sen. Jon Tester, D-Mont., did not hear from the White House until Friday. Asked whether he would be willing to vote for Summers, Tester simply said that he would not, according to his aides.

Tester's opposition was a critical blow. He is not a member of the group of liberal senators that had opposed Summers from the outset. Instead, his opposition showed that other constituencies, including rural lawmakers who support community banks, might also rally against Summers.

It became clear to the administration that it would need far more Republican support than it had anticipated, just to get Summers' nomination out of committee and presented to the full Senate. That meant cutting deals and making promises to Republican senators that the White House was unwilling to make.

In his letter to the president, Summers said that he had "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' withdrawal quickly reinvigorated supporters of Yellen. A key architect of the Fed's efforts to stimulate the economy, she is seen by many Democrats as sharing their commitment to stricter regulation of the financial system. She is also the preferred candidate of many economists who note the depth of her experience both as an academic economist and as a policymaker since the mid-1990s. She would also be the first woman to lead a major central bank.

An administration official said that Yellen clearly remained a candidate, but she has few strong supporters among the president's advisers. Some argue that the Fed needs an outsider to shake up its thinking as it begins to retreat from its stimulus efforts. Yellen also has never worked closely with Obama, who often favors candidates he has had a chance to measure personally.

The president also has interviewed Kohn, Yellen's predecessor as vice chairman, who has stronger relationships with some of the president's advisers because of his work during the financial crisis. But he lacks the academic credentials of Yellen, and his selection would offer Obama less opportunity to shape the Fed past the end of his own term.

The opposition to a Summers nomination was about more than his combative personality and the lingering concerns over his 2005 comments, as president of Harvard, that suggesting that the dearth of female scientists stems partly from inherent differences between the genders. For example, many Democrats who favor stricter regulations of the nation's financial institutions have expressed concerns about Summers' role in the Clinton administration's opposition to regulating the derivatives market, a factor that many economists believe helped precipitate the 2008 market collapse. As the Treasury secretary for Bill Clinton, Summers supported less oversight of derivatives, something Clinton has since said was bad advice.

Others in the Senate have taken exception to his views on large versus small banks. Summers has said he believes it would be harmful to the economy to break up the nation's largest financial institutions, which Democratic senators like Sherrod Brown of Ohio - another avowed no vote on the banking committee - support. Democrats from rural, less-populous states were also concerned about what they perceive as Summers' weak support for community banking institutions, an issue Tester's staff raised in its statement. Sen. Jeff Merkley, D-Ore., was also a no.

This is the second time in the past year that a candidate for one of the top positions in the Obama administration has withdrawn after resistance in the Senate seemed insurmountable. Susan E. Rice, who was a contender to become secretary of state, took herself out of the running after Republicans threatened to filibuster her nomination.

But this time, it was members of the president's own party who were going to make any confirmation process extremely difficult. Democrats on Capitol Hill said that this was a showdown they were hoping to avoid.

"The truth is that it was unlikely he would have been confirmed by the Senate," said Sen. Bernard Sanders of Vermont.

© 2013, The New York Times News Service