A central banker has two lives: the first is spent studying neoclassical money supply mechanics; the second begins when they realize the real world doesn’t work that way. If Warsh has not entered the second phase, he soon will, since he’s been tasked with the impossible: to helm a machine that requires no operator.
Let’s review several comments he made, on video, noting his pre-Chair ascension. We may one day look back at this and determine his trajectory. Will he achieve monetary enlightenment, or become captured by franchise entanglement like his predecessors?
Just two years ago at a Stanford graduate class, Warsh offered moments of candor regarding the 2008 crisis, having already served at the Fed since 2006.
At 11:32 min:
The global banking system was insolvent and the last people who knew were the regulators that were responsible… But then what was crafted in the years since was what I believe they described as fundamental reform... And I think on that the results are less than were hoped.
It’s notable to admit the results weren’t stellar, but the idea that the Fed would ever be “in the know” prior to a crash (before stock traders, hedge funds, and banks) sounds naïve. Rest assured, when the next crash happens, the Fed will once again be the last to know.
At 21:10 min:
Whether one bank should make 25 billion or 100 billion dollars, not a particular interest to me, but when they do something that is useful for their customers and they profit by that’s great. When they make mistakes, there has to be a cost to it, there’s a cost to it in virtually every other business and it strikes me the business of banking should be no different.
Fair assessment. What he describes is moral hazard, which is inherent to the Fed: the notion that banking profits should be privatized while banking losses should be socialized.
At 47:36 min:
The 21st century can be America’s century, but not if we follow a Chinese five-year plan. The 21st century can be America’s century if we go back to rewarding success and punishing failure.
Sounds good in theory. If we cannot abolish the Fed right now, then at least we should strive to stop propping up the banking system. Of course, the whole point of the Fed is to literally prop up the banking system, so perhaps this is just something nice to say in a classroom.
Looking back to just last month at the Senate hearing:
Americans are no doubt feeling it. I think that means a regime change in the conduct of policy... a different new inflation framework... I think it means using tools differently. The Fed has an interest rate tool and a balance sheet tool. My view is the interest rate tool gets in the cracks.
This was said for his job interview, and job interviews are notorious for saying what sounds great even if it doesn’t work out in reality.
He wants to “get in the cracks” by controlling interest rates, but to do that he would have to use the money supply to increase or decrease rates. Manipulating interest rates without manipulating the money supply sounds like the impossible; whether he understands this remains unclear. However, if Warsh actually lessens the reliance on the expansion of the balance sheet, that would become one step closer to a freer market.
Overall, we can look forward to the year ahead as the $40 trillion debt looms, potentially with runaway interest rates and a Jerome Powell still in the boardroom. Hopefully, some economic truth and even casual-realist methods can be explored… but this is just a hope.
