Ryan Lizza and John Cassidy on Washington's fiscal fights.
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Amelia Lester
This is the Political Scene, a weekly conversation with New Yorker writers and editors about politics. It's Thursday, September 19th. I'm Amelia Lester, in this week for Dorothy Wickenden. The Federal Reserve has been making news all week. First, Larry Summers withdrew his name from consideration as a candidate, making Janet Yellen the top contender to replace Ben Bernanke as Fed chairman. Then Bernanke surprised Wall street by announcing the Fed would continue its stimulus measures.
Ryan Lizza
Long term unemployment and underemployment remain high.
John Cassidy
And we have seen ongoing declines in labor force participation.
Ryan Lizza
In addition, federal fiscal policy continues to be an important restraint on growth and a source of downside risk.
Amelia Lester
To talk about the Fed and the struggle over who will take over, I'm joined by John Cassidy and Ryan Lizzo. John, some people think the Fed chairman is the most powerful unelected official in the country, if not the world. So could you explain to us laypeople why the Fed matters so much and why choosing this next chairperson is such a big decision for Obama?
John Cassidy
The main reason the Fed matters so much is because it basically sets the monetary Conditions not just for the US but for the entire world. So much of the rest of the world, sort of other financial systems and other financial markets basically refer back to the Fed. And that's largely because the Fed controls the core interest rate in the world economy, which is the short term federal funds rate. But the reason the Fed chairman himself is so important is because he actually, even though it's nominally a democracy, the Fed, the policy making committee, key policymaking committee, has got 12 people on it, seven people who are appointed by the President, and five Federal Reserve bank presidents, which are sort of local Feds all around the country. They have to vote on any big decision like changing interest rates or stopping and starting the policy they're doing now called quantitative easing. But actually, historically, the committee has largely followed the chairman. So you've had these very strong chairmen like Paul Volcker and Alan Greenspan, who've basically been able to decide what they want to do and bring the committee along with them. Bernanke has been more collegial and has sort of allowed it to become a bit more of a debating society. But that's one of the reasons why people inside the Fed like him and one of the reasons that they were sort of supportive of Janet Yellen following him. Because Janet Yellen, who already is the Vice chairman of the Fed, is also very collegial. The other main candidate, Larry Summers, is not known as so collegial. But anyway, the Fed chairman himself has a lot of power he doesn't have. He's not like a president where he has to get everything passed by Congress. As long as he can get something through the committee, his word is rule.
Amelia Lester
Ryan, let's talk a little bit about Bernanke's time as chairman. In 2009, Obama re nominated Bernanke as chairman and he was reappointed in 2010. But Bernanke is a Republican and he was originally appointed by George W. Bush. So can you talk us through what Obama was thinking?
Ryan Lizza
Well, I think he was thinking stability. I think it was at a time when the economy was still recovering and they didn't want to do anything that might disrupt the actions that they had taken with the stimulus in 2009. They didn't want to send any missed signals to the markets. They decided they would keep the person they had in place. And I think they also thought, John, correct me if I'm wrong, that Bernanke's policies at the Fed were just fine in complementing Obama's own fiscal policy to the extent that he could do much on Fiscal policy after the stimulus. Summers lobbied very hard for the job in 2009 and I think personally believed that he was promised the job and that the White House didn't deliver on their promise. Which gets into the series of disappointments Summers has faced with working for Obama. An irony of Bernanke's appointment back then is that it really didn't raise the hackles of the left at all.
John Cassidy
Bernanke has proved a very sort of liberal, dovish Federal Reserve chairman, even though he was appointed by the Republicans. I mean, nobody, most of his friends didn't even know he was a Republican. They thought he was apolitical. But then he went to work for George W. Bush in the White House and got along well there and was eventually appointed to the Fed by the Bush administration. But actually politics doesn't canvass much in the Fed. The sort of distinction is between hawks and dove. Hawks worry about inflation and tend to raise interest rates at the first sign of trouble. Doves are more worried about unemployment and growth and tend to keep interest rates low as long as they can. And that's how Bernanke has governed. He's been very much concerned with the economy at large rather than just focusing on inflation like the Fed sort of traditionally did during the financial crisis. He took all sorts, sorts of quite radical measures to try and prop up the economy. All sorts of sort of new and innovative lending programs were introduced to prop up the banks. That was controversial, but it did bring an end to the financial crisis and did get the economy, help get the economy growing again along with the stimulus. And then since then, Bernanke has sort of moved more to the left, infuriating some old school conservatives who think the Fed's role is to preserve financial stability and keep a lid on inflation. He started talking extensively about unemployment and how unemployment's too high and even said that the Fed won't start raising its interest rates until unemployment comes down to 6.5% or below. You know, that's the sort of, in the old days that would have been considered a very dovish thing to say. So that's main reason people on the left haven't got anything against Bernanke. I mean, he's ruled just like they wanted, really.
Amelia Lester
So let's talk about Lawrence Summers and where he might be on that spectrum of hawk and dove that you were talking about. John, where is he on the spectrum?
John Cassidy
Well, that's a bit of a mystery. I mean, if you read Larry's published articles over the last few years when he was sort of auditioning for the role, in a way. He too has been talking extensively about issues like inequality and joblessness and unemployment. So I think generally speaking, he would be sympathetic to the Bernanke line, that the Fed needs to provide a lot more continued support for the economy until unemployment comes down. Because even though the unemployment rates drop to the low sevens, that's largely been driven by people dropping out of the labor force. I think generally speaking, on the sort of historical spectrum, Larry Summers would have been pretty dovish. But on the other hand, he's expressed some concerns about the Fed's policy of quantitative easing, which is basically creating money and buying bonds, pumping money into the financial markets. $85 billion a month, which is quite a controversial policy in financial circles. It's really. It's a form of monetizing the national debt, really, although the Fed would never put it like that. So it raises specters of sort of rampant inflation and financial instability, et cetera. We haven't had any of so far. But Larry Summers gave a speech a few months ago questioning whether quantifies and has actually worked very well. So a lot of people thought if he took over, he might try and bring it to an end more quickly than Bernanke. That was seen as a sort of hawkish thing. And actually the market started to price off that because people thought that Summers was the most likely candidate. Interest rates started to rise in the markets, because the way the markets work is they try and anticipate what the Fed does. They don't wait for it to happen. So that was one of the reasons why we've seen a sort of rally in the last week or so. There's been a sort of Summer's bounce because Yellen is widely seen as much more dovish than not much more, a bit more dovish than Larry Summers.
Amelia Lester
So Ryan, was the opposition amongst Democrats in the Senate really about quantitative easing, or why were they so against Summers and so prepared to speak out against what was seen to be Obama's wishes?
Ryan Lizza
I don't think it was much about quantitative easing at all. He was in some ways paying for his sins back from the 1990s when he worked for Bill Clinton and was involved with a couple of major deregulatory decisions. One was the decision not to regulate derivatives, and two was the decision to get rid of the Glass Steagall Act. You know, so there's some classic just left right division in the Democratic Party where people think Summers has been wrong too many times. But then the other issue was gender. Here you have a chance for the first Time to have a female chair of the Fed. And I think that there's a belief among a lot of liberals that Obama has not been as good as he could be on advancing women into senior ranks of his administration. He's, in fact, by the numbers, not been as good as Bill Clinton, the last Democratic president. And once this became a Summers versus Yellen battle, I think that that rallied a lot of liberals on these two issues, gender and economic policy. And, you know, I think there is a. A growing. I wouldn't call it the equivalent of the Tea Party on the left yet, but there's definitely a growing, more robust, you know, economically populist left that is looking for these kinds of fights and is looking to show the Democratic Party that it wants it to abandon what it would describe as its sort of more corporatist policies. And, you know, I think this is just the first in what's going to be many battles in the coming years as we move towards the 2016 election. This faction of the Democratic Party is going to be looking for similar opportunities to show its strength. And, you know, arguably, it's something that someone like Hillary Clinton needs to watch out for as she thinks about running for president, because there will be a candidate that will sort of hold up the banner of the economic left in the 2016 election. I don't know who that will be. Some people talk about Elizabeth Warren, but it'll be someone. So this fight over Summers, this sort of scalp, it's the beginning of a bit more of a split in the Democratic Party than we've seen in recent years.
John Cassidy
I agree with that. But I think actually, politically, the key thing was gender in this case. I mean, I spoke to a couple of people involved in the campaign, and they were saying that, you know, they thought Obama may have been willing to take on the left. He's done that before, the sort of economic left, but he wasn't willing to take on the economic left and the sort of women's groups, et cetera. Not just the sort of traditional women's group, but even in the sort of economic world. There was a letter written last week or a couple of weeks ago organized by a couple of prominent female academics, and was then signed by three of the most senior female Democratic officials to serve in the Clinton and Obama administration. Laura Tyson, Alice Rivlin, and Christine Romer. Now, that wasn't explicitly aimed at Summers, but it was definitely a shot across the bow of the White House. They signed saying that they thought Yellen was the best person for the job. So I think There was a feeling in the White House that maybe they'd be willing to fight on one front against the sort of economic liberals who, as Ryan says, are certainly growing in influence. But to take on the economic liberals and the sort of women's vote, women's group at the same time, I think that was just a step too far for the political operatives in the White House. And it's widely said, although I don't have any evidence, maybe Ryan knows that Valerie Jarrett, the President's senior advisor, was one of the people who sort of eventually put the kibosh on the. On the Summers nomination.
Amelia Lester
Yeah. And it seemed like Obama hasn't exactly been supportive of Yellen in the way that he was for Summers, even now that Summers has withdrawn from the contest. Why do you think that is?
John Cassidy
There is talk that back in the Clinton administration, when Janet Yellen was in the White House as Chairman of Economic Advisers, that she had some clashes with Gene Sperling, who was then Bob Rubin's deputy, I think in the sort of National Economic Council. I don't have any firsthand knowledge of that, but that might explain, you know, there's a bit of the backstory, this sort of wrap on Yellen to such that. To such that. There is one. She's a very capable and intelligent woman with a sort of good record at the Fed. Been there a long time. But the sort of rap on her which you got from the sort of Summer's forces who were trying to push him and knock her down a bit, is that, you know, she hasn't been tested in a crisis or leadership. She headed the San Francisco Fed. But that's a much, you know, that's a much smaller job than being the actual Fed chairman. There seems to have been, for whatever reason, some skepticism in the White House as to whether Janet Yellen is actually sort of up to the job in leadership terms. Now, they never came out and said that because they would have been accused of being sexist. But, you know, even now, as you say, they're not coming out with sort of ringing endorsements, although maybe they will next week if they announce her.
Amelia Lester
Ryan stepping back a bit. One thing that confuses me is that Obama has really relied heavily on all these former Clinton administration veterans. And yet in the 2008 race, Clinton and Obama didn't see eye to eye on many things. Does it surprise you that Obama has ended up inheriting so much of the Clinton infrastructure?
Ryan Lizza
Well, you know, this was a story right from the beginning, right when he picked Larry Summers to run the National Economic Council at the White House. And, you know, there were quite a few Obama economic advisers who were a little disappointed that they had stuck with him in the campaign. They were the folks who joined the Obama campaign and they were sort of the B team in Democrats politics. Right. They were the ones that didn't rally to Hillary Clinton, and they felt there was a certain loyalty to Obama that wasn't repaid when he became president. You know, the explanation often has been that Obama was in the teeth of a pretty serious crisis the likes of which no modern president had faced. And he wasn't going to make his staffing decisions based on loyalty. He was going to find the people who had been the most experienced in dealing with crises. And, you know, Geithner, the first Treasury Secretary and Summers leading the economic council at the White House. They had been involved in economic, you know, much smaller but still economic crises during the Clinton years. And it made sense to elevate them into the top roles. So I always thought that there was a sense that Obama felt a lot of the top, top tier talent in Democratic politics naturally flowed to Hillary Clinton. And once he won the race, he wanted access to those people despite the fact that they had campaigned for someone else.
Amelia Lester
Ryan, we're going to see some epic budget battles over the coming weeks and months. Can you give us an overview of what these battles are and how you think they might play out?
Ryan Lizza
The likelihood of a government shutdown and or defaulting on the national debt seems more likely this time than the previous two years. There are about 80 Republicans who signed onto a letter basically forcing John Boehner to take a path in the current battle that greatly increases the odds of a government Shutdown. And these 80 Republicans, as you can imagine, are, you know, the most conservative members of the House, people who are in districts that Obama lost by 20 and 30 points. Overwhelmingly Southern and Midwestern Republicans, people who are elected easily, don't fear Obama at all, intensely dislike him, have constituents who intensely dislike him and really don't believe that they're pushing the Republican Party into an unpopular position and don't really fear or care about the consequences nationally for Republicans if there's a government shutdown.
Amelia Lester
Do you think Boehner's uncomfortable in this position or.
Ryan Lizza
I mean, he publicly, earlier in the year, he publicly warned that House Republicans should not threaten to shut down the government if Obama won't defund his health care law. And now, as you know, this week he embraced that position that he previously said was suicidal. So they're basically threatening Obama with a shutdown. If he won't defund the aca, which obviously President Obama's not going to do.
John Cassidy
Ismael I think one of the fascinating things about this, Amelia, is the sort of disjuncture between Wall street and Washington. In Washington, as Ryan says, people are now taking seriously the prospect of a government shutdown or a default on the debt. On Wall street, people think it's just the usual sort of jokes. You know, the stock market is at an all time high, especially after, you know, Bernanke held off on changing policy. The Dow and the S and P both hit all time highs. The assumption on Wall street is that, you know, there'll be a lot of shouting and yelling and posturing, but we'll do a deal like we always do. If that perception changes over the next few weeks, which it might well do, then there's likely to be a big sell off in the market at some point. And historically, what you find is, you know, the only thing which sort of disciplines Washington is a big market sell off. So if it gets to the stage where you were sort of 24, 48 hours away from a default on the national debt, there'll be turmoil in the markets.
Ryan Lizza
This is the buying the administration's in is on the one hand, they need to sort of warn everyone of the consequences if we have a shutdown and much worse consequences if there's a default. At the same time, of course, they don't want to do anything to roil the markets prematurely if all this is going to get worked out anyway. But I think you're absolutely right. A lot of Wall street just assumes this is the usual Kabuki theater that happens in Washington right before they work everything, you know, up close. It doesn't look like there's any deal to be had just yet.
John Cassidy
How does it work legally? Ryan say that the House passes this, you know, sort of shutdown thing with the Obamacare in it. Senate will obviously strip it out and then send a bill back to the House without it.
Ryan Lizza
Right? That's exactly the scenario that everyone assumes. They pass this, it goes over to the Senate, the Senate strips out the part about Obamacare, sends it back, and then Boehner is faced with this choice similar to the choice he's been faced with a few times this year. Does he pass this sort of sensible legislation that the Senate sent him and that he knows the president will sign? And remember, he can do that. He can pass legislation in the House. He just has to rely on Democratic votes to do it. And, you know, he's done that three times this year. He did it on the bill for aid to victims of Hurricane Sandy. He did it on the Violence Against Women act, and he did it on the economic deal to avert the consequences of taxes. Taxmageddon so, you know, the question people ask is how many times can Boehner do that before Republicans rebel against his leadership and try and overthrow him? So if he has to do it once to avert a government shutdown, maybe that's okay. Well, two weeks later, where he has to raise the debt limit, can he do that again? And if he does, does it mean that he's going to be overthrown and conservatives will try and elect a new speaker? So that's the big dynamic here.
Amelia Lester
Well, I'm not sure I approve of the phrase Taxmageddon, but thanks to both of you. Ryan Lizza and John Cassidy are staff writers and John blogs frequently on newyorker.com this has been the political scene from the New Yorker. I'm Amelia Laster. Dorothy Wickenden will be back next week.
Ryan Lizza
You can subscribe to this and other free New Yorker podcasts in the iTunes store. The weekly audio edition of the magazine is available at audible.com subscribers can read the magazine online@newyorker.com and also in the tablet edition on the iPad and the Kindle Fire.
Katie Drummond
What the hell is going on right now and why is it happening like this? At Wired, we're obsessed with getting to the bottom of those questions on a daily basis. And maybe you are too. I'm Katie Drummond, the global editorial director of Wired, and I'm hosting our new podcast series, the Interview. Each week I'll sit down with some of the most interesting, provocative and influential people who are shaping our right now. Big interview conversations are fun.
Ryan Lizza
I want a shark that that eats.
Katie Drummond
The Internet, that turns it all off, unfiltered and unafraid.
John Cassidy
So in a lot of ways, I.
Ryan Lizza
Try to be an antidote to the.
John Cassidy
Unimaginable faucet of reactionary content that you see online. To the best of my ability, every.
Katie Drummond
Week we're going to offer you the ultimate luxury of our times, meaning and context. True or false. You, Brian Johnson, the man sitting across from me, one day, at some point, as of yet undefined in the future, you will die.
Amelia Lester
False.
Katie Drummond
Tell me more. Listen to the big Interview right now in the same place you find WIRED's Uncanny Valley podcast. Subscribe or follow wherever you get your podcasts.
Ryan Lizza
From.
Amelia Lester
PRX.
Episode: Ryan Lizza and John Cassidy on Washington’s Fiscal Fights
Date: September 21, 2013
Host: Amelia Lester (for Dorothy Wickenden)
This episode of "The Political Scene" centers on two major storylines rattling Washington and the financial world in September 2013: the Federal Reserve’s transition of leadership (with the withdrawal of Larry Summers and the rise of Janet Yellen as top contender), and the looming fiscal showdowns in Congress—specifically, the potential for a government shutdown and debt default battles.
New Yorker writers Ryan Lizza and John Cassidy break down why the selection of the next Fed chair matters, trace the political histories and policy leanings of Ben Bernanke, Janet Yellen, and Larry Summers, and discuss the internal rifts within the Democratic and Republican parties, all against the background of high-stakes budget battles and legislative brinkmanship.
[02:14]
Memorable Quote:
“Historically, the committee has largely followed the chairman. So you’ve had these very strong chairmen like Paul Volcker and Alan Greenspan, who've basically been able to decide what they want to do and bring the committee along with them.”
—John Cassidy [02:53]
[03:50–05:03]
Notable Quote:
"Bernanke has proved a very sort of liberal, dovish Federal Reserve chairman, even though he was appointed by the Republicans."
—John Cassidy [05:03]
[06:45–10:52]
Memorable Quote:
"I wouldn't call it the equivalent of the Tea Party on the left yet, but there's definitely a growing, more robust, economically populist left that is looking for these kinds of fights and is looking to show the Democratic Party that it wants it to abandon what it would describe as its sort of more corporatist policies."
—Ryan Lizza [09:53]
[12:17–13:31]
[13:31–15:09]
Quote:
"They were the folks who joined the Obama campaign and they were sort of the B team in Democrats politics...he wanted access to those people [Clinton team] despite the fact that they had campaigned for someone else."
—Ryan Lizza [14:29]
[15:09–19:29]
Quote:
"In Washington… people are now taking seriously the prospect of a government shutdown or a default on the debt. On Wall Street, people think it's just the usual sort of jokes… If that perception changes… there’s likely to be a big sell-off in the market at some point."
—John Cassidy [16:41]
[18:05–19:29]
On the power and perception of the Fed chair:
"His word is rule."
—John Cassidy [03:42]
On Bernanke’s legacy:
“In the old days, that would have been considered a very dovish thing to say.”
—John Cassidy [06:25]
On the gender aspect of the Yellen nomination:
“I think actually, politically, the key thing was gender in this case.”
—John Cassidy [10:52]
On the stakes for upcoming fiscal fights:
"The likelihood of a government shutdown and or defaulting on the national debt seems more likely this time than the previous two years."
—Ryan Lizza [15:17]
This episode offers an accessible, insightful look at the high-wire policymaking and political anxieties surrounding U.S. economic stewardship and partisan gridlock in 2013, highlighting how even personnel battles at the Fed are rarely just about policy—and foreshadowing the deeper ideological fissures in American politics.