This is not the man to make America great again, but the rich still richer.
Michael Roberts is an Economist in the City of London and a prolific blogger
Cross-posted from Michael Roberts’ blog
This work is in the public domain because it is a work of the Board of Governors of the Federal Reserve System
Kevin Warsh, President Trump’s nominee to replace Jay Powell as Chair of the Federal Reserve next May, is the epitomy of a Wall Street, hedge fund insider. Educated at Stanford University and currently a fellow of its graduate school, he is also a member of the secretive Bilderberg Group set up in the 1950s to work out strategy for the preservation of ‘Western democracy’ as the Cold War with the Soviet Union intensified. He is married to the heiress of the Estee Lauder company. As a young man he first worked at Morgan Stanley, the American investment bank (actually at the same time as I did, although I never met him).
A good Republican, he became an adviser to the Bush administration on financial markets. He was heavily involved in the 2008 financial crash, becoming the liaison between the Federal Reserve under Ben Bernanke and the Wall Street banks. He advocated that the crashing investment banks should be turned into proper ‘banks’ so that they could receive Fed loans to bail them out. In this way, he helped save his former employer Morgan Stanley from going the same way as Bear Stearns or Lehman Bros.
So Warsh was the link man for the Fed in ensuring the banks were bailed out of the disaster of their own making. “He brought a lot of real experience, he knew these people on Wall Street — he knew the difference between when they were arguing their book and when they were bringing us good information — and that was very, very valuable,” said Don Kohn, the former Fed vice-chair. The then chair of Goldman Sachs, Lloyd Blankfein, the man who claimed he was “doing God’s work” at Goldman Sachs, loved Warsh. “Kevin was unflappable at chaotic moments,”
Warsh’s mentor is the billionaire hedge fund boss, Stanley Druckmiller, who also promoted current Treasury Secretary Scott Bessent. Druckmiller maintains regular contact with both Bessent and Warsh. Indeed, Warsh has worked as a partner in Druckmiller’s operations since 2011.
Warsh had been a Federal Reserve governor but resigned after the financial crash bailout when Obama took over the presidency and Fed chair Bernanke began to pursue a policy of ‘quantitative easing’ (QE), where the Fed pumped billions into the banking system to support it and keep interest rates low. Warsh was opposed to QE. He was a good ‘Austrian school’, free market man. So he saw the Fed monetary pump as causing “misallocations of capital in the economy and the misallocation of responsibility in our government.” Warsh has long believed that central banks were addicted to ‘printing money’ and thus encouraged “recklessly large public sector deficits”. He wanted no excessive funding for the economy and no excessive government spending. Quoting Chris Giles of the FT here, he thinks the Fed governors “should stick to their knitting on inflation and not get distracted by environmental concerns or the distribution of income.” Reducing inequalities is not on Warsh’s agenda.
As a monetarist a la Milton Friedman, he then claimed that QE would lead to runaway inflation. As we now know, it did not. As I have shown in other posts, the monetarist theory of inflation is faulty because it assumes that money drives supply, when it is the opposite; and it fails to account for ‘hoarding’ or increased money supply being used by the financial sector for speculation and not for lending onto the wider economy. That is what happened after the financial crash in 2008-9 and explains the near-zero inflation during the Long Depression of the 2010s.
But now in 2026, after the inflationary spike following the end of the pandemic slump, Warsh is not worried about the Fed lowering its policy interest rate and causing inflation because this time AI is going to save the day by boosting productivity so much that it will be a “significant deflationary force”. As his mentor Druckenmiller put it “Kevin right now very much believes you can have growth without inflation.”
The interesting contradiction is that Warsh still wants to stop the Fed expanding the money supply as that is inflationary, in his view. So if the Fed reduces its balance sheet further (which it did for a while under Powell) that could raise government bond yields – unless, of course, the government makes significant cuts in spending and inflation subsides. Everything will depend on that AI productivity boost.
As Mohamed El-Erian, now an FT columnist and former head of the giant Pimco bond fund, said about Warsh: “I feel he’s much more of a known quantity and I am comfortable with most of his views.” It seems that financial markets agree: the dollar made a sharp recovery against gold on the news that Warsh had been nominated – as he is one of their own.
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