According to a few new articles in Bloomberg today I am hardly alone in opposition to the nomination of Mr. Kevin Warsh to the chairmanship of the Federal Reserve. It’s a comforting thought that the sure thing of being nominated to the Fed back in 2005 of simply talking the line of ‘whip inflation now’, regardless of whether what that means is actually understood, is now more of a liability than an asset in securing a top job at the Fed. It’s a sign that at least someone learned the right lesson from the Great Recession, a development that creates a rather celebratory mood.
There are still the defenders of the indefensible, however, sorry to see their idea of a good man falling victim to misunderstanding, as Daniel Moss expresses in his Bloomberg View column here. Moss points out that Warsh’s record indicates that he would mean no less than more of the same, having voted the consensus at every FOMC meeting when he was on the BoG from 2006-2011, and in 2010 Warsh voted for QE2 to avoid undermining Bernanke; to which Moss says, “Fair Enough.”
My question here is whether voting with the Chairman to vote with the Chairman is demonstrative of a “more of the same” record regarding a “remedy” for a cyclical unemployment problem when coming from the position of leadership. I think this distinction matters because I don’t believe that voting for QE2 on behalf of the chairman is the same thing as leading the committee toward it, assuming that Bernanke believed QE2 was necessary given the 10% plus cyclical unemployment problem at the time. What would have been Warsh’s alternative remedy for the problem had he been in Bernanke’s position at the time? He never provided one at the meeting nor has he since. If he was against QE, what would he have lead the committee to do instead?
Given Warsh’s public
outbursts opposition to any sort of easing and periodic reluctance by the FOMC to tighten without providing an alternative, one can only speculate as to what would be done differently to handle a situation where policy has become too tight for the Fed to effectively achieve compliance with its mandates. Congress cannot help with that, and an absence of monetary policy action in such a situation violates the spirit of both the Federal Reserve Act calling for the provision of an elastic currency and the Full Employment and Balanced Growth Act that calls for maintenance of full employment.
The distinction between leading and following definitely matters here because it provides a glimpse of the contractionary risk and the sort of narcissistic depravity that would rule our monetary policy with a potential Warsh nomination to the Chairmanship of the Fed with QE off the table and no alternative except to grouse about Congress.
With these points, I beg to disagree with Mr. Moss. A Warsh Fed would not equal more of the same or anywhere close.