Warsh: I heard it's all my fault?

Market fluctuations are never short of explanations, and most are just hindsight comforts. The morning's market volatility was explained as being related to Warsh's impending nomination as Federal Reserve Chairman. It's foreseeable that a deluge of quick, superficial commentary on Warsh will soon follow. Below is a summary of Warsh's own remarks, for readers who don't want secondhand accounts. I. 2006: Onboarding Confirmation Hearing I hope my previous experience on Wall Street, especially my nearly seven years at Morgan Stanley, will be helpful to the Federal Reserve's deliberations and communications. II. 2007: On the Eve of the Crisis March 2007 "Market Liquidity" Speech The benefits of ample liquidity are substantial… but historical experience shows that markets can become severely illiquid due to investor risk aversion and increased uncertainty. While policymakers and market participants are certain that these events will occur, they must remain humble in predicting the timing, scope, and duration of these periods of financial distress. (September 2007 Albany University Speech) Regarding my upbringing: I learned most of what it takes to understand the real economy during my first eighteen years here (upstate New York).

November 2007 "The End of History?" speech

If the end of economic history is imminent, what will it look like? You will almost certainly find strong, synchronized global economic growth; good inflation data and anchored inflation expectations; low global risk premiums and low term premiums; low volatility in asset markets…

In my view, the recent financial turmoil should not be seen as a historical accident. Rather, it is history's latest reminder to policymakers and market participants—we should remain humble in our beliefs and cautious in our actions. Market confidence ultimately breeds complacency.

III. 2008: The Financial Crisis March 18, 2008 FOMC Meeting (Before Bear Stearns' bailout) I believe the most fundamental issue is that the business model of investment banks has been threatened, and I doubt that the existing business model can survive this period. March 2008 FOMC Meeting On Inflation: Regarding inflation, there is little reason to believe that inflation will decline. This may be the most severe test for central banks in a generation. The Federal Reserve is not omniscient. Our tools are not unique or perfect in ensuring that yesterday's mistakes will not be repeated. Nor can we guarantee that our policy responses alone will put the economy on a stable and clear path to unparalleled prosperity. We face serious risks if we overestimate our knowledge or over-intervene. Just look at those recent financial gurus who thought they had controllable risks and exponential returns. Milton Friedman warned us long ago, and Edmund Phelps recently reminded us of the "consequences of conceit." Even if the economy weakens further, we should tend to resist the anticipated, reflexive calls for another round of hammering. Policy actions should reinforce the idea among stakeholders that further hammering is necessary, but it needs to be done by financial institutions themselves. In my view, the proper functioning of credit markets and their support for economic growth can only be restored when private financial entities resume their role as the primary source of market liquidity. September 2008 FOMC Meeting (after the Lehman Brothers collapse) I remain unprepared to abandon my concerns about inflation. Bernanke's reaction (venting in an email to Don Kohn the next day): I found myself reassuring those with irrational views—those who believed that even with the economy and financial system in danger and inflation/commodity pressures seemingly easing, we should tighten policy. This domestic housing-centric diagnosis has also undergone a natural test over the past few months. In US financial institutions, concerns about asset quality are no longer limited to the mortgage sector. IV. 2009: After the Crisis Speech at "The Panic of 2008" on April 6, 2009 I should point out that the encouraging news is that the panic will end. When the strong live in a neighborhood that is being destroyed, they find it difficult to prosper, let alone survive. When panic persists and long-held beliefs lose followers, markets tend to react indiscriminately. June 2009 "Defining Deviancy" speech: On the definition of "normal": The title itself is significant—"Definition Bias"—suggesting that the crisis has altered people's understanding of "normal." September 25, 2009 "Longer Days, Fewer Weekends" speech: If policymakers insist on waiting for a clear and substantial return to normalcy in actual economic activity…they will almost certainly wait far too long. There is a risk, the size of which is still debated, that unusually high levels of reserves, coupled with the large amount of liquid assets in the banking system, could trigger an unexpected and excessive surge in lending. Two years after the outbreak of the financial crisis—about a year after the darkest days of the 2008 panic—now is not the time to declare victory, nor is it almost the time to award medals. I believe that the final record of economic history will determine that winning the battle against the 2008 panic was a necessary but not sufficient condition for winning peace and ensuring a solid foundation for economic prosperity. Some say that "at all costs" is the motto that marks the past year's battle. But it cannot be an asymmetrical mantra—used only during periods of deep economic and financial distress and discarded when the cycle turns. V. 2010: The QE2 Debate February 3, 2010 Speech "Regulation and Its Discontents" The panic of 2008, which exacerbated the recession, was the result of numerous flawed private and public practices, with regulatory errors being only one part of it. Reforms must encourage strong competition. Market entry and exit can be more effective means of developing a stronger, more resilient financial system. The "too big to fail" problem may be alleviated if smaller, more dynamic companies take market share from less agile incumbents. March 26, 2010, "An Ode to Independence" Speech: There is no such thing as 'somewhat independent' or 'somewhat credible.' Therefore, central bankers must remain vigilant, especially during periods of fiscal expansion. Even if central banks can do it, it doesn't mean they should. The 2008 panic is just the beginning. The Fed's future actions—especially while economic conditions remain unfavorable—should strongly demonstrate its commitment to its mission. Central bankers are granted a revocable privilege. Therefore, the Fed policymakers' declarations of independence are encouraging. But independence is something we need to prove, not primarily declare. At the November 2010 FOMC meeting (QE2 vote), when the unemployment rate was nearing 10%, he said to Bernanke: "If I were sitting in your chair, I wouldn't lead the committee in this direction; frankly, if I were sitting in the majority of this room, I would also vote against it. I think we're taking on burdens that should be borne by others—especially growth and employment targets—instead of letting them fall where they should be." We are too quick to accept dangerous policies that others have long established; we should place the burden on them. November 8, 2010, "Rejecting the Requiem" speech (SIFMA Annual Meeting) One week after voting in favor of QE2: Opening statement: They call it the "new normal." I call it the new depression. I reject that view. I believe this emerging mentality is dangerous, defeatist, and refuted by America's own extraordinary economic history. The pessimistic economic story being told is not inevitable. Our citizens are not innocent victims of some unavoidable fate. The current below-standard growth and high unemployment are real, but they don't have to continue. We shouldn't lower our expectations. We should improve our policies. Regarding short-termism: Chronic short-termism in economic policy implementation has largely led us to this dangerous situation. Regarding fiscal stimulus: These programs may indeed boost GDP for a quarter or two, but that hardly explains their full effect. In my view, these stimulus programs have done little to put the economy on a stronger, more sustainable path. Sound fiscal policy must do more than just reintroduce consumers to old, bad habits. Regarding the supply side: If left untreated, cyclical issues will become structural. Persistent weakness in the labor market will effectively and permanently displace more workers from the labor market. Regarding the role of the Federal Reserve: The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies. Given the causes of our illness, additional monetary policy measures are at best a poor substitute for stronger growth policies. If the Fed promises too much or fails to deliver, it may lose its hard-won credibility—and monetary policy may lose its considerable influence. We should be wary of drawing inappropriate lessons from the crisis… The power of lender of last resort cannot easily translate into the power of the primary fighter. Regarding the risks of QE2: Expanding the Federal Reserve's balance sheet is not a free option. Significant risks exist, requiring close monitoring by the FOMC. The Treasury market is unique. It plays a unique role in the global financial system. It is a consequence of the dollar's role as the world's reserve currency. The price of Treasury securities—the risk-free rate—is the basis for calculating the prices of almost all assets in the world. As the Federal Reserve's balance sheet expands, it increasingly acts as a price setter rather than a price taker in the Treasury market. There is also a more subtle risk in the Federal Reserve's increased involvement in the long-term Treasury market—blurring price signals about total U.S. debt. Extraordinary measures often lead to extraordinary countermeasures. Second-order effects may produce first-order consequences. VI. 2011: Resignation Letter to President Obama dated February 10, 2011. No specific reasons were given, and his term was originally scheduled to end on January 31, 2018. Larry Kudlow's assessment (CNBC): "a hard money hawk" (Central News Agency) VII. After leaving the Fed (2011-2025) 2014 "Warsh Review" (Bank of England Review) Core argument: More transparency is not always better. After the Federal Reserve released the FOMC minutes, "free and fluent discussion was replaced by pre-prepared, canned speeches." A 2015 CNBC interview on market pricing distortion stated: "The financial markets and the Treasury market tell us almost nothing about the state of the economy because central banks are influencing those prices with every word, every minute speech by every regional Fed president. We would be much better off letting the markets set the prices, instead of having a group of government officials guiding them seven years into the U.S. economic recovery." This, in my view, is quite inconsistent with the original intent of QE. Interest rates should be set by the financial markets, but when the Federal Reserve and other central banks around the world become the first and last buyers, interest rates are not set by the financial markets. October 26, 2015, *Wall Street Journal* column (co-authored with Michael Spence) We believe that QE has shifted capital from the domestic real economy to domestic and foreign financial assets. In this environment, it is difficult to criticize companies that choose "shareholder-friendly" stock buybacks instead of investing in new factories. However, public policy should not favor investment in paper assets over investment in the real economy. The central bank has been quite successful in stimulating investors in financial markets to take risks. Clearly, one reason market participants believe the central bank uses QE is to set a floor for financial asset prices. QE reduces volatility in financial markets, not in the real economy. In fact, as in 2007, when market volatility indicators are at their lowest, actual macroeconomic risks may be at their highest. (August 24, 2016, Wall Street Journal column) The implementation of monetary policy in recent years has been seriously flawed… A robust reform agenda requires a more rigorous review of recent policy choices and significant changes to the Federal Reserve’s tools, strategies, communications, and governance. Two major obstacles must be overcome: groupthink within the academic economics guild and the central bankers' reluctance to relinquish their newfound power. The Federal Reserve often treats financial markets as a wild beast to be tamed, a cub to be pampered, or a market to be manipulated. It appears enslaved by the financial markets, and the financial markets by the Federal Reserve, but only one side has the final say. A simple yet unsettling fact: more than half of the S&P 500's value growth since the beginning of 2008 has occurred on the day the Federal Open Market Committee makes its decisions. Groupthink continues to attract followers, even as its success becomes increasingly difficult to find. The Federal Reserve tightened its grip when it should have been open to new data sources, new analytical methods, new economic models, new communication strategies, and new policy paradigms. Regarding the overreach of functions: Real reform should reverse the trend that has turned the Federal Reserve into a generic government agency. Many members of the Federal Reserve believe that central bankers—nonpartisan, highly respected experts—are particularly well-suited to expanding their policy authority. A 2017 Wall Street Journal column suggested lowering the inflation target from 2% to a 1%-2% range: When broader trends begin to shift—such as in the labor market or output—the Federal Reserve should consider new leading signals. It proposed replacing "data dependence" with "trend dependence."

A retrospective on QE with Bernanke in 2018

My primary concern about continued QE, both in the past and present, concerns capital misallocation in the economy and responsibility misallocation in government.

Misallocations rarely operate in their own name. They choose other names to hide. They often linger in the public eye for years, until they emerge with force at the most ominous moment, causing unexpected damage to the economy.

Anecdotes about Volcker (recounted multiple times by Warsh) Before being nominated as a Federal Reserve Governor, he visited Volcker: He said, "Kevin, there's something I need to tell you. The job you're about to sign is actually very simple. It really only requires two things." (Warsh said he took out a pen and notebook to write it down—but never revealed what Volcker specifically said.) VIII. 2025: Returning to the Public Eye April 25, 2025 "Central Banking at a Crossroads" Speech (G30/IMF) Key Paragraphs of the Complete Speech: Opening: I can't think of a moment more economically important since 1980 than now… Some might argue that the biggest threat to our economy comes from outsiders trying to change the status quo… I disagree… I believe the main risk comes from the choices made within the four walls of our most important economic institutions. Regarding institutional trust: To be trusted, economic institutions must be trustworthy. To be trustworthy, they must prove their competence. Economic institutions must also maintain epistemological humility—that is, acknowledge that knowledge, even great knowledge, has its limitations. Regarding the crisis period: Nothing was easy during that time. We made the right decisions and we made mistakes. Inevitably, the most difficult issue then—and still the most prominent issue now—was the role and responsibility of the Federal Reserve. Quoting Volcker's warning: After a particularly tense weekend that led to unconventional policy support, former Chairman Paul Volcker commented: "The Federal Reserve has reached the very edge of its legitimate and implicit powers, exceeding certain long-embedded central bank principles and practices. We take this as a high and tight warning ball from a powerful institutional ally to its successor." But Volcker's warnings were largely ignored, even to this day. Core criticism: In my view, the overreaching of boundaries on various occasions and for various reasons has led to systemic errors in the implementation of macroeconomic policy. The Federal Reserve is more like a general government agency than a central bank in the narrow sense. Institutional drift occurred simultaneously with the Fed's failure to fulfill a core part of its statutory mandate—price stability. It also led to an explosion in federal spending. The Fed's excessive role and poor performance undermine the important and valuable argument of monetary policy independence. Regarding "fast-food" policy: The frequent changes in the Federal Reserve's indicators—including its claimed preferred measure of inflation—undermine the central bank's esteemed position. I believe the Fed's current "data-dependent" policy has little practical value. We shouldn't pay too much attention to the two decimal places on the latest government data. Holding our breath for lagging data from outdated national accounts—which undergoes significant subsequent revisions—is evidence of false precision and analytical complacency. Recent forecasts are another distracting obsession for the Fed. Economists are not immune to human weaknesses either. Once policymakers reveal their economic projections, they may become prisoners of their own words. Forward guidance—a tool touted during the financial crisis—is virtually useless in normal times. It's tempting to leverage markets with a rolling Fed mantra, but it doesn't help. Central banks should find new comfort in working without applause or breathless spectators. Regarding fiscal dominance: I find it hard to absolve the Fed of responsibility for the nation's fiscal extravagance. Years ago, during difficult times, Fed leaders encouraged government spending. But during periods of sustained growth and full employment, they failed to call for fiscal discipline. Since 2008, the Fed has been the most important buyer of U.S. Treasury bonds—and other U.S. government-backed debt. The Federal Reserve's $7 trillion balance sheet is almost an order of magnitude larger than when I joined. Regarding QE: I strongly support this crisis-time innovation, both in the past and now. But when the crisis ended, the Fed never stopped. In the summer and fall of 2010—a period of strong growth and financial stability—I was deeply concerned that the decision to buy more Treasury bonds would embroil the Fed in the messy politics of fiscal policy. QE2 was announced. I disagreed with the decision and resigned from the Fed shortly afterward. QE—which has had its ups and downs in the 2010s—has become a virtually permanent feature of central bank power and policy. Fiscal policymakers—that is, elected members of Congress—financed that knowing the government's borrowing costs would be subsidized by the central bank, making appropriations much easier. Regarding Monetary Dominance vs. Fiscal Dominance: Fiscal dominance—where national debt constrains monetary policymakers—has long been considered by economists as a possible end state. My view is that monetary dominance—where the central bank becomes the ultimate arbiter of fiscal policy—is a clearer and more realistic danger. Regarding the "Economic Imprinting" Theory: I propose an "economic imprinting" theory, which posits that policy choices made in previous periods make the economy more vulnerable to shocks and less able to organically adjust. Each time the Federal Reserve jumps into action, the scale and scope of its actions expand further, encroaching on other areas of the macroeconomy. More debt accumulation…more capital mismatch…more institutional boundaries being crossed…the risk of future shocks is amplified…the Fed is forced to take more aggressive action next time. Simply put, path dependence is driving policy. We need to be careful it doesn't go astray. Regarding climate and diversity: Climate change and diversity are politicized issues. People of conscience have their own opinions and motivations. The task of elected officials is to assess data, synthesize opinions, formulate policies, and authorize executive agencies when necessary. However, the Fed has neither the expertise nor the privilege to make political judgments in these areas. The Fed's mandate is not to advise, nor to serve as a springboard. Citing Supreme Court precedent: As Supreme Court precedent clearly points out, Congress is not in a position to hide an elephant in a mouse hole. Regarding inflation: The intellectual errors that lead to large inflation include some combination of the following: central banks begin to believe that their price stability goals are largely self-enforcing… those large black-box DSGE models are rooted in reality… monetary policy is unrelated to money… central banks are bystanders of forces outside their control… Putin's rise and the pandemic should be held responsible for inflation, not the surge in government spending and money printing. Stable prices are the main attraction for the Federal Reserve. Like in a movie, it's a protection for the protagonist who dares to challenge. However, the Fed's shifting scope of authority and grand ambitions expand its exposure, making it more vulnerable. Regarding independence: Central bank independence is cited more often than defined. Independence itself is not a policy goal. It is a means to achieve certain important and specific policy outcomes. Whenever Fed policies are criticized, "independence" is reflexively invoked. Congress has granted the Fed important functions, such as bank supervision. I don't believe the Fed should receive any special respect in bank supervision policy. I firmly believe that operational independence of monetary policy is a wise political and economic decision. I believe the Fed's independence depends primarily on the Fed itself. This does not mean that central banks should be treated like pampered princes. When monetary policy fails, the Federal Reserve should be subject to serious scrutiny and strong oversight, and when they err, they should be reprimanded. Regarding the history of the Federal Reserve: The advantages of a narrow central bank are not merely tradition. Our constitutional republic accepts an independent central bank, provided it closely adheres to the responsibilities assigned by Congress and successfully performs its duties. After all, our central bank is the third experiment…not because of the success of its predecessors, but because of their failures. We should remember that the apparent preference of a political system is a deep aversion to inflation—and equally to bailouts and the seizure of power. Core Governance Principles: The governance objective is clear: to ensure the central bank's safety against democracy, not the other way around. Conclusion: The Federal Reserve's current wounds are largely self-inflicted; its protagonist aura is showing signs of erosion. A strategic reset is necessary to mitigate credibility losses, shifting status, and most importantly—worse economic outcomes for our fellow citizens. Central bankers are trained to be cautious in their criticism, lest the sunlight expose their magic. However, a greater risk lies with the wizard's apprentice: abusing magical power to create trouble. We shouldn't worry about violating piety, and we should be prepared to endure periodic frowns of discontent. Now is the time for us to reclaim intellectual freedom and get policy back on track. The legitimacy requirements for central banks are this, and cannot be less. May 28, 2025, Hoover Institution Uncommon Knowledge Interview. You print a trillion here, you print a trillion there. That will catch up with you, Peter. When the Federal Reserve prints trillions of dollars, especially in good times, it changes everything. It's almost sending a signal to the rest of Congress: We're doing this, and so can you. Regarding QE1 in favor but subsequent opposition: I supported it, and many of my colleagues and I supported it, based on the view that we should put these very dangerous, risky things back behind a glass dome until another crisis arrives. We never really did that. So the story you're going to tell about subsequent QE—during what I consider a period of fairly strong growth, fairly stable financial markets, fairly stable prices—we started doing it for various seasons, for various reasons, and by doing so we raised the bar for the next crisis. Because no matter what you did before, it could never be enough. July 13, 2025, Fox News Interview: The Fed's policy mix is ​​completely wrong—it has a huge balance sheet, like we're in the 2008 crisis or the 2020 pandemic, and interest rates are too high. It needs to shrink the Fed's balance sheet and lower interest rates. That way, ordinary streets can get lower borrowing costs. July 17, 2025, CNBC Squawk Box Interview: We need regime change in policy implementation. In my view, the credibility deficit lies with the current Fed administration. I think their hesitation to cut interest rates is actually a pretty bad sign for them. The specter of their mistakes on inflation keeps haunting them. I think a change of regime at the Federal Reserve will happen in due time. Regarding the Treasury-Fed agreement: We need a new Treasury-Fed agreement, just like we did in 1951, after we had accumulated national debt and the central bank's and Treasury's objectives were at odds. That's where things are now. If we reach a new agreement, then the Federal Reserve Chairman and the Treasury Secretary can clearly and prudently describe to the market, "This is our target for the size of the Federal Reserve's balance sheet." A smaller balance sheet has many advantages, including better economic outcomes. We have two policy tools, imperfect substitutes for each other, sometimes contradictory, sometimes working together. But if the printing presses can be quieted, you can have low policy rates. "The Federal Reserve's Broken" (November 2025 Wall Street Journal column) Inflation is a choice, and the record of the Federal Reserve under Chairman Powell is a record of unwise choices. If the Fed picks up its game, Americans will have higher wages and greater purchasing power. AI will be a significant anti-inflationary force, boosting productivity and enhancing American competitiveness. Productivity gains should drive significant growth in real after-tax wages. A one percentage point increase in annual productivity growth will double the standard of living within a generation. The Fed should abandon the dogma that inflation is caused by too fast economic growth and too high worker wages. The Fed's bloated balance sheet—designed to support the largest companies of past crisis eras—can be significantly reduced. This generosity can be redeployed in the form of lower interest rates to support households and small and medium-sized enterprises. The cost of curiosity is approaching zero due to a new era of innovation in the United States, while the rewards for curiosity are soaring, largely thanks to the pro-growth policies championed by President Trump.