The strangest part of the increasingly bitter shadow campaign for chairman of the Federal Reserve is that the contest is not really about monetary policy. It’s about financial regulation.

The two leading candidates for the job are Janet Yellen, the current vice chairman of the Fed, and Larry Summers, the former Treasury secretary and an economics adviser to President Barack Obama. When it comes to monetary policy, they don’t differ drastically. Both support the Fed policy to maintain low interest rates and continue asset purchases ― no premature “tapering” ― until unemployment falls significantly.

Yet, the race between them has generated extraordinary political heat. News that the White House is leaning toward Summers rocked Capitol Hill, leading almost half of Senate Democrats to sign a letter in support of Yellen. This is, to put it lightly, a surprise. I’ve spoken to quite a few Senate Democrats about economic policy, and even monetary policy, and Yellen’s name has never come up.

Their letter is really about Summers, even though his name is never mentioned. Liberal senators hold incredibly strong opinions on the controversial economist. They blame Summers for the financial deregulation of the 1990s, and even if they could forgive that, they resent his opposition in 2010 to the Volcker rule, a proposal in the Dodd-Frank reforms to restrict banks from using deposits to make proprietary trades. That he has taken a bunch of money from Wall Street in the interim doesn’t make them any happier.

These disputes are directly relevant to the job. The chairman of the Federal Reserve is by far the single most powerful financial regulator in the world. That was true when Chairman Ben S. Bernanke took the job in 2006, and it’s truer today, as the Dodd-Frank reforms need to be implemented and, in many cases, defined.

As assistant secretary for financial institutions from 2009 to 2010, Michael Barr was the Obama administration’s point person on financial reform. He knows better than most how much power the law handed the next Fed chairman. “They have an extraordinarily central role to play in the development of the new financial regulation architecture post Dodd-Frank and then in the development of global capital standards and rules on resolution and foreign currency and derivatives markets and a central role after that in the supervision of firms.”

Is that enough central roles for you?

In addition to the elements of the law on which the Fed takes the lead regulatory responsibility, there are many others on which it works in concert with other regulators. Even in those cases, the Fed more or less takes the lead, too. “What the Fed has is this enormous intellectual machinery,” said former Representative Barney Frank, one of the drafters of the law. “The head of Federal Deposit Insurance Corp. and the comptroller of the currency can’t remotely match the Fed in resources, and this is a place where data and analysis are real currency.”

This is why the prospect of a Summers chairmanship gives financial reformers heartburn. They think he can’t be trusted to regulate Wall Street. But like many ― though not all ― of his former White House colleagues, Barr thinks reform-minded critics don’t give Summers nearly enough credit.

“I wouldn’t have gone to work for Larry if he didn’t believe in financial regulation,” Barr said. “He cares about this stuff. I know he’d implement Dodd-Frank. And I think his impatience, which some people don’t like, would serve us well in this implementation phase.”

The distinction that Summers allies draw is that he favors blunt, simple regulation ― such as higher, simpler capital ratios ― over more intricate regulatory interventions, which he thinks routinely enable Wall Street lawyers to outmaneuver government regulators. This makes him, they believe, a tougher regulator than many of his critics, who they view as getting distracted by ideas that punish the banks rather than secure the financial system.

In one sense, though, that’s exactly what Summers’s critics are afraid of: That as Fed chairman, his reflexive skepticism will cause him to back away from some of their favored regulations, including the Volcker rule and efforts to limit executive compensation.

Testimonials from Summers’s colleagues in the Obama administration don’t impress these critics much; in their view, the Obama administration has always been too friendly with the banks. It had to be forced to support the Volcker rule in the first place, and it never even considered breaking up the big banks.

Yellen, meanwhile, has little record on these issues. Her supporters seem to prefer her mostly because she’s not Summers. “The question is whether you are prepared to beat up on the banks, yes or no,” said Dean Baker, president of the liberal Center for Economic and Policy Research. “If no, then everything else doesn’t matter. With Summers you’re picking someone you know is not. I don’t know that Yellen is prepared to, either. But there’s reason for hope that Yellen would be stronger on regulating finance.”

The criticism of Yellen is that ― like Bernanke and Alan Greenspan before her ― regulating banks simply isn’t something she’s terribly interested in. She’s at the Federal Reserve because she’s an excellent monetary economist. There’s little evidence she wants to spend her time watching over hedge funds. Her heart may be in the right place; her priorities might not be.

Of course, financial regulation is something she could delegate. “One thing we created in the bill is a vice chair of the Federal Reserve for regulation,” Frank said. The seat is unfilled, though it’s widely believed that Daniel Tarullo, an Obama appointee to the Fed’s board of governors, is filling the position de facto.

Both Summers and Yellen require a certain leap of faith. Summers supporters say that behind closed doors, he was much more aggressive on the banks than his critics realize ― and that’s to say nothing of his long history fighting to regulate the mortgage giants Fannie Mae and Freddie Mac.

Yellen supporters ask for a different, yet still large, leap of faith: The absence of a record on regulatory issues, they say, is not evidence of an absence of interest, or knowledge or effectiveness. She’ll be great, they say. At the very least, she won’t be Larry Summers.

There just isn’t a perfect candidate to be both the nation’s top central banker and the top financial regulator. And because the Fed chairman’s central banker role is pre-eminent, the regulatory aspects of the job tend to be discounted.

It would be better to elevate the power and visibility of the vice chairman for supervision so that the president and the Senate could just choose the best financial regulator on offer. Right now, the position’s powers aren’t clearly defined, and the Obama administration hasn’t even bothered to name an official candidate.

Meanwhile, the Senate will probably be asked to confirm a nominee for the top Fed job whose record on financial regulation is either controversial and perhaps misunderstood, or thin. Getting a clear picture of where the nominee stands should be a top priority of Senate hearings. 

By Ezra Klein

Ezra Klein is a Bloomberg View columnist. ― Ed.

(Bloomberg)