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Kevin Warsh was named to Fortune Magazine’s 2009 list of 40 Under 40. He had been the youngest ever appointed to the Federal Reserve Board when President Bush put forward his name in 2006. Having been a banker in the M&A area of Morgan Stanley, Warsh was reported to have been instrumental in acting the liaison between Wall Street CEO’s and officials at the Fed. As Fortune put it, Kevin “took on the role of ambassador to Wall Street” during the worst crisis since the Great Depression.

He was not an economist nor even a banker by training, Warsh was and is, in fact, a lawyer. Despite that, when Timothy Geithner was appointed by President Obama for Treasury Secretary, there was a great deal of speculation that Warsh might be nominated to take his position as head of FRBNY. Given the nature of the job, however, and the location of the Open Market Desk within it, perhaps lawyer wasn’t the best idea. Still, it was, I suppose, a credit to his mainstream reputation that he was even considered.

Ultimately, Bill Dudley as head of the Open Market Desk would logically succeed Geithner, though Warsh’s openly Republican politics surely did him no favors with the Obama administration. There are also several indications that he wasn’t completely synchronized with the rest of the FOMC. Just four days after QE2 was voted, Warsh was able to have published an almost opposition piece in the Wall Street Journal to Bernanke’s quasi-official Washington Post op-ed justifying the second round.

After a cyclical boost early this year, the current state of the U.S. economy is unimpressive: modest growth, high levels of unemployment, stagnant wages, low levels of consumer and business sentiment, and volatile financial markets. Extrapolating from recent data, many predict only a middling recovery in the next several years. They call it “the new normal.” I call it the new malaise.

Purportedly his objections were so robust that a few months later he would unexpectedly resign. In fact, he is mentioned only once in the March 2011 FOMC meeting transcripts despite him still being on the board, if only to note that given his planned resignation he was for some unexplained reason absent.

Several years later, Mr. Warsh would emerge as a leading critic of monetary policy. Taking to the Wall Street Journal again in June 2014, along with Stanley Druckenmiller, they together wrote:

It’s taken a full 76 months for the number of people working to get back to its previous peak, a discomfiting postwar record. Unfortunately, during the same period the U.S. working-age population increased by more than 15 million people. That’s why the share of the working-age population out of work is now at a 36-year high. There are now more Americans on disability insurance than are working in construction and education, combined.


Meanwhile, corporate chieftains rationally choose financial engineering — debt-financed share buybacks, for example — over capital investment in property, plants and equipment. Financial markets reward shareholder activism. Institutional investors extend their risk parameters to beat their benchmarks. And retail investors belatedly participate in the rising asset-price environment.

With such a seemingly populist bend, it is little wonder that his name has been offered several times in the early Trump days as a possible replacement for Janet Yellen; either at her scheduled time or even, as some after the election speculated, perhaps well before her term expires. Trump at least on the campaign trail declared no special love for Dr. Yellen, saying of her in September 2016 “she is very political” and “she should be ashamed of herself.” Who else might have to feel shame?

In a speech given last week, former Fed Governor Warsh went even farther.

I am confused by the Fed’s ‘normalization’ strategy in monetary policy. Its preferred sequencing of rate increases and balance sheet reductions differ markedly from what was agreed when we conceived QE in the ’war room’ amid the crisis. There might be good reason. But, the transmission mechanisms of rate changes and balance sheet adjustments are markedly different than projected. So too are the distributional effects. This merits a more robust public explanation.

It is almost refreshing to hear someone of official standing finally admit that nothing is like what it was supposed to be; almost. For as much as Mr. Warsh may sound very different than Yellen or other Fed members, in truth there isn’t nearly as much distance as it may seem. To begin with, for all his supposed opposition, he never once voted against QE either the first or the second.

There was, to be sure, enormous pressure for uniformity at that time as officials were heavily concerned about spooking already fragile markets and the economy of that “new normal.” But that only contributes to the vacuous nature of his opposition. If he really felt things were going way off course and that the Fed wasn’t doing what was necessary to it turn it back, playing into unanimity was the worst thing he could have done. Doubt was required way back then, not now.

But more than that, Warsh was part of the 2008 response; and if press reports are to be believed a very big part. Thus, TBTF as well as all the ill-conceived and even more poorly executed “liquidity” strategies fall under his name and right onto his resume. He was as dazed and confused as all the rest, leaving the global as well as US economy to suffer what has been so far a permanent rupture. Perhaps his expertise would have been legitimately useful had it been worth enough in early 2007 rather than far too late in 2008.

Despite public writings, right up to the end of his FOMC tenure there was every indication he was saturated orthodox. At what would be his final meeting, January 2011, just a few months before the next “unexpected” “dollar” crisis that would unleash the next perhaps fatal tightening of the monetary noose, Warsh contributed a summation that was wholly indistinguishable from any of the rest of the internal discussions.

MR. WARSH.  Let me talk about the U.S. economy first as if it were an island, because my sense is that developments in the United States would be considered quite encouraging in that case. We look a bit stronger and a bit more settled from the perspective of markets and the economy and politics… Still, there are encouraging signs that the Tealbook forecasts going back a couple of sessions seem to be more on point than off. Having said that, I’m still a bit more cautious than they are. Yet, I’m impressed by tax revenues that are flowing into the federal government and into states and municipalities, and I expect the deleveraging headwind to subside materially in 2011.

It makes for quite a contrast to the theme of his November 2010 Wall Street Journal writing, especially in light of what he said in that January 2011 FOMC meeting about the standards for evaluating QE2.

MR. WARSH. On what basis could we say it was a success? We could, I think rightly, look at the change in the deflation risks and—much more so than any great successes on financial markets or employment or GDP—take perhaps more credit for the change in inflation risks between the time we announced the program and the time that we pivoted away from it. So I think that is the way we hope that the $600 billion program is “successfully” accomplished, and we move on.

I think, then, as a result of much more study than just what is presented here Kevin Warsh is an exemplar for what to do about the Federal Reserve in a counterintuitive way. Almost all proposed reforms, and all of those proposed by anyone with any standing, rely on switching personnel. The real issue, however, is not now nor has it ever been “who” is running the Fed. They would all do the same (general) things no matter if they even argued against it from time to time. As much as it may at first appear, there truly is no difference between Ben Bernanke or Janet Yellen and Kevin Warsh.

What the Fed really needs, what the global economy really needs, is to be forced back to Money 101. It needs to be purged of all remnants of Positive Economics (the self-imposed ignorance of econometrics) before anything else. It can’t be done so long as these same people are always in the running; though Warsh is a lawyer and Wall Street veteran, it’s absolutely clear he looks to DSGE above competence, insight, and vision.

I have written it many times before, and I’ll do so again; the recovery is at this point purely political. Given the past few months and the hopes that the elections here and elsewhere have inspired it hasn’t been nearly political enough even in theory. Until that changes we are Japan, an ultimately bleak and dangerous future where economists debate R* and confer at conferences about what might they be able to do during the “next” one even though the last one still clings to every macro variable and populist uprising; while more and more adults live as a financial burden in the homes of their increasingly angry parents, here and all across the world.

Bernanke, Yellen, Warsh, etc.

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