Back in the younger and more innocent days of January, 2006, then-President George W. Bush decided to appoint a nice-looking and well-off young man named Kevin Warsh to a seat on the Federal Reserve Board of Governors that he had no apparent qualification for.
At just 35 years old, Warsh had no background in monetary policy or economics at all. He was, instead, a Wall Street lawyer working primarily on mergers and acquisitions who in 2002 had come to Washington to work in the White House on financial regulation. Or, rather, given that this was the Bush administration in the mid-aughts he came to work on financial de-regulation. And he headed to the Fed with, presumably, the same mandate — to cut through the red tape that was overburdening America’s financial system and unleash the forces of financial innovation.
A couple of years after that, of course, it turned out that these deregulatory impulses had completely destroyed the economy of the United States of America and, indeed, of much of the rest of the world. Congress and the Federal Reserve staunched the bleeding with bailouts, and then Ben Bernanke, later followed by Janet Yellen, nursed the American policy back to health with a program of low interest rates.
But Warsh spent the crisis years being flagrantly wrong about the macroeconomic outlook in both public and private remarks. He excoriated the Bernanke Fed for being too aggressive in its efforts to stabilize the economy and too blind to the risks of inflation. He lauded the disastrous tenure of Jean-Claude Trichet at the European Central Bank, and eventually left the Fed to join a chorus of outside conservative critics who lambasted Bernanke and Janet Yellen for pursuing loose money policies that would allegedly debase the dollar and send prices spiraling upward (didn’t happen).
And now, having acquired a resume that leaves him superficially qualified for the job, Warsh has landed on Donald Trump’s short list to be the next chair of the Federal Reserve when Janet Yellen’s term expires next year. And, frankly, he’d be the perfect Trumpian choice — he’s rich, rich people like him, congressional Republicans like him, he stands by Trump when Trump says morally outrageous things, and he doesn’t have a lot of time for self-reflection or accurate information about public policy.
If we’re lucky, it’ll turn out that a lot of what he’s said over the years is just a kind of partisan hackery — he’ll undermine the Fed’s independence and become part of the larger story of Trump-era institutional rot. At essentially the government’s single most important economic policy agency — the one tasked with the critical job of trying to ensure steady, sustainable economic growth — that would be a tragedy, but one we can survive. If we’re unlucky, it’ll turn out he’s a true believer in what he says and he’ll wreck the economy. Maybe soon we’ll get to find out.
The Harriet Miers of the Fed
Warsh was sent to the Fed amidst generally benign economic conditions, before the central bank was a focus of political arguments, and his nomination largely flew under the radar with the mass public.
But to Fed watchers, it was a baffling choice. Warsh’s wife, Jane, is a wealthy heiress whose father, Estée Lauder’s Ron Lauder, was a major GOP donor. But beyond that, he seemed to have made no particular mark anywhere he’d worked in his brief career.
Noam Scheiber of the New Republic reported that unlike earlier young men selected for Fed Board jobs, Warsh was “a complete unknown among economists — even among the economists who have populated the Bush administration.”
“I really don’t know much about him,” Kent Smetters, a deputy assistant Treasury Secretary under Bush told Scheiber. “We might have interacted a few times — but I really can’t recall.”
Nor did he strike his former colleagues from Morgan Stanley on Wall Street as much of a rising star. The Financial Times’s Observer column reported that “His name barely gets a blink of recognition among the bankers Observer has spoken to. They add that their Morgan Stanley buddies are struggling to remember him.”
To bestow such a position of responsibility on such a lightly regarded person struck many as unusual. But to others it was an all-too-common pattern in a Bush administration that had recently been stung for its decision to tap former horse breeder Michael Brown to run FEMA. Or to nominate White House counsel Harriet Miers to serve on the Supreme Court.
“To some people,” Tom Schlesinger, executive director of the Financial Markets Center, told the Baltimore Sun, “the problem is he is young, has rich in-laws and doesn’t have a Ph.D. in economics. From those facts some people have argued that Warsh is the newest version of Harriet Miers.”
America, of course, never got to see what kind of justice Miers might have made since conservative Republicans ultimately decided to insist on having a Supreme Court seat filled by someone who wasn’t just a Republican, but a Republican with impeccable legal credentials and unquestioned smarts. Warsh, however, was confirmed relatively easily and we got to see how a rich, well-connected lightweight served in a critical role.
A tight money deregulator
In his written material provided to the US Senate, Warsh listed more memberships in social clubs (including the Chevy Chase Club, the Metropolitan Club of DC, the Meadow Brook Club, and the Union Club of the City of New York) than academic publications, neither of which were on topics in finance or economics anyway.
And in office he behaved roughly as one might expect a well-clubbed, Republican heir-in-law with a little experience as a Wall Street lawyer and none with economics to behave — as a deregulator with scant concern for the labor market.
- At his first Fed Board meeting he proudly announced that “one CEO said to me about a week ago, ‘being a board member is fun again’” because companies were no longer worrying so much about Sarbanes-Oxley regulations.
- In March 2007 he told industry insiders that “while premiums on riskier assets rose some last week, markets are functioning well” and hailed the “sound, transparent regulatory and legal framework” that existed in the United States as having laid the foundation for the “strong credit markets” the country was enjoying.
- By June 2008, he was telling colleagues that “inflation risks, in my view, continue to predominate as the greater risk to the economy.”
- In September of that year, a day after Lehman Brothers failed and while the global economy was tipping into the biggest recession in decades, he remarked “I’m still not ready to relinquish my concerns on the inflation front.”
- In March 2009, he was still worried the Fed was doing too much to stimulate the economy, proclaiming himself “quite uncomfortable with the idea of purchasing long-term Treasuries in size.”
- In June, he urged his Fed colleagues to be “thinking about exits” from efforts to stimulate economic activity.
- In a September 2009 speech he urged the Fed not to wait for economic recovery before pivoting to fight inflation.
Warsh continued in this vein until resigning from the Fed in 2011 with many years left on his term, telling Bernanke near the end of his tenure that “if I were in your chair, I would not be leading the Committee in this direction.”
Warsh’s criticism of US policymaking from 2008 to 2011 is that macroeconomic policymakers were too worried about unemployment, insufficiently worried about inflation, and too aggressive in their regulation of banks.
If we’re lucky, he’s just lying
Of course, sometimes people’s views on economic policy migrate according to the partisan composition of the White House. When Barack Obama was president and the unemployment rate was 7, 8, 9, or even 10 percent, then-Rep. Mick Mulvaney was a hardcore deficit hawk who, like other Republicans, warned that nearly any effort to stimulate the economy with deficit spending or even payroll tax cuts would bring economic ruin upon the country.
Now Mulvaney is the Trump administration’s Office of Management and Budget director and he says things like, “We need to have new deficits because of that. We need to have the growth. If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”
A generous interpretation of Warsh’s record would be that he is a shrewd, cynical partisan operator who believed that weak economic performance under Obama would boost the fortunes of the Republican Party and therefore he would advocate for anti-stimulative policies. Putting a well-networked party hack in charge as Fed chair would mark a throwback to what are now broadly considered to be the “bad old days” of how Richard Nixon ran monetary policy, but it wouldn’t be the first time Trump appeared to be using Nixon as a model.
A more troubling interpretation, however, would be that Warsh means exactly what he says. That would help explain why he was so paranoid about inflation even back during the waning days of the Bush administration, when the poor performance of the economy doubtless ended up helping Democrats secure their landslide down ballot wins in November 2008. And it would explain why in January of this year he published a Wall Street Journal op-ed on monetary issues that Tim Duy characterized as “so riddled with errors and misperceptions that it is hard to believe he was actually a governor.”
In the short term, a Warsh-style approach would likely mean slightly slower economic growth, slightly higher levels of joblessness, and slightly lower wages. In the longer term, lax regulation could help contribute to a new financial crisis — just like it did the last time Warsh was a bank regulator — and then Warsh’s ideas at the helm would mean an even slower and more ineffectual policy response than we saw last time around, inflicting untold suffering on tens of millions of Americans and possibly many more than that around the world.
On the other hand, Warsh served on Trump’s now-disbanded CEO council despite not being a CEO and, unlike real CEOs, managed to avoid distancing himself from Trump’s infamous remarks about the “many fine people” who attended a neo-Nazi march in Charlottesville. And that may be good enough for Trump.