In the end, Lawrence Summers couldn't escape his past.
The Harvard economist arguably is a hero of the financial crisis – in U.S. President Barack Obama's words, a "critical member" of the White House team that stopped a very bad recession from becoming a depression.
Yet for a reinvigorated bloc of liberals on Capitol Hill, Prof. Summers is the firefighter who also helped light the blaze by supporting a substantial loosening of financial regulations when he served as a high-ranking member of former U.S. president Bill Clinton's administration in the 1990s.
They refused to forgive Prof. Summers for his perceived sins, forcing Mr. Obama to give up trying to nominate his friend and former adviser as the next chairman of the U.S. Federal Reserve Board. Their resistance signals a power shift, further complicating a fall legislative agenda already facing threats by Republicans to shut down the government over their opposition to the President's health-care policy.
"There is an increasing tendency for the left wing of the Democratic Party to want to do battle on some of these issues," said Barry Bosworth, a former adviser in Jimmy Carter's White House who now is a senior fellow at the Brookings Institution think tank in Washington. "It foreshadows a little bit more of a battle at the extremes of each party. It's not going to be easy."
Stocks rose around the world, as traders reasoned the transition to a new Fed chairman will be more predictable with Prof. Summers out of the race. Janet Yellen, the No. 2 at the Fed, re-emerged as the front-runner, a status she had lost to Prof. Summers in the uncommonly public contest to replace Ben Bernanke, whose four-year term ends in January.
"Larry was not my first choice for Federal Reserve chair," said Elizabeth Warren, a Democratic member of the Senate banking committee who won in Massachusetts in 2012 in part because of her vocal criticism of Wall Street's role in the financial crisis. "I'm a big fan of Janet Yellen," Ms. Warren added in an interview with Bloomberg Television on Monday. "I think she's terrific. She's got the right experience and I think she'd make a terrific Federal Reserve chair."
Ms. Warren was one of four Democrats on the banking committee who said they would vote against Prof. Summers. That meant the White House would have had to have sought Republican support to get Prof. Summers through the committee stage of the nomination process and onto the Senate floor. That's more political capital than the President currently has to spend.
"Republicans would have wanted something in return," Mr. Bosworth said. "It wasn't worth it."
More of the contentious fiscal showdowns that have characterized Mr. Obama's relationship with the Republican-led House of Representatives are on the horizon.
While the U.S. government's fiscal year ends on Sept. 30, Democrats and Republicans appear nowhere near agreement on a new budget, despite promises earlier in the year that they would do so. Failure to come up with a fiscal plan, or extend existing spending authority, would force the government to cease operations.
Some Republicans insist they are prepared to let that happen unless the President agrees to delay the implementation of the new health-care law – Mr. Obama's signature piece of domestic policy – for a year, if not repeal it outright.
The President was defiant Monday. "The [presidential] candidate who called for repeal [of Obamacare] lost," he said in a speech in Washington.
Mr. Obama called on Congress to pass a budget "without drama," and said that budget should reverse the "irresponsible" across-the-board spending cuts – known as sequestration – that were implemented earlier this year.
He also said he would refuse to negotiate over an increase to the debt limit, which likely will be breached at some point in October. That suggests a clash, as the Republican leaders in the House say they see the debt ceiling as a better opportunity to squeeze concessions out of the White House than the prospect of a government shutdown.
It's a course full of pitfalls, and the President can no longer proceed with full confidence that his own party will be completely behind him. Senators such as Ms. Warren and Sherrod Brown of Ohio have rallied a committed group that is tired of conceding on matters of principle, whether it's to Republicans, to Wall Street lobbyists or to oil companies.
"I have 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," Prof. Summers said in a letter to Mr. Obama that was published by various U.S. news outlets.
John Makin, a scholar at the Washington-based American Enterprise Institute and an acquaintance of Prof. Summers, says his friend has been unfairly maligned. "I don't hear anyone complaining about Bill Clinton," Mr. Makin said. "I have known Larry for a long time. He was never going to win a charm contest, but I don't see that as a problem."
Mr. Obama reportedly made the same point to Democratic lawmakers. But clearly they wouldn't be swayed. Mr. Makin's money now is on Ms. Yellen, as she offers the prospect of continuity at the Fed and a calmer nomination process in Congress.
MEET THE FRONT-RUNNERS
The chair of the U.S. Federal Reserve Board holds one of the most powerful seats in Washington. After Sunday's withdrawal by Lawrence Summers, current Fed No. 2 Janet Yellen is widely seen as the most likely candidate to replace current chairman Ben Bernanke – but she has competition.
Pro: The safe choice. Ms. Yellen has deep experience at the Fed and is popular among the Democratic lawmakers who blocked Lawrence Summers.
Con: No leader wants to be seen to be answerable to the mob. The campaign in support of Ms. Yellen could work against her.
Pro: President Barack Obama is known to have mentioned by name three candidates: Professor Summers, Ms. Yellen, and Mr. Kohn, a popular former vice-chairman at the Fed.
Con: Mr. Kohn is 70. That's when elite policy makers tend to wind down their careers, not resume them.
Pro: A respected former Fed vice-chairman who has burnished his résumé by running TIAA-CREF, which manages more than $500-billion (U.S.). Just as Ms. Yellen would be the first woman to run the Fed, Mr. Ferguson would be the first black leader.
Con: Seen as a good manager and strong on financial regulation. That's all good, but the Fed's primary task in the years ahead will be unwinding the extraordinary stimulus used to fight the recession.
Pro: Federal Reserve chairman Ben Bernanke's thesis adviser recently stepped down as the head of the Bank of Israel. Few economists in the world have a better reputation.
Con: Like Mr. Kohn, 69-year-old Mr. Fischer could be seen as too old. And although he is American, he has been away from the country for a long time.
Pro: The former head of Mr. Obama's Council of Economic Advisers is a monetary policy expert who shares many of Ms. Yellen's attributes, save one: There's no hint that she is being forced on the President.
Con: As one of the chief designers of Mr. Obama's fiscal stimulus plan, Ms. Romer likely would face stiffer opposition from Republicans than would other candidates.