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Trump’s new favorite to lead the Fed almost made the financial crisis a lot worse

(Kevin Warsh, addresses the Shadow Open Market Committee during a symposium in New York.Thomson Reuters)
Being wrong with conviction is a trademark of President Donald Trump. Perhaps that makes Kevin Warsh, his new perceived favorite to replace Janet Yellen as Federal Reserve chair, an ideal candidate.

Warsh was a Fed governor between 2006 and 2011, during the depths of the financial crisis and Great Recession. He was previously a Morgan Stanley banker who now “advises several private and public companies, including serving on the board of directors of UPS,” according to his biography at the Hoover Institution, where he is a distinguished visiting fellow in economics.

Warsh is also, importantly, on one of Trump’s remaining business councils, and is one of the few high-profile figures not to have condemned the president’s equating neo-Nazis to those protesting them in Charlottesville. Warsh is married to Jane Lauder, the billionaire heiress of cosmetics giant Estee Lauder, a major Republican donor and a childhood friend of Trump’s.

Warsh declined to comment for this article.

Back in 2009-2011, while still at the Fed, Warsh was keenly worried about inflation at a time when consumer price growth was actually deeply undershooting the central bank’s 2% target and unemployment remained very high. His concerns, since reiterated in the occasional opinion piece, have proven deeply misguided since the Fed continues to undershoot its inflation goal to this day. Indeed, bond investors have palpable doubts about the Fed’s plans to continue raising interest rates next year and in 2019.

Vocal critic of bond buys, low rates

While Warsh never dissented against the policies of ex-Fed chairman Ben Bernanke, he was always quick to warn of their risks.

“I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy,” he said in November 2010, when the Fed was just about to embark in the second of three rounds of bond purchases that helped stimulate the economy and bring the jobless rate sharply lower to its current 4.4%.

“Expanding the Fed’s balance sheet is not a free option,” he warned. “There are significant risks that bear careful monitoring. If the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed’s price stability objective might no longer be a compelling policy rationale. In such a case—even with the unemployment rate still high—the FOMC would have cause to consider the path of policy.”

That’s not what took place, thank goodness for the US economy. In fact, growth, employment and indeed inflation itself would require substantial additional support from the Fed.

Critics argue that such asset buys, also known as quantitative easing or QE, have distorted financial markets, driving stocks and other assets to new records and potentially creating bubbles that could come back to haunt the economy.

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