Asia wants Yellen, not Summers, as US Fed chief

Published: August 7, 4:02 AM
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That 1999 Time magazine cover is finally catching up with Mr Lawrence Summers — he was celebrated along with Mr Alan Greenspan and Mr Robert Rubin 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 favour Ms Janet Yellen over Mr Summers as the next Federal Reserve Chairman. After conversations with policymakers, economists and investors in this region, it is clear to me that Ms Yellen is seen as a better choice to grab the monetary baton from Fed leader Ben Bernanke when his term ends on Jan 31.

“Personally, continuity and predictability would be my preferences, which favour Yellen,” says Mr Jose Camacho, the Philippines’ Finance Secretary from 2001 to 2003. “There are already enough uncertainties in the world.”

The biggest is when and how Mr Bernanke’s successor will end the Fed’s quantitative-easing experiment. Bank of Korea Governor Kim Choongsoo, 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.

Now Asia worries about a clumsy exit. Mr Summers, who has expressed doubts about the effectiveness of quantitative easing, might scrap the policy faster than the other Fed candidates. That concern has pushed economists such as Mr Charlie Lay of Commerzbank in Singapore into the pro-Yellen camp. He 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 US$3 trillion (S$3.8 trillion) in US Treasuries will not panic if President Barack Obama chooses Mr Summers. Even detractors admit Mr Summers is a brilliant economist and thinker. As supporters such as Mr Liu Li Gang, an economist at Australia and New Zealand Banking Group, point out, few financial experts anywhere have more experience dealing with crises of all shapes and sizes. Also, Mr Liu says, Mr Summers “may have many former students in Asian countries in key places”.

Yet, the prickly Mr Summers faces some major image problems. Tens of millions of Asians — and more than a few policymakers — 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 have not gotten over.

Why should the White House care what Asia thinks? For one thing, the Fed is now the world’s central bank. Travelling around Asia, it is easy to see the global economy as a vast network of interconnected strings, all controlled from above by Mr Bernanke. From Seoul to Singapore, investors care more about what happens in Washington than at their local monetary authorities.

Mr Obama should consider how this dynamic feeds into his pivot towards Asia, which is becoming the crucial market for US goods and services. It is rarely a good move to export financial chaos to your biggest customer. Asia is now America’s financier. Were Asia to lose faith and sell dollars, Fed policies would go awry, as would Mr Obama’s ability to manage America’s massive debt load.

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