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“The Fed is no longer the backstop to the financial system on a dark day. It’s the dominant player day in and day out.” Those are the dispiriting words of former Federal Reserve Board member Kevin Warsh. They bring to mind Warsh’s former boss at the Fed, Ben Bernanke.

Bernanke similarly believes the Fed fine-tunes economic outcomes. Think his quip to Milton Friedman way back when about how the Fed caused the Great Depression by tightening so-called “money supply.” Except that money in circulation is something no central bank or monetary authority could ever control simply because money in circulation is production determined.

If the Fed had the power that Bernanke and Warsh think it does, the economy would be too wrecked to talk about. That is so because finance is but a byword for the infinite decisions taking place every millisecond all day and every day that result in precious resources being directed to their highest use. If the Fed were the “dominant player,” then we would have to invent all new words to adequately describe our economic desperation.

Warsh writes that “When the crisis hit” in 2008, the Fed among other things “rightfully cut to zero to lessen the economic hit.” Not explained by Warsh is why he believes knowledge-pregnant economies are improved by the intervention of knowledge-bereft government officials. More puzzling is that Warsh would no doubt nod his head to the assertion that free markets crucially associate with more freedom and much better economic outcomes during times of tranquility, so why would Warsh accept the shunting aside of free markets when times aren’t tranquil?

It’s just a reminder that intervention is the problem, always and everywhere. In other words, the correct history of 2008 will note that the crisis wasn’t financial, rather it was intervention.

What was true in 2008 was also true in 2020. Easily forgotten is that the coronavirus had been spreading for quite some time, and had been in the news since early January. Despite this the U.S. economy boomed, and equity markets looking into the future signaled good times ahead as free people dealt with the virus. Then politicians panicked, only to substitute their judgement and that of experts for the marketplace that was the people. Readers know the economic contraction that followed.

What’s unfortunate is that Warsh supported this intervention at the time, and still won’t acknowledge that the intervention was yet again the crisis. Warsh writes that amid an economic contraction engineered by government, “the Fed” sought “massive new fiscal spending.” Translated, in its infinite wisdom the Fed called for centralized allocation of precious resources from government at the same time that the government was suffocating a once-vibrant economy.

Worse, Warsh’s history his off. He contends that “The Biden administration and Congress happily obliged” the Fed’s call for “massive new fiscal spending.” Except that Joe Biden was a private citizen when the lockdowns took place. It was President Trump who heeded the Fed’s call, which was the equivalent of a doctor fixing a broken collarbone by putting a cast on the patient’s leg. Only for Warsh’s commentary to become even stranger.

He writes that Fed Chairman Powell “has promised substantial rate cuts in 2024 since late last year,” and the “U.S. stock market has subsequently increased in value by $12 trillion.” Except that’s not what happened. Easily the biggest driver of this latest equity surge has been the discovery of Nvidia’s outsize role in future economic progress, and the biggest leaps in Nvidia’s valuation took place when Powell was raising rates.

Surprisingly lost on Warsh is that equity markets do not gain vitality from stabs at price control by central bankers, rather their strength is a consequence of the future relentlessly replacing the past. In other words, if the Fed could do as Warsh imagines it can by propping up the present, U.S. equity markets (like the U.S. economy) would be too wrecked to rate discussion.

Which is why Warsh’s op-ed was more worrisome than disappointing. Precisely because it’s a reminder of Ben Bernanke, someone Warsh plainly venerates, it’s a worrying look into a future that might include Warsh at the top of the Fed. While the central bank's power is vastly overstated, the power of the government the Fed serves can’t be overstated enough. And with Bernanke-style thinking back at the central bank, it’s not unreasonable to fear more of the intervention from the Commanding Heights that was so disastrous in both 2008 and 2020.

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book, released on April 16, 2024 and co-authored with Jack Ryan, is Bringing Adam Smith Into the American Home: A Case Against Homeownership


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