Original Author: Long Yue

Original Source: Wall Street Journal

Recently, Trump's confidant nominated Warsh as the Chairman of the Federal Reserve. If Kevin Warsh takes over the Federal Reserve next year, the market may witness one of the most significant policy shifts at the Fed in decades.

Earlier this year, in a conversation with Hoover Institution host Peter Robinson, Warsh candidly pointed out the chronic issues within the current Federal Reserve system and made a bold assertion: “Inflation is a choice.” He dismissed the excuses of blaming inflation on supply chains or geopolitical factors, insisting that central banks have the full capability to determine price levels, and the current situation is a result of the Fed's poor choices.

Warsh's core argument is built on a critique of "complacency." He noted that after the Great Moderation, the Fed mistakenly believed inflation was dead, leading to an excessively large balance sheet during non-crisis periods. Quoting Warsh: “When you keep printing a trillion here and a trillion there, it will eventually catch up with you.” He believes that the Fed's failure to withdraw during the stable period from 2010 to 2020 forced it to cross more red lines when a real crisis (like the pandemic) hit, resulting in today's inflationary consequences.

As a potential successor to the Fed chair, Warsh is not just a critic but also a reformer. He proposed a specific policy path: “If we quiet down the money printing press, our interest rates could actually be lower.” This is a crucial incremental piece of information—Warsh may lean towards controlling inflation through balance sheet reduction (QT), thereby creating space for lowering nominal interest rates.

This aligns logically with the Trump administration's desire to lower borrowing costs. He referred to this strategy as "pragmatic monetarism," advocating that the Fed and the Treasury must “each do their part”: the Fed is responsible for managing interest rates, while the Treasury manages fiscal accounts, and the two need to reach some sort of “new agreement” to address the issue of excessive debt interest, rather than having blurred lines and entanglements as in the past.

In response to market concerns about "radical reform," Warsh provided reassurance. He clearly stated that there is no need to “smash the Fed for reform,” but rather to conduct a “restoration.” He likened it to “renovating a great golf course, inspired by the past but not bound by it.” The American economy he envisions is not one of recession, but a productivity boom driven by AI, similar to the Reagan era. As long as policies return to rationality, the U.S. economy will demonstrate remarkable resilience.

With current Fed Chair Powell set to step down in May 2026 (note: his term as a governor will end on January 31, 2028), former Fed governor and Hoover Institution fellow Kevin Warsh has become one of the most prominent successors nominated by President Trump. In this critical time window, revisiting Warsh's in-depth interview at the Hoover Institution this May may be crucial for understanding the direction of U.S. monetary policy over the next four years. Warsh is not only a witness to the 2008 financial crisis but also a staunch monetarist.

Key points from the interview are summarized as follows:

• Return to Core Mission: The Fed has deviated from its core mission of maintaining price stability, exhibiting "institutional drift," and must reform to regain credibility.
• Inflation is a Policy Choice: Warsh bluntly stated that inflation is not an accident caused by Putin or supply chains, but rather a "choice" of the Fed. The central bank has the full capability to determine price levels through controlling the money supply.
• Fed "Repair Rather than Revolution": Regarding the future of the Fed, he advocates for "restoration" rather than "revolution"—retaining its core structure while eliminating the erroneous policies of the past decade, rather than completely overturning it. The core of the reform is to reduce its balance sheet, which has reached $7 trillion, to curb inflation, which in turn may create space for lowering interest rates, as rate cuts are more important for the real economy.
• Severe Critique of Normalized Quantitative Easing (QE): He supports the emergency injections during the 2008 crisis (QE1) but strongly opposes continued money printing during stable economic periods (like QE2, QE3, and the post-pandemic period), arguing that this is not only ineffective but also fuels asset bubbles. He believes this broke the original understanding of "exit after the crisis ends," leading him to resign in protest.
• Pragmatic Monetarism: Warsh proposed a unique path: controlling inflation through balance sheet reduction (QT), thereby creating space for lowering interest rates.
• Fed Overstepping Its Mission: Warsh believes the Fed has transformed from the "lender of last resort" for the banking system to an omnipresent "first intervener," and this overreach must stop.
• Clear Division of Responsibilities between the Fed and Treasury: He calls for a new agreement between the Treasury and the Fed, similar to that of 1951, to clarify their respective responsibilities: the Fed manages interest rates, while the Treasury manages fiscal accounts, avoiding role confusion.
• Collusion of Fiscal and Monetary Policies: He pointed out that the Fed's purchase of government bonds (fiscal dominance) indirectly encourages Congress's reckless fiscal spending, leading to a surge in U.S. debt.
• Optimistic about U.S. Productivity and AI: Despite criticizing policies, he is extremely optimistic about the U.S. economic outlook, believing that AI and deregulation will lead to a productivity explosion similar to the 1980s.

[Full Transcript of the Interview]

Recording Date: May 28, 2025

Host: Peter Robinson

Guest: Kevin Warsh

Institution: Hoover Institution, Stanford University - "Uncommon Knowledge"

(The following is a Chinese translation of the interview, assisted by AI tools)

Host Peter Robinson 00:00

The Federal Reserve System has been responsible for maintaining price stability and combating inflation for over a century. How has the Fed performed? Our guest today will say it should have done better. Kevin Warsh is here on "Uncommon Knowledge."

Welcome to "Uncommon Knowledge," I'm Peter Robinson. Kevin Warsh hails from upstate New York, earned his undergraduate degree from Stanford University, and his law degree from Harvard University. Mr. Warsh worked on Wall Street and in Washington early in his career. In 2006, President George W. Bush appointed him to the Federal Reserve Board, where he served until 2011. Note that Mr. Warsh was on the Fed during the 2008 financial crisis, the most severe financial crisis in over half a century. Mr. Warsh now splits his time between New York and Stanford, working at an investment firm in New York while also being a fellow at the Hoover Institution. Kevin, welcome back to "Uncommon Knowledge."

Kevin Warsh 01:10

It's great to be back. You hid the most important point, which is that the investment firm I happen to work for has one of the greatest investors in world history, a man named Stan Druckenmiller. But you tried to keep it low-key, and I appreciate that. No, I just wanted to brag about my friend.

Peter Robinson 01:24

You keep going on that part because I want to get him on the show sooner or later. Let's start flattering him now. Okay, Kevin, first question. The Federal Reserve was created over a century ago as the institution responsible for maintaining the value of our currency—the dollar. Two quotes. The first is from the late legendary investor Charlie Munger: “Destroy the currency, and God knows what will happen.”

Peter Robinson 01:53

The second quote is from your speech in April to a banking organization called the "Group of Thirty." I pulled out some of your descriptions of today's Fed: institutional drift, failure to fulfill its statutory duties, fostering a surge in federal spending, overstepping its role while underperforming. Kevin Warsh, you are attacking a sacred institution. Each of us relies on this institution every day to ensure the integrity of the money we earn and spend. What exactly are you trying to do?

Kevin Warsh 02:33

In the central banking field, we are taught to keep our criticisms under wraps. So I didn't do well in that speech. Peter, I described it as a love letter rather than a cold critique. You might not have felt it was a love letter. I'm not sure the current governors…

Peter Robinson 02:53

I skipped over… I left out the mushy parts.

Kevin Warsh 02:54

The reason it’s a love letter is that the importance of this institution, as you suggested in your opening remarks, is profound. It’s a love letter because if this institution can reform itself, it could lead to great achievements for both the institution and the country. But it does mean it’s time to get things back on track.

Kevin Warsh 03:14

I should also say this. This is our third experiment with a central bank in America, and it’s the third not because the first two went well—they messed it up, right? It’s not like winning a third Super Bowl championship, Peter, you know, the more you win, the better. The first two failures were because they lost the confidence of the governed and their ability to deliver on promises.

Kevin Warsh 03:37

This isn’t a history lesson, but you can think of the Jacksonian era, when some would say the central bank seemed to focus only on the special interests of those on the East Coast, forgetting what was happening in the middle of our country.

Kevin Warsh 03:54

This is similar to my concerns today. So, this central bank has been around for over 100 years, and if they can reform themselves, they will have another glorious century ahead. Otherwise, I worry. Okay.

Peter Robinson 04:07

We will return to your speech later, but first, walk me through this. I am an outsider on these issues. You are a skilled central banker and investor. You understand this world, and I do not. So walk me through it. I have a few very basic questions. Give me a moment to lay this question out.

Peter Robinson 04:25

The Federal Reserve System was established in 1913 and has the power—this may be a bit of an oversimplification, but essentially—that it has the power to set interest rates and regulate the money supply to achieve price stability. These powers are significant. How has it performed?

Peter Robinson 04:41

This is what Nobel laureate Milton Friedman said in 1994: “In America, no institution has such a high public status and such a poor performance record. The Federal Reserve began operations in 1914, causing prices to double during World War I, and it led to a major recession in 1921. The main culprit of the Great Depression is undoubtedly the Federal Reserve System. Since then, it has caused prices to double again after World War II. It funded the inflation of the 1970s. The drawbacks of the Federal Reserve System far outweigh its benefits, and I have long advocated for its abolition.” Kevin, why do we need the Federal Reserve System?

Kevin Warsh 05:29

So…

Peter Robinson 05:31

This is not new to you. Milton Friedman was at Stanford when you were an undergraduate.

Kevin Warsh 05:35

I was fortunate to be his student. He had a tremendous impact when he came here, not just on me but on generations of students that followed. I spent a lot of time in the Hoover Institution archives studying what Milton had said. For example, regarding the Fed chair, our own Jennifer Burns has a great book that includes some of that correspondence. But I had them search and provide me with all the correspondence between Paul Volcker, Milton Friedman, and Alan Greenspan.

Peter Robinson 06:06

Okay, give us some date context. Volcker was appointed by Jimmy Carter in the late 1970s and early 1980s, specifically…

Kevin Warsh 06:14

Midway through the Carter administration. I don’t have the exact date.

Peter Robinson 06:17

Then Ronald Reagan reappointed him, and he served until the end of the Reagan administration. Correct. Then Alan Greenspan took over and served until…

Kevin Warsh 06:26

He served for 17 years until Ben Bernanke appeared in the midst of the 2006 crisis.

Peter Robinson 06:30

Okay.

Kevin Warsh 06:30

I remember this because I recall being a junior staffer in the White House at the time, and I found out that not only did Chairman Bernanke (who came from the Fed to the White House and was going back to take over Alan Greenspan's responsibilities) want me to go with him to take over his original Fed governor position. So I remember that day.

Kevin Warsh 06:55

Okay, back to Milton. In those communications from Milton, it’s remarkable how he constantly reexamined his previous views. He kept questioning whether the data and conclusions he reached in a given year were still applicable the next year, and whether his judgments about the institution were still valid. In most of the correspondence during the Volcker and Greenspan eras, he expressed considerable satisfaction with the changes in methodology, new ways of thinking about the economy, and the success of what later became known as the Great Moderation. So I wouldn’t say Milton thought the Fed was a bad institution. He believed they had bad periods and good periods. I can only speculate on what he would say about the “Great Inflation” of the past five or six years, how he would foresee it, how he would warn about it, and it’s likely that the Fed wouldn’t…

Peter Robinson 07:46

Listen. Okay, so here’s another basic question. Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon.” Since inflation is a monetary phenomenon, and the Fed is responsible for the money supply, then inflation is ultimately always the Fed's fault. Why don’t you describe what Paul Volcker did? When Carter appointed Volcker, you would know this. I’m just recalling. When Carter appointed Volcker, I believe we were suffering from the highest inflation since the Civil War. And when Paul Volcker left office, the inflation rate had dropped to around 2%, almost 2%. Okay, so Milton Friedman says the Fed is always to blame.

Kevin Warsh 08:34

Yes, so I believe Milton and the point you just conveyed, which is as you said in your opening, “Inflation is a choice.” The responsibility for ensuring price stability was granted to the Fed by Congress, most recently during the review of its charter in the 1970s, so that there would be an institution accountable for prices. No more blaming others. We hand the baton to you, central bank. Go solve it. **But from the comments in recent years, you wouldn’t get the impression that inflation is a choice at all. In fact, during the period of the Great Inflation over the past five or six years, what have we heard about the causes of inflation? It’s because of Putin and Ukraine. Yes. It’s because of the pandemic and supply chains. Milton would be furious to hear this. And I, in my own subtle way, feel uneasy hearing this too. These things do cause price changes; after all, in a market economy, Walmart’s prices change every day. That’s how a market economy works. It’s not the central bank’s job to regulate those prices. But that’s not inflation. That’s a one-time change in commodity price levels. Inflation occurs when that one-time price level change becomes self-reinforcing. That is, higher prices lead to higher prices. This means inflation will ultimately affect every household’s dinner table and every company’s boardroom because as a decision-maker, you don’t know what the price level will become. It’s not about Putin or the pandemic. It’s about the Fed. It’s about the central bank. I fear that in recent years, this may be because the central bank has become part of our culture, and we’ve gotten a bit used to saying, “Well, it’s not my fault; it’s someone else’s fault.” I think this is where Milton would feel the most anger in recent times. *The central bank can achieve any price level it wants, any level of inflation. We may not like the way they achieve it, but they should not blame others, and I think that goes against good economic history.*

Peter Robinson 10:35

And, in our upcoming conversation, it may be important to repeat, not only that “inflation is a choice,” but also that “a strong dollar is also a choice.” Volcker did it in our generation’s memory. This has been achieved. We suffered from inflation, and then the Fed controlled it. Okay, here’s another basic question.

Kevin Warsh 10:59

If I may, they controlled inflation, and then I guess for economists, this is a bit of a cliché, after the so-called Great Moderation, they became complacent about controlling inflation during that period when prices remained relatively stable for over a generation. I think some people in my field thought it was easy; in fact, controlling inflation was because we all became very good at it. We may have all become a bit complacent about it, but economics isn’t that simple. And I think it’s precisely because of the recent COVID pandemic and the crisis of 2020 that we shifted our focus.

Peter Robinson 11:42

You’ve used this term a few times. Let’s define it. The “Great Moderation” period began in the mid-1980s when Volcker and the Fed, arguably during Ronald Reagan’s presidency, truly brought inflation down to low single digits and kept it there, with the economy expanding continuously until the 2008 crisis, with only a few quarters of recession, lasting about a quarter of a century. Am I right? Is that what you mean by the “Great Moderation”?

Kevin Warsh 12:12

Absolutely correct. We don’t want to sound like every year was perfect, and central bankers made no mistakes, but those mistakes were relatively small and manageable. For the audience, I think inflation remains a very abstract concept. We want price changes to be small enough that no one talks about it in the economy. That way, we know we’ve done our job. And what do we know happened in the past five or six years? Almost anything, almost anything people have been talking about. Right?

Peter Robinson 12:42

This is the last basic question I want to ask. Gold. President Nixon took us off the gold standard in 1971. Before that, the dollar could be exchanged for precious metals, primarily gold, at a fixed weight most of the time. This constrained the money supply.

Peter Robinson 13:00

Journalist and investor James Grant wrote last year: “The opposite of the gold standard, which is the system we have today, is actually the system that the United States practices today. Some might call it the ‘PhD standard.’ It is a system in which economists with PhDs have discretionary control over interest rates.” So James Grant implies that if not gold, at least some kind of fixed basket of commodities.

Peter Robinson 13:31

Milton Friedman, around the same time, also said, when he made the statement I just quoted about advocating for the abolition of the Fed, that the Fed should be replaced by a fixed annual increase in the money supply that is announced in advance. That way, it would be completely transparent, and the market could plan a decade in advance. Both statements are saying, let’s find some objective standard here. Let’s find some way to constrain the money supply so that the market can know in advance, rather than leaving everything to the subjective impulses, groupthink, and those who truly understand the latest econometric research within the Fed system. Now, how would Kevin Warsh respond?

Kevin Warsh 14:24

There’s no “good old days” to return to. I have many right-leaning friends who believe, well, let’s go back to the gold standard. The world has changed. If we had made different choices back then, would things be better or worse? But you have to deal with the issues at hand. I think that’s what Orwell said. And between “let the machines do it” and “let the central bankers have complete discretionary freedom with their latest whimsical ideas,” there must be a third way.

Kevin Warsh 14:52

I think you and I might have learned the essence of conservatism from Edmund Burke: resist whimsical ideas. We central bankers, both past and present, need to resist whimsical ideas. There’s a way to make the central bank’s response function to incoming information clear. If Milton were with us today, I wouldn’t want to speak for this great man, but I think he would say there’s too much “scientism,” “academic philosophy,” trying to make precise those things we still don’t understand well.

Kevin Warsh 15:27

Most of us in the economics profession, if we’re a bit better than average, we would try to focus on the numbers to the left of the decimal point rather than those to the right. Now, if our craft were more sophisticated, if we were smarter, we would be physicists and mathematicians. And most of us who work in this field initially started in those areas and then moved to economics because, frankly, it’s easier. So we don’t have a perfect understanding of how the economy works. If we did, we could create machines, we could create formulas. But the economy changes every day. It’s highly dynamic. So I hesitate to say we have a perfect rule. Okay.

Peter Robinson 16:07

Now let’s talk about modern history, your modern history and the modern history of the Fed, and the impact of the financial crisis. During the 2008 financial crisis, you served on the Federal Reserve Board, and that crisis led to the most severe economic contraction since the Great Depression, and the U.S.…

Kevin Warsh 16:27

10% unemployment rate. Peter, are you implying a causal relationship here? I’m not…

Peter Robinson 16:31

I’m guiding the topic. Just pure bad luck. The Fed took a series of actions in response, but perhaps the most dramatic was injecting massive liquidity into the system. Let me give you a sense of the scale of the Fed's actions: between the first and second quarters of 2008, the Fed's balance sheet—an indicator of the supply of reserves in the banking system—doubled from $1 trillion to $2 trillion in a single quarter. Now, you’ve written that you strongly supported that decision. So, before we discuss QE2, 3, 4, etc., which deeply concern you (or at least, well, you’ll explain later), tell me why you supported that massive injection of funds into the market in 2008.

Kevin Warsh 17:26

First, we keep mentioning the word "money." On this, I should clarify. As you hinted, Milton believed that monetary policy and inflation are about "money." This is heresy in modern academia. It is not taught in introductory economics courses at most elite universities. Most come from different schools of thought, not this monetarist school, but more aligned with Keynesianism. In that Keynesian school, money is hardly mentioned. In fact, if you look at the minutes of the Fed meetings, they record most of what we say in the Federal Open Market Committee, and you have to search long and hard to find the word "money."

Kevin Warsh 18:07

I think money, strangely enough, is related to monetary policy. It has been absent from the discussion. I believe this is part of the reason for the resurgence of this Great Inflation. Because, well, I believe Milton himself would not fully adhere to the model he had in mind 30 years ago. He would say money is related to this. And during the period leading up to the Great Inflation before and after the COVID crisis, we saw a surge in money, whether it was the money we could measure or the velocity we observed.

Peter Robinson 18:37

MV=PQ, I’m trying to recall from long ago… I thought this was foundational in discussions at the Fed.

Kevin Warsh 18:46

It is, it is, it is absent in most discussions among modern economists. Now, Milton used to say, this is the last tribute to Milton, and then we’ll turn to current events. Yes, Milton, I was probably 19 or 20 years old, and a small group of us were sitting around a table, a bit more than there are now. I asked him a question, probably trying to show off. I seemed to understand something about things I didn’t understand. He said, “Kevin, the only thing we understand in economics is the principles of economics 101. Everything else is made up.” I remember thinking at the time, Peter, you know, maybe this old man is confused. Maybe his time has passed, you know, the Nobel Prize was awarded some time before that. It wasn’t until the financial crisis you just mentioned that I realized this old man was completely right. No one predicted it. No one saw it coming because what we really understood about economics was taught in economics 101. At least before the economic schools of thought in these elite departments became dominant, we talked about money being related to monetary policy. I still believe that’s true.

Peter Robinson 19:50

By the way, I just realized that as we sit here today, it’s been almost 20 years since the financial crisis broke out. So, why don’t you take some time to explain what that felt like? You were in Washington, a Fed governor, calling friends in New York. How bad was it? What do we need to understand?

Kevin Warsh 20:10

About that crisis? I occasionally teach at a business school not far from where we’re recording. Over the years, I’ve talked about the global financial crisis, and they look at me; these students now have some memories, they weren’t in business at the time, but they remember how their parents came home or remember seeing it on TV. Now, when I talk about the global financial crisis, they’ve heard of it; I might as well be talking about the Great Depression, right? So that was a long time ago.

Kevin Warsh 20:35

How did it feel for me? You know, I was 35 at the time, and ultimately because of President Bush and Ben Bernanke, I found myself in this solemn position. I sat in a nice office for about six to eight months, and life was good. Someone would come in to stoke the fire. Another person would, you know, refill my little picture of ice water. I thought everything was great.

Kevin Warsh 20:58

I had no idea that it was the calm before the storm. In hindsight, I think it was scarier than it felt at the time because we were somewhat in the bunker together.

Kevin Warsh 21:10

Well, I don’t know if Ben Bernanke fully agrees with what I said a few weeks ago at the IMF G30 meeting? He is a very outstanding and excellent combat commander. We were all in the bunker, and he was very open to a small group of us sitting around the table discussing what was happening and why. He was quite open to heretical ideas. I don’t know if such heresy is still allowed in today’s industry or central banking.

Kevin Warsh 21:42

But in the darkest days of that crisis, perhaps we handled it well enough to get a “B.” We could have done more sooner. We made many mistakes. We also had some successes. The deterioration of the real economy was faster than any historical reference we had. Financial market stock prices fell by 60%, 70%, and perhaps most concerning were the Treasury market auctions. The world’s most important securities—synonymous with the dollar—had auctions that initially had very few participants. The bid-ask spreads were wide, and we were worried that the U.S. economic system was on the brink of collapse.

Peter Robinson 22:24

So, if I understand correctly, injecting liquidity into the system, pushing funds into the system, was an emergency measure aimed at keeping the exchanges running, maintaining market operations, with the theory being that keeping the market functioning, keeping it open and operating, and giving people enough money to buy and sell was the best and most direct thing anyone could do. The market itself would gradually solve the problem, I guess. Is that the reasoning?

Kevin Warsh 23:05

So I would say this goes back to first principles, right? The third central banking experiment you mentioned, which we are still in, was created in 1913 to respond to a panic that occurred less than a decade earlier. Central banks were originally created, or this generation of central banks was created, to respond to such panic situations. In the past, what we now call deep recessions or financial crises were times of market failure, when there was a gap between buyers’ bids and sellers’ asks, and the central bank’s job was to show up with various funds (there’s that “dirty” word again) to get those markets running, not to set prices, but to ensure that buyers and sellers could transact, with the central bank providing liquidity when no one else was willing to.

Kevin Warsh 23:57

We are the backstop of the banking system, not just in the U.S., but elsewhere in the world. Because if we mess up, it will be worse for the rest of the world. So that’s what we did in the crisis. And, you know, some of my right-leaning friends, including people in institutions whose views we highly value, thought at the time that we should let the system burn. The phoenix would rise from the ashes. You really had no reason to do that.

Kevin Warsh 24:23

That’s not my view. My view is that central banks were created to respond to panics. We encountered one. Although we recognized it late, we demonstrated overwhelming power. The word you used, I think, is right. That was an emergency, right? So you are prepared to cross more boundaries than you would in normal times. In a sense, you are prepared to go to the edge of your power, as Paul Volcker famously said. But we made an implicit commitment to each other at the table, and to the Treasury, to Congress (I’m speaking broadly about other parts of the U.S. government).

Kevin Warsh 25:00

When the crisis is over, we will exit. We will return to being a relatively boring central bank. That should appear on the 12th page of the newspaper, six small paragraphs: “The Fed met today, and they raised or lowered rates by a quarter of a percent.” But from that moment until now, the central bank has become front-page news. And I think the role it plays is larger than our founding fathers would feel comfortable with, and larger than the creators of the central bank should feel comfortable with.

Peter Robinson 25:30

Okay, so let’s sort through from 2008 to now. I’m sure I’ll get it wrong, so correct me. Let me quickly run through it. QE1. QE stands for quantitative easing, which is a fancy term for injecting funds into the system. QE1 happened in 2008. We just discussed it. The Fed’s balance sheet rose from just under $1 trillion to just over $2 trillion. Kevin supported that one. QE2 happened in 2010. The Fed’s balance sheet rose to just under $3 trillion. QE3 happened in 2012. The Fed raised its balance sheet to $4 trillion. QE4 happened during the COVID lockdown in 2020, which needs to be discussed because that was also an emergency. By the time COVID ended in 2022, its balance sheet had risen to $9 trillion. Since then, the Fed has reduced it to $7 trillion. But as you pointed out, the Fed’s balance sheet today is almost ten times what it was when you joined the Fed in 2006 (in our generation’s memory). Okay. We’ve discussed QE1, QE2, QE3, the monetary supply expansion before COVID.

Kevin Warsh 26:52

You know, you keep printing a trillion here, a trillion there, and it will catch up with you, Peter. I mean, think back to when you were in Washington and I was at that time; various departments of economic institutions would spend millions on this project and billions on that project. Our economy is huge and robust; we can absorb this kind of thing, even if those projects are not perfect. But when the Fed prints trillions, especially in stable times, it changes everything. It’s almost sending a signal to other departments in Congress: We’re doing this, so you can too. So let’s get back to the essence of quantitative easing for a moment. QE1, by the way, at the time we tried to market it as—this probably worked for about a week—“credit easing,” that was the name we liked, “Kleacher Nominal,” but the term “QE” took off, and we had no way to stop it.

Kevin Warsh 27:41

How did we say it at the time? We debated internally whether to do it this way. The story goes something like this. Peter, Secretary Paulson was issuing bonds on Monday and Tuesday. Why don’t we buy them on Thursday and Friday? I don’t like to leak the confidences of those sitting around the table. But I remember someone saying, well, this sounds like a Ponzi scheme. What other way do you have to save us from the global financial crisis? We gave some explanations; the Bank of Japan had done a small-scale version of this trick about a decade earlier, but not on this scale. We weren’t very sure how it would work, but it turned out it worked. At the time, it was radical. Now, if you open an economics textbook, even an introductory economics one, they describe it as standard operating procedure.

Kevin Warsh 28:32

At the time, it seemed like a gamble, but we were in a moment where we needed to gamble, so we did. But that was QE1. I supported it, and I, along with many colleagues, supported it, on the condition that: we would put these very dangerous, high-risk things back behind bulletproof glass until the next crisis came. But we never really did that. So the story about the subsequent QEs you were about to tell happened in a phase where I think growth was quite strong, financial markets were relatively stable, and prices remained stable for a reasonable period. We started doing this indiscriminately, regardless of the season or reason. By doing so, we raised the threshold for the next crisis because whatever you did before might not be enough. I just want to mention one thing; you summarized my career, and I should be grateful. I resigned. You did.

Kevin Warsh 29:26

When QE2 was launched in 2010. Okay, I left in early 2011. My colleagues, including Chairman Bernanke, whom I mentioned—whom I respect greatly as a combat commander—and other colleagues at the Fed decided we should continue doing this.

Peter Robinson 29:44

What was the reasoning? If you could present the best argument for their position, what would it be?

Kevin Warsh 29:50

That is, we see no costs. We found a free lunch. Look around, asset prices are higher. Market liquidity is more abundant. The economy is doing well. And, my goodness, if we withdraw, we don’t know what will happen. In a sense, I think they have violated the consensus that was reached initially. Does anyone among us know what would happen in various scenarios? No, because, once again, in economics, unlike physics, there are no control groups, at least not good ones. I should also say that another difference between economics and physics or mathematics is that the "atoms" we track—the individuals in the economy—they can change their minds, right? So we don’t know how individuals will respond to a series of things. But their argument is that the costs are low, the benefits are high, so let’s keep doing more of the same. Okay.

Peter Robinson 30:46

QE4 happened during COVID. Economist Paul Sheard, I believe I’m misreading this name, Paul Sheard wrote in 2021: “As governments suppressed economic activity to contain the pandemic, fiscal policy needed to play an important social safety role by providing income support to households and small businesses. The more monetary policymakers demonstrated their determination to achieve inflation targets through the implementation of aggressive quantitative easing (injecting more liquidity into the system), the higher their credibility in combating inflation.” Kevin, this quote has a lot to unpack.

Peter Robinson 31:30

Please interpret.

Kevin Warsh 31:31

When you are in a crisis, like the 2008 crisis and the COVID crisis, you know, I used to be known for a saying: “Once you’ve seen a financial crisis…” So no two are exactly alike. But again, if I were to directly transplant my thoughts from the pandemic in 2020, when I was sitting as an observer in cheap seats at Stanford and New York, I would also say, well, this is a moment where we must take aggressive action. But the problem is that for most of the decade between 2010 and 2020, we had no emergencies. This was the time for central banks to exit. However, the central bank has remained front-page news. I should also point out that during that relatively stable, relatively peaceful, and prosperous period, Congress said, well, since the central bank is buying all the bonds, we can spend trillions of dollars. Therefore, the fiscal authorities—Congress and the President—believed that the costs of all this spending were very low because the Fed was subsidizing it, as we were the most important buyers of these bonds.

Kevin Warsh 32:41

Then, when you find yourself in a crisis, yes, I sympathize with my colleagues in the crisis. Do what needs to be done in times of crisis. But if you treat every day over a decade as a crisis, then when a real crisis comes, you have to cross more boundaries. You have to intervene deeper into the private sector. And doing so, going back to where you started, you will have an economic institution that is no longer the “first among equals,” but the foremost and most important institution in the world. You will see both Republican and Democratic governments…

Peter Robinson 33:14

And…

Kevin Warsh 33:16

You will see members of Congress. Importantly, you will see businesses that are now hiring lobbyists to seek relief from the central bank. This is unprecedented and, in my view, dangerous. It brings the responsibility and accountability of fiscal policy to the central bank. Even though my colleagues have good intentions and may make some good judgments, many things are not their responsibility.

Peter Robinson 33:42

Kevin, let me respond on behalf of the Fed. Yes, everything you said. But our situation today is this: inflation is now below 2.5%, and despite all this, the economy is still growing. So rather than blaming the Fed, you should say, ladies and gentlemen, well done.

Kevin Warsh 34:07

“Mission accomplished” is a very dangerous thing for policymakers in Washington. That was just what you tried to say was “mission accomplished.” So let me put it this way. Peter, after most crises, like after 9/11 and after the global financial crisis, there are a series of post-mortems, congressional reviews, blue-ribbon commissions. How did this happen? Well, after this Great Inflation, I’m still waiting for such a review. Instead, we just did a little cleaning up, but in my view, this institution has still greatly exceeded its proper role, and inflation remains above target. The Fed says they are doing some post-mortem reviews. They are examining their goals. They will release this report in August of this year. I doubt whether their report can… Can it competently review this major failure, the prices of goods and services have risen by more than 30% since the day before the pandemic, and federal government spending has increased by 63%. Five years ago, I don’t remember thinking this was an efficient, well-functioning government. So we shouldn’t sweep these consequences under the rug. So I appreciate this snapshot. Things are better, but this mistake has a cost, and those costs are being borne by our least affluent.

Peter Robinson 35:37

Let’s… you’ve mentioned some, but I want to talk explicitly about the damage the Fed has caused. The Wall Street Journal, this is an extraordinary thing to congratulate you on, I’ve never seen it before. The Wall Street Journal reprinted your speech here (excerpted and rewritten as a column), and then on the same day’s paper, the editorial headline commented on your speech. Winning a Nobel Prize doesn’t compare to appearing on both sides of the editorial page of The Wall Street Journal. So, The Wall Street Journal said: When you joined the Fed in 2006, the federal debt was about 34% of GDP. Today, the federal debt is about 100% of GDP and is heading toward about 124%. And The Wall Street Journal quoted your speech: “Irresponsible spending has surged, especially after the pandemic. I find it hard to absolve the Fed for (causing) the nation’s profligacy. Fed leaders encouraged government spending in difficult times but did not call for fiscal discipline during periods of sustained growth and full employment.” Now I want to turn the tables and ask you, Kevin, because up to this point, I’ve been providing a little defense for the Fed’s policies. Now I want to turn the tables and ask you: The growth of federal debt, as Neil Ferguson recently pointed out in a very compelling column, historically, no government has maintained great power after its debt interest payments exceeded defense spending. Friend, rather than saying you’re sounding the alarm, your attacks on the Fed are too mild. This is an outrage.

Kevin Warsh 37:31

So now you want me to defend the Fed. Yes.

Peter Robinson 37:34

Role reversal. I want to see how you respond to this. So…

Kevin Warsh 37:39

I believe the Fed is essential. I believe the Fed has the capacity to reform. It is important for all institutions to “heal themselves.” It is not too late, but they need to pose and answer significant, difficult strategic questions, rather than just covering these things up. Congress itself should also be criticized for engaging in reckless, irresponsible spending, and I believe that because the Fed has largely purchased these bonds and sent a signal to the world (when the Fed buys bonds, what do we tell global investors? The water is warm, come on in. You should do this too), it has made this spending easier to accept. But the President and Congress should also be heavily criticized for pushing massive spending during times of peace and prosperity. So, but this is very dangerous.

Kevin Warsh 38:37

I want to point out one last thing: irresponsibility is two-way. The connection between fiscal spending (i.e., what Congress does) and money printing (i.e., what the central bank does). When one side is irresponsible, the other side often becomes irresponsible as well. We often do not see the damage caused immediately. As Milton famously said, there are “long and variable lags,” but there is no free lunch here. I also want to make a broader point. When the rest of the world sees the world’s most important economic institution treating normal times as emergencies, Peter, they will do the same. In terms of irresponsibility, no one can compete with us. Other countries have long held a view of the U.S.: well, we don’t really like them showing up at G7, G10, or G20 meetings and lecturing us. But before the 2008 crisis, you know what they thought? Well, those Americans, they might be a bit aggressive, but they really know how to operate a banking system—until we didn’t. Then, before the COVID crisis, what did they think? Well, those Americans, they are different from us, but they seem to really believe in federalism, freedom, and human agency—until we didn’t. Then, well, that central bank, maybe we were too harsh on them, but they maintained price stability for 40 years. That’s pretty good—until we didn’t. When these institutions keep failing on important matters, the rest of the world is watching. And the rest of the world is watching the central bank today. If the central bank can get its internal order in shape, disappear from the front page, and encourage Congress to be more responsible in spending, then America can once again become the shining city on a hill, Kevin.

Peter Robinson 40:24

Okay, Herbert Stein used to say, if something cannot last, it won’t. The late economist Herbert Stein, I believe he was the chairman of the Council of Economic Advisers under President Nixon, right? Okay. I think he never served at the Fed, right?

Kevin Warsh 40:38

As far as I know, no. Okay.

Peter Robinson 40:39

So the late economist Herbert Stein often said, “If something cannot last forever, it won’t.” The question is: We have been running an essentially Ponzi scheme. The Fed, the Treasury issues bonds for sale. The Fed buys them. This is as close as you can get to turning on the printing press to print money. Yet the world still buys Treasury bonds. In other words, why hasn’t the market, why hasn’t the world market punished the U.S.?

Kevin Warsh 41:17

So I want to clarify…

Peter Robinson 41:18

Because it seems like Ben Bernanke was right. It seems like there’s no cost.

Kevin Warsh 41:24

That was our host Peter Robinson saying this is a Ponzi scheme. That was not a statement made by his guest (referring to me) in a private setting about how this would be presented in debate. In fact, I believe America… I would rather hold our hand than anyone else in the world, right? I believe we are on the eve of a productivity boom. I believe that American economic growth is the most important thing and can handle this debt better than anything else. To give a simple data point, look at the latest report from the Congressional Budget Office; I want to state that I am a member of the advisory panel for that office. They don’t necessarily heed what I say. They say that U.S. economic growth over the next 10 years will be 1.7% or 1.8% per year. I think in the future, well, 10 years…

Peter Robinson 42:17

They don’t know. Sorry, I’m not on your panel, but they don’t know what the growth will be over the next 10 years.

Kevin Warsh 42:25

We don’t even know what will happen in the next 10 minutes. That’s right. So I agree, but whatever our government does, I would bet that growth will be higher. It turns out, well, I wasn’t born a U.S. citizen, but we are a highly productive society. Our government may have tried to distort prices through quantitative easing over the past 15 years or so, but the American people will show impressive vitality and adaptability. If our annual growth rate can be 1 percentage point higher than the Congressional Budget Office predicts, that would bring an additional $4.5 trillion in revenue to the federal treasury in most cases. Right? Well, that’s a good way to mitigate this debt. So it’s not too late. But regarding your question of “if something cannot last forever, it won’t”…

Peter Robinson 43:16

Where are the alarm signals in the world market?

Kevin Warsh 43:18

Or in our own markets, we don’t want to reach that critical point and see the yellow and red lights flashing again, because even now, I believe we are the best economy with the most promising moment. We can see some worrying things, but I don’t want to say it’s unfixable. But the longer we drag out the problems, the closer we get to the critical point. And the best way to avoid the critical point is not to get so close that we see it. Okay.

Peter Robinson 43:52

So, according to a document released by the House Budget Committee in March: “In an attempt to eliminate the inflationary pressures caused by Biden’s deficit spending spree, the Federal Reserve raised interest rates 11 times between March 2022 and July 2023. As a result, the average real interest rate on national debt doubled from 1.7% to 3.4%, and net interest costs rose from $352 billion to $881 billion.” It is this $881 billion that means we are now spending more on debt interest than on the Pentagon, which is about $800 billion.

Peter Robinson 44:36

So, Kevin, the Fed still has a $7 trillion balance sheet. How does it shrink that balance sheet? How does it withdraw funds without raising interest rates? In other words, we are in a tough spot now, caught between a rock and a hard place. This is a terrible dilemma. And current members of the Fed might say, Kevin, don’t you understand? We are doing our best. In other words, what kind of reform agenda can you propose that neither makes things worse nor improves the situation?

Kevin Warsh 45:09

This might unsettle part of your audience, Peter. So I have to issue a “trigger warning”—this is a popular practice on campuses now. I believe this administration has inherited a mess, a fiscal and monetary mess, and it is the responsibility of this administration to clean it up. No one said this would be easy. We didn’t fall into this predicament overnight. We won’t get out of it overnight either.

Kevin Warsh 45:32

To make the numbers you mentioned easier to understand, I think it can be said: The day before the pandemic, we were paying about $1 billion in interest every day. Now we are paying over $3 billion in interest every day. None of this money is being used to strengthen the military or help our least affluent. This money is being wasted.

Kevin Warsh 45:53

So what do I suggest? As you pointed out, and as you and I have discussed, but I’m not sure the economics community believes this, monetary policy has two tools. One is setting interest rates, right? The other is this “money” we’ve been talking about. We call it quantitative easing; we call it the central bank’s balance sheet. If we can quiet the printing press a bit, then we can have lower interest rates because what we are doing now is injecting a lot of money into the system, which is causing inflation to be above target. That’s the $7 trillion balance sheet you mentioned, which is an order of magnitude larger than when I joined the Fed. Meanwhile, you have another monetary policy tool, which is interest rates. They don’t work perfectly in sync. They are not perfect substitutes for each other, but they are both monetary policy, and too many people working in central banking say, no, that balance sheet has nothing to do with monetary policy. Well, if it’s related to monetary policy when it’s growing, then it should also be related to the implementation of monetary policy when it goes in the other direction. I think we need to be honest about these two tools, and because I believe that growth in the real economy is a more important part of fiscal revenue, equity, efficiency, and growth.

Kevin Warsh 47:17

Since a larger balance sheet has led to higher inflation, we want to shrink it. We can’t do it overnight. We hope the Treasury and the Fed can reach some sort of agreement, like the one they reached in 1951.

Kevin Warsh 47:34

Who is responsible for what? Who will manage interest rates? The Fed. Who will handle the fiscal accounts? The Treasury. We have blurred the lines of responsibility here. When a president takes office, his Treasury Secretary should take responsibility as the fiscal authority, rather than ambiguously pushing the responsibility onto the Fed, which only brings politics into the Fed, and I think interferes with their normal operations.

Kevin Warsh 48:04

In my judgment, we should shrink the central bank’s balance sheet and let the Fed exit these markets, unless and until a crisis arises. By doing this, you will reduce inflation. You and I might call it “pragmatic monetarism.” I think this is our intellectual error, or what our ideological mentors might consider. By doing this, you might actually achieve lower interest rates, and interest rates are more important to the real economy than the balance sheet. Okay.

Peter Robinson 48:37

Kevin, let me end by discussing two visions for this country. Let me set the stage with a few more quotes. This is you, Kevin Warsh, saying: “For about 40 years—starting with the ‘Great Moderation’ period, which began in the mid-1980s—Americans have hardly considered changes in price levels. Things were supposed to work this way. We could take it for granted because smart, hardworking people kept the rest of the country running smoothly.”

Peter Robinson 49:14

Right. Okay, this is former Fed Chairman Alan Greenspan testifying to Congressman Henry Waxman during the 2008 financial crisis: “I made a mistake in assuming that organizations—especially banks—acting in their self-interest would be sufficient to protect their shareholders and equity.” From Alan Greenspan, who began his career as a fan of Ayn Rand and is one of the deepest believers in free-market principles in the 20th or 21st century. This is a statement. Waxman said: “In other words, you found that your free-market ideology didn’t work?” Greenspan: “That’s precisely why I was shocked, because I had been adhering to that view for 40 years and had a great deal of evidence that it was valid.”

Peter Robinson 50:10

Okay, so this is one vision: Starting with Fed Chairman Paul Volcker and President Reagan in the 1980s, we achieved low inflation and a strong dollar. Overall federal spending was low enough to allow economic growth. In fact, it grew faster than federal spending. By the time George W. Bush took office, before the new wars began, we were actually running, or expected to run, surpluses for several years, but that ended. The financial crisis changed the world. The COVID lockdowns, we now have over a decade of fiscal irresponsibility and market-distorting loose monetary policy. Now you have market professionals like James Grant and Ray Dalio expressing skepticism about the entire monetary system. Young entrepreneurs are buying Bitcoin because they no longer trust the dollar. Kevin, something fundamental has ended and cannot be reversed. What do you think of this vision?

Kevin Warsh 51:18

That’s absurd. I really, I’m not a defeatist. This country is not a defeatist. This country is on the verge of a productivity boom. In my view, this will make the productivity boom you knew when you served as a presidential aide in the Oval Office—the one in the 1980s—look like we can do it again. AI.

Peter Robinson 51:42

Not just AI. So tell me your vision. Tell me what will happen if we don’t continue to mess things up. Our…

Kevin Warsh 51:50

The government has been doing its utmost to intervene and damage the market economy for over 15 years. Despite our best efforts to undermine America and its role in the world, we have sadly failed.

Kevin Warsh 52:03

The 21st century can be America’s century, right? We have real competitors, a G2 competition, just like you once competed with the Soviet Union on the other side of the globe. We must take it very seriously. But, my goodness, I would rather hold our cards than theirs. The overall implementation of public policy doesn’t have to be perfect. You and I can imagine what kind of trade policy, regulatory policy, or tax policy would be perfect with our colleagues here. Of course, perfection is not a necessary condition. We just need to make the policies a little better than they are now, directionally returning to some meaningful monetary and fiscal policies, and the American economy will thrive.

Kevin Warsh 52:46

Now there is a tendency among some of our colleagues to say, well, we should do what Reagan did. But those days are over. Hayek, I think, has a famous saying: The job of people like you and me is to rephrase the ideas of the past and rethink them in the minds of a new generation. So it’s not about going back to Reaganism, but about crafting a new set of economic policies in a new world that can drive the American spirit, drive individual freedom and liberation. Importantly, they need to restore institutions like the Fed to what they once were: mostly in a secondary role, intervening only in specific circumstances and exiting important institutions. By doing this, we will have more responsible fiscal policies, higher economic growth, and these will start with a new generation of technologies in America, and I believe America will be a huge beneficiary. This is not destined, nor is it an inherent right, but I believe it is not only possible but likely to happen.

Peter Robinson 53:56

Finally, two concluding questions. The Fed doesn’t need to be completely overthrown. It doesn’t need to be smashed and rebuilt. It just needs to correct its current course a few degrees. Adjusting an aircraft carrier takes time, but a few degrees can solve the problem. Am I understanding this correctly?

Kevin Warsh 54:17

I think so. The Fed doesn’t need a revolution. It has already undergone a revolution in the past decade. What it needs is some degree of revival. Now, I don’t know… I know you’re not a golfer, but I learned this from a famous golf course designer, Gil Hanse. When he examines these golf courses and thinks about how to make them great again, he says he is inspired by their past but not bound by it. Faithful to the vision in the designer’s mind of that golf course—here it is the central bank. Faithful to it, but not necessarily recreating it in a literal sense.

Kevin Warsh 54:56

Just as we cannot return to the regulatory policies of the Reagan era, or the fiscal or tax policies of the Reagan era. We cannot return to the monetary policies of the Reagan era, but we can look back at an institution and try to restore its best elements while keeping in mind that the world is changing. You mentioned Bitcoin, and I seem to hear a hint of disdain in your voice when you said people are buying things like Bitcoin.

Peter Robinson 55:20

Isn’t it true that Charlie Munger, in the two or three years before he passed away, criticized Bitcoin? He called it evil, partly because it would begin to undermine the Fed’s ability to manage the economy.

Kevin Warsh 55:32

Or it can provide market discipline, or it can tell the world that problems need to be fixed. Bitcoin…

Peter Robinson 55:39

Doesn’t that make you nervous?

Kevin Warsh 55:40

Bitcoin doesn’t make me nervous. I can recall a dinner here in 2011 with another guest who has been on your show. I won’t mention his name. Well, I just did.

Kevin Warsh 55:55

Marc Andreessen showed me that white paper, the original white paper. I really wish I had understood as clearly as he did how transformative Bitcoin and this new technology would be.

Kevin Warsh 56:08

Bitcoin doesn’t trouble me. I think it’s an important asset that can provide information when policymakers do right or wrong. It’s not a substitute for the dollar. I think it can often serve as a good overseer of policy. If I speak more broadly, what might Charlie Munger and others be thinking? A plethora of securities have emerged under various names, many of which, if not most, are trading at prices that aren’t worth that much.

Kevin Warsh 56:42

So what did Charlie say, and perhaps his friend Warren said? There are innovators, imitators, and incompetents. There are indeed real innovators acting around that new technology. What I want to emphasize to businesses and bankers is the underlying technology that Marc was trying to show me in that white paper? It’s essentially just software. It’s just the latest, coolest software that will enable us to do things we’ve never been able to do before. Can this software be used for good and evil? Yes, both, just like all software. So I don’t demean it that way. If I were to say one last thing, it’s that these technologies are being built here. I’m not just referring to the Stanford campus.

Peter Robinson 57:49

Last question, Kevin. Last question. You returned to Manhattan to work with one of the greatest investors of the past half-century, Stanley Druckenmiller. You are known for macro investing. You look at global trends.

Peter Robinson 58:03

So you see, and I know you see the details because I know you’ve been to China for on-site visits many times. In China, since the late 1970s, hundreds of millions of people have been lifted out of poverty, establishing a modern economy. We now see India growing, and India is more open to markets. It lags behind China but is catching up. We even see, and I say “even” because for many, these places have been seen as problem areas for decades. But in sub-Saharan Africa, places like Nigeria and Kenya show real signs of economic growth. Given all this, understanding all this, Kevin Warsh still has a long-term optimistic view of the United States.

Kevin Warsh 58:52

Absolutely. If I could say a few words. Of course, you mentioned that the U.S. is the innovator of almost all these technologies. Now, could they be used elsewhere? Absolutely. The most talented people in the world still want to come here. The most talented people in America want to build here.

Kevin Warsh 59:19

I believe that over the past six months, economic policy has been shifting in a better direction than before. Economic policy is not perfect and will never be perfect. But the American people are ready to be liberated from the shackles they have been bearing.

Kevin Warsh 59:37

All the policies discussed here, around this table, and elsewhere. We haven’t even mentioned the regulatory burden that has caused tremendous damage to U.S. economic growth over the past decade. I believe, in part, that this burden is being alleviated, and we talked about this productivity revolution. We talked about technology in a sense. But I think humanity has been underestimated, especially Americans, in their ability to adapt to new technologies and thrive, which I believe is very real. This may sound blindly optimistic to some of your listeners, but what we used to call the microfoundations of macroeconomics, I will broadly translate into another trigger word, which is the culture happening in society, the willingness to take risks, fail, and take risks again. These still happen in America more than anywhere else. They are not happening at this pace in France and Germany. This is a very exciting moment as we remove that regulatory burden and restore some economic policies that worked better in the past.

Kevin Warsh 01:00:55

As we now reform institutions. I’m willing to bet on the upside potential of U.S. economic growth, and I’m willing to bet that the central bank will fix those things that have been broken and achieve price stability again. The rest of the world may not love us, but they will look to America again and say, despite some things we don’t like, their economic growth is faster, and that’s where we want to send capital.

Peter Robinson 01:01:23

Kevin Warsh, thank you.

Kevin Warsh 01:01:25

Thank you, Peter. It’s an honor to be on the show again.

Peter Robinson 01:01:28

This is "Uncommon Knowledge," from the Hoover Institution and Fox Nation. I’m Peter Robinson.

Note: The Chinese translation may not be 100% accurate.

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