The Next Federal Reserve Chairman: Summers Out, Yellen In

Larry Summers shocked Wall Street and Washington circles on Sunday by withdrawing his name for consideration as the next U.S. Federal Reserve chairman.

Summers wrote in a letter to U.S. President Barack Obama, "I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration, or ultimately, the interests of the nation's ongoing economic recovery."

His decision comes at a critical point for the Federal Reserve. The Fed will meet on Tuesday and Wednesday to discuss whether it will "taper" its third round of asset purchases from the current monthly pace of $85 billion.

His decision to withdraw makes Janet Yellen, the current vice chair of the Federal Reserve, the favorite to become the next Fed chair.

The idea of Summers as the Fed's next chairman was met with strong criticism, and markets soared to within 1% of record highs Monday morning after the announcement.

Some believe that Summers was likely to take a more hawkish approach to the easy money policies of current Chair Ben Bernanke.

Others, myself included, said "good riddance" and see the news as a positive step in taking the keys to the asylum away from the inmates...

Why Summers Backed Out of Fed Chair Running

Summers didn't have a hill to climb when it came to the nomination process for the next Fed chairman; he faced a mountain.

Senate Democrats had mounted a bitter offensive against his nomination, and firebrand and anti-Wall Street Sen. Elizabeth Warren, D-MA, seemed ready to block him at all costs.

Now some think Summers is an easy target for criticism and that criticizing him has become clichéd. But Summers deserves constant pressure given his background...

Time and time again, the man was given a fresh start and leadership responsibilities, only to let his own ego get in the way.

At Harvard, he steered hundreds of millions of endowment dollars into risky derivatives positions, only to watch that money sink into a hole. Harvard still owes his friends on Wall Street millions of dollars over the next 30 years (and while that was going on, he was making misogynist comments about the intellect of his female colleagues...).

Summers was also the center of the crony deregulation policies that happened under the Greenspan/Clinton era. When Brooksley Born attempted to regulate the derivatives markets, Summers and company accused her of trying to start the next financial crisis. Of course, it was the total lack of oversight in those markets that fueled the recent crisis.

No, Summers isn't an easy target because he's vulnerable. He's a difficult man to pin down and limit his influence. The administration wanted Summers because they believe he has the ability to help navigate crisis, meaning he's the man to head the ship when the waters begin to get rough.

But they never seem to have understood that when he takes control of anything, he seems to steer it toward the riskiest possible destination and helps foster crisis with his unwillingness to accept the irrationalities of the marketplace.

Even after the announcement, Summers isn't going away. He's a prime candidate for a plum job up in New York any time he wants it, and with his influence in Washington he can find work at any bank seeking a chief executive officer, president, or board member in the next few years.

For Next Fed Chair: Enter Janet Yellen, the Dove

Treasury Secretary Timothy Geithner said on Sunday that he wouldn't seek Ben Bernanke's privilege.

Calling it "someone else's privilege," Geithner seems resigned to finishing his book on the financial crisis and his time in Washington and potentially slipping into the abyss of academia one day, far away from financial reporters.

That leaves Janet Yellen, a brilliant Ph.D., who seems the most qualified to carry on.

Yellen would become the first woman to chair the U.S. central bank.

Yellen is the former president of the San Francisco Fed and the chairwoman of the Council of Economic Advisers. She has the heavy support of Senate Democrats, and any opposition will likely come from Tea Party House Members who are focused on U.S. debt levels.

Yellen has been praised for having a better understanding of the housing crisis than others within the Federal Reserve. Yellen is also considered "dovish" on inflation, and she will likely carry on many of the same policies of Bernanke and his predecessor.

Overall, that stands to benefit the United States and emerging markets over the short term.

Emerging markets had struggled in recent months after Bernanke first hinted of the tapering. But with Summers unlikely to take the helm and confront monetary easing, that leaves upside for commodities like gold and silver and Treasury bonds. Meanwhile, the dollar would likely face increased pressures during her leadership.

Yellen hasn't been given the nod yet. But an announcement is likely, particularly with the Fed meeting this week.

Investors shouldn't make any rash moves before the Federal Reserve meeting announcements set to come out over the next two days and the future of the QE program.

What investors can do is prepare for the long term, and what Bernanke has done to markets, by taking these steps.

The next Fed chair could rattle markets - but so can a QE taper. This chart shows us how...


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