There is increasing chatter that Kevin Warsh is being seriously considered for Fed chair. He would not be my first choice, for several reasons:
1. He is viewed as a well rounded figure, with some knowledge of both monetary policy and the financial system. I’d prefer someone who has great expertise on monetary policy, even if they knew little about anything else.
2. He was spectacularly wrong about policy during the Great Recession. Here is Business Insider:
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.
And here is Politico:
Jordan Haedtler of the progressive group Fed Up, which advocates lower interest rates and more diversity at the central bank, doesn’t see Warsh’s Wall Street ties as a positive.
“He was tasked by Bernanke with being the emissary to his former employer and other major Wall Street firms, so his independence from the financial sector is just as questionable as the Trump administration as a whole,” he said.
Haedtler also argued that Warsh was “spectacularly wrong during the lead-up to the crisis, during the crisis and following the crisis.” He cited a March 2007 speech in which Warsh praised the proliferation of new financial instruments, one of the major factors leading to the crisis.
Can we now be sure that Warsh was wrong about monetary policy during the Great Recession? I think so, but I’d also like to briefly discuss the implications of the other view, that we can’t be sure he was wrong. If that were true, then monetary economics would be useless. There would be no core of knowledge worth teaching to our students. The loony right wing critics of the Fed would be correct; it would be a bunch of priests in robes incanting a lot of mystical mumbo jumbo, with no connection to anything real. Indeed it’s now so obvious that money was too tight during the Great Recession that anyone still denying that claim basically loses all credibility.
Imagine that we actually didn’t know that Warsh was wrong. Now imagine a cynical student who likes to shoot his mouth, sitting in the front row of a college monetary economics class. The instructor starts teaching, and the student immediately shoots his hand up in the air. “How do we know that’s true.” “Prove it.” “I don’t believe you.” “You say the Fed pursues a dual mandate, but then how come even famous monetary economists can’t agree that money was too tight during the Great Recession, when both employment and inflation were far below target, and when the inflation they warned about never showed up, even years later when unemployment fell to 4.3%”. “If you guys can’t even agree on that, then how can you claim to know anything.”
I don’t think we could criticize that annoying student. Who’s to say he’s wrong? Why should he accept anything he’s being taught as being true, if even the leaders of the profession can’t agree on its most basic principles?
And BTW, I’d say the same thing about microeconomics. If we as a profession can’t agree that “price gouging” is a good thing, which should not be outlawed, then how can microeconomists claim to know anything. And yet a recent post by David Henderson discussed a poll which showed that 8% of leading economists actually hold those deeply unscientific views. (And lots more were uncertain.) Opposing price gouging is not like denying global warming, it’s far worse. It’s like creationism. At least with global warming there is some doubt. (I happen to agree with the scientific consensus.) But if economists are wrong about price gouging, then you might as well put all EC101 textbooks into a big bonfire. Greg Mankiw’s (excellent) textbook is probably about 750 pages long, but the basic punch line of much of what he says can be boiled down to something to the effect that, “price gouging is not only good, it’s the whole point of a market economy.” (My words, not his.) If Mankiw is wrong about that, then he’s wrong about almost everything.
And Madura’s policies in Venezuela would be wonderful.