Oct 29 • 43M

Regime Change at the FED

Speakers: Kevin Warsh and Myron Scholes

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Larry Bernstein
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Larry Bernstein

Welcome to What Happens Next. My name is Larry Bernstein. 

What Happens Next is a podcast which covers economics, finance, history, science and politics. Today’s session will be Designing the Perfect Portfolio.

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Welcome to What Happens Next. My name is Larry Bernstein. 

What Happens Next is a podcast which covers economics, finance, history, science and politics.

Today’s session will be Regime Change at the FED.

Today’s podcast is a conversation that includes former Fed Governor Kevin Warsh and my old boss Nobel Prize winner Myron Scholes.  

There is no free lunch and Kevin will explain how excessive government spending has resulted in a surge in inflation and changed the behavior of ordinary Americans on how they spend, save, and take risks. The inflation genie is out of the bottle, and to get inflation under control will require a regime change at the Fed.  This will not be an easy battle to fight, and you should expect chaotic market movements.  

Buckle up.

I make this podcast to learn, and I offer this program free of charge to anyone that is interested.  Please tell your friends about it and have them sign-up to receive our weekly emails about upcoming shows.  If you enjoy today’s podcast, please subscribe so that you can continue to enjoy this content.

Ok, let’s start today’s session with Kevin Warsh.

Kevin Warsh

0:00
-5:37

Topic: Regime Change at the FED
Bio: Former FED governor, Kevin Warsh

Opening Remarks:

To summarize it, the 21st century has been decidedly unkind to most Americans. A series of shocks have shaken their American ethos. The policy making response has been extraordinary with both positive and negative connotations.

It's changed expectations for policy going forward. And it certainly caused the rest of the world to look at us differently. 

Those shocks:

First, 9/11 led to a series of wars. The global financial crisis where I still have the scars from my 10 years in government. Third, the pandemic. And the fourth shock is the Russian invasion of Ukraine. 

Now I would say we're living through a new era of price instability. Not because that means we're in a time where inflation will be permanently higher, but I'd expect there to be large variances around what we'd think of as stable prices in the decade ahead. 

I begin the paper with one of my favorite lessons from Myron, which he used to call the ice cream truck.

What happens is there's kids on a playground. Some are on the jungle gym, others are playing, doing their thing. And then Myron's ice cream truck comes by and rings the bell. They get an ice cream. The ice cream truck leaves and you'd think they go back to the place in the playground where they were before. But they never go back; It's changed. The environment's changed, the ecosystems change, their wants and preferences have changed. And that is a metaphor for what's happened to the US economy during these shocks.

We begin the paper with a quote from Hayek, where he says, “If old truths are to retain their hold on men's minds, they must be restated in the language and concepts of successive generations.” Well, that's what we tried to do. 

I've been hanging around Hoover since I was 19 years old, and it's my 30th reunion this weekend. For places like Hoover that believe in free markets and limited government, it is one thing to go back and say, “Oh well, what did Ronald Reagan do?” 

We have enduring lessons from that era but this isn't a cut and paste exercise.

The world is different. The G2 rivalry with China is different than the rivalry with the Soviet Union. Our economy is different. 

What is it that was born out of the enlightenment that is still valuable today? And we created what we call a triptych, three panels on a wall. And what we say is that the core of the American experiment and its leadership in a peaceful world has three I’s: ideas, individuals and institutions. And these three I’s have to be applied to the conduct of public policy in Washington: fiscal policy, trade policy, monetary policy, regulatory policy.

But we need a framework. 

The first were ideas. Paul Romer reminded us that ideas are different than goods. They're non-rival goods. There's no fixed pie of ideas where one slice of that idea for you means less of a slice for me. The promulgation of ideas areis the key to American prosperity in the 21st century. 

And is the conduct of economic policy suppressing these ideas by keeping rates at zero for more than a decade, is that really the right price to give rise to new ideas? That's the first part of the triptych. 

The second is individuals. Cogan and I maintained individuals are different. They're the core of civil society. They're not cogs of a machine. They have a set of preferences and inclinations that are unique to them. 

But if we treat individuals as part of groups, are we going to extinguish the flame that would cause them to create new ideas? Connecting the other part of the triptych. We wonder whether the culture, to use a loaded word, is civil society doing harm to individualism. 

The third is institutions. 

Ben Bernanke's work for which he received the Nobel Prize, where he'll be standing having his picture taken with the likes of Myron.

He brought institutions back into an understanding of financial crises and the Great Depression. 

Cogan and I fear there's a conflation of roles of institutions between the public sector and the private sector where we think there's a very red line that should separate the roles and responsibilities. And inside the public sector our government trying to compensate for the failures of other institutions in government. An example, whether the Fed has become an appeals court for broken fiscal policy and has wandered in areas that are outside of its remit. Cogan and I worry about that institutional creep and it happened to coincide with this period of price instability. 

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