High prices beget low prices. It’s the high prices that summon more supply, more innovative production processes that ultimately result in lower prices, and often both.
That high prices foretell lower prices rates more discussion as Republicans and conservatives rush to anoint former Fed Governor Kevin Warsh as the next Fed Chairman. They seemingly view Warsh as another “adult” with whom they have history with in the Trump economic room, while Warsh likely fits Trump’s preference for good-looking people.
Ok, but what about Warsh the economic theorist? This is the real danger associated with Warsh that happy-talking conservatives don’t seem willing to acknowledge, or grasp.
Warsh is an interventionist by his own admission. He still defends his former Fed boss Ben Bernanke’s “try everything” response to financial uncertainty in 2008. Warsh also defends the Fed’s “quantitative easing” efforts in 2008-2009 meant to push down interest rates.
If we forget for a moment that the Fed can’t alter reality opposite Bernanke and others who buy into (and practiced) central-banking mysticism, stop and think about what it signals about Warsh that he thinks otherwise: it’s a sign that he’s fully willing to substitute himself for the information-pregnant marketplace when it’s sending crucial signals. Lest readers forget, prices are how the market economy organizes itself, yet Warsh thinks it’s alright for government officials to intervene when market prices are communicating what they don’t like.
Here lies the danger of “adults” like Warsh, and arguably “free market” Republicans more broadly. Just as hardline anti-communist hardliner Richard Nixon could go to China, Republicans can meddle with markets. That’s the stuff of crises. More on this in a bit.
For now, it’s useful to contemplate the speech Warsh gave last week and that had conservatives rapturous. In one editorial Warsh was lionized for observing that the Fed “has undermined its own credibility in recent years by failing to fulfill its core duty of providing price stability.” Really? Market prices, much like credit prices, are an effect of wildly sophisticated cooperation among man and machine (we don’t borrow money, we buy what money can be exchanged for) around the world, and the infinite prices of either could never, ever be managed or overseen by central bankers.
From there, Warsh promoted the fiction that the quantitative easing he initially supported ultimately “disguised the true cost of capital,” and the latter allegedly “subsidized government deficit spending by keeping the cost of borrowing artificially low.” No, that’s not serious. Just the same, it’s remarkable the veiled disdain conservatives have for the market signals they claim to embrace. Seriously, do they really believe the deepest markets in the world in which are traded the most owned assets in the world (Treasuries) were really tricked by men and women with last names like Bernanke, Yellen, and Powell on the way to much easier borrowing than would have taken place if markets hadn’t been duped? Hopefully the question answers itself.
Contra Warsh, the danger isn’t that the Fed can trick markets and control credit prices (what a laugh), it’s Warsh himself. It’s that conservatives view him as their adult in the room. Except that Warsh joined with other adults in 2008 to intervene in a healthy correction, one that logically included financial institution failure, and that if left alone would have taken place absent what some who should know better claim to this day was a “financial crisis.”
No, no such thing. Markets just are. They’re a mirror. The only crisis is one of intervention, and the adult in Warsh situationally embraces intervention. Which is the stuff of crises by its very name.
