The Apprentice: Federal Reserve took another dramatic turn this week with news that Donald Trump and Steven Mnuchin personally interviewed Kevin Warsh Thursday for the job of Fed chair, confirming suspicions that Janet Yellen's days may be numbered. Not only is Warsh the sort of business-friendly, Hoover-Institution monetary hawk preferred by the Republican establishment, he comes highly recommended:
Mr. Warsh, a veteran Republican economic policy maker, is married to Jane Lauder, granddaughter of cosmetic icon Estée Lauder. His father-in-law, businessman Ron Lauder, has been lobbying the White House to have the president name his son-in-law to the central bank’s highest post, said people familiar with those conversations.
But Warsh does have one notable mark against him. Although being the son-in-law of an heir to a makeup fortune might put one high in the running to head the world's most important central bank, Warsh has stood in opposition to what is evidently Trump's only monetary policy concern: low rates. America, as we know, is a smoldering hell-hole desperately in need of Trumponomics, which can be understood as an amalgamation of deregulation and massive tax cuts, all to be held together with a liberal dose of easy monetary policy.
Warsh feels differently. He resigned as Fed Governor in 2011, at odds with the Fed's easy money policies. He has urged the Fed to take on a firmer “strategy” on normalizing rates. Warsh is not, it's safe to say, a low-interest-rate guy.
But Warsh does have one thing going for him in a White House that installed at Treasury a guy who, in August 2007, said housing and debt markets weren't a big part of the economy. To his credit, Warsh has an impressive and lengthy record in being wrong about important economic matters. And that gives him a leg up.
Not only that, but he has the added benefit of having been wrong in some of the same ways as our Commander in Chief. Let's take a tour:
Kevin Warsh in March 2007, arguing that derivatives and securitization were going to keep us safe:
First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques. ...Look no further than dramatic growth of the derivatives markets. In just the past four years, notional amounts outstanding of interest rate swaps and options tripled, and outstanding credit default swaps surged more than ten-fold. These products allow investors to hedge and unwind positions easily without having to transact in cash markets, expanding the participant pool. Syndication and securitization also lead to greater risk distribution. An important source of strength has been financial innovation, and while we have yet to see how some new products will play out in a more stressful environment, there almost certainly will remain a greater dispersion and insurability of risks.
Donald Trump, on launching one of his many perfectly timed business ventures:
In the spring of 2006, the tycoon hosted a glitzy event at Trump Tower to introduce Trump Mortgage LLC, a new firm that specialized in selling residential and commercial real estate loans. He devoted a floor of the Trump Organization headquarters at 40 Wall Street to the new business. And his picture appeared atop the company website with the instruction: “Talk to My Mortgage Professionals now!”
“I think it’s a great time to start a mortgage company,” Trump told a CNBC interviewer in April 2006, adding that “the real estate market is going to be very strong for a long time to come.”
Kevin Warsh, inflation whisperer:
In March 2009 he told his Fed colleagues that he was “quite uncomfortable with the idea of purchasing long-term Treasuries in size” because “if the Fed is perceived to be monetizing debt and serving as a buyer of last resort in the name of lowering risk-free rates, we could end up with higher rates and less credibility as a central bank.” ... The argument predicted a sudden break in faith with the United States of America — one day the market would say “enough” to all this government effort to boost the economy and would stop buying its bonds. Not only was Warsh wrong but he was as far from right as you can get. Buyers gobbled up government bonds. Instead of spiking, treasury rates reached historically low levels where they have stayed for years.
Donald Trump, inflation whisperer:
“They’re creating phony numbers and they’re doing it through stimulus and the stimulus many people would say is the worst thing that can happen,” Donald Trump told a fawning Maria Bartiromo on CNBC Thursday. (Bartiromo called him a “genius.”) The Donald went on to say that the Fed’s decision will cause the dollar to lose value and “inflation to start rearing it’s ugly head.”
My friends Mike Spence and Kevin Warsh, writing in yesterday’s Wall Street Journal, have produced what seems to me the single most confused analysis of US monetary policy that I have read this year...Perhaps Spence and Warsh are on to something that I am missing. I’m curious whether they can point to any peer reviewed economic research or indeed any statistical work that backs up their views. I am certainly open to any new evidence or new argument after all that has happened in recent years that easy money reduces business investment. And there is plenty of room for debate over policy. For now though I would put the Spence-Warsh doctrine that easy money reduces investment in a class of propositions backed by neither logic nor evidence.
Donald Trump in 2016:
“They’re keeping the rates down so that everything else doesn’t go down,” Trump said in response to a reporter’s request to address a potential rate hike by the Federal Reserve in September. “We have a very false economy,” he said. “At some point the rates are going to have to change,” Trump, who was campaigning in Ohio on Monday, added. “The only thing that is strong is the artificial stock market,” he said.
It goes on like this. Whatever your views on the effectiveness of QE or the wisdom of extraordinarily low rates, you have to offer critiques that make sense. And predictions – if you're willing to make them – should at least correspond in some small part with reality. Warsh has a pretty strong record of falling short on both those fronts. Accordingly, we look forward to welcoming him to the Fed next year.
Trump Meets With Former Fed Governor Kevin Warsh About Chairman Job [WSJ]
Just Say No To Kevin Warsh [The Niskanen Center]
Jared Kushner for Fed Chair? [Sam Bell]