By John Tamny
In a recent weekend interview with the Wall Street Journal, Hoover Institution senior fellows John Cogan and Kevin Warsh concluded with the properly optimistic, and laudable assertion that the U.S. can “again become a ‘beacon to the world’ if its leaders ‘choose to empower the individual, encourage the development…of new ideas, and ensure the fidelity of institutions to their mission.” And while they arguably overstate the notion that the U.S. isn’t still the world’s “beacon” given the basic truth that a bad day here is an amazing day anywhere else, who but a stubborn fool would suggest there’s not room for improvement? Of course there is, and the scholars have written a paper (“Reinvigorating Economic Governance”) meant to put the U.S. on the path from amazing to spectacular.
Without having read the paper yet, it’s not unreasonable to at least question some of the suggestions offered within the interview. In particular, it’s hard not to hope that at least some of the suggestions will come in the form of reflection, or self-critique.
Warsh was at the Fed when, by his own past admission, the head of the central bank (Ben Bernanke), essentially called for an “anything” approach to stopping the economic decline in 2008. It was as though the U.S. economy was a blob, or perhaps more ridiculous an engine that just needed more fuel. Bernanke felt a failure to save institutions like multi-decade bailout recipient Citibank would bring on an economic decline that would make the 1930s seem tame by comparison.
What Bernanke desired was not only rooted in falsehood (Germany and Japan could quickly bounce back from the death of millions and countries reduced to rubble, but the U.S. couldn’t survive the bankruptcy of Citi, Goldman Sachs, and Morgan Stanley?), he got it backwards. How we know he did is the quote that begins this piece, and that concludes the interview with Cogan and Warsh gave to the Journal.
The scholars are properly clear that an economy is not a blob, nor is it an engine; rather it’s a collection of individuals. Individuals require human and physical capital to bring the “new ideas” that Cogan and Warsh properly elevate to life, yet bailouts and other market interventions by their name freeze the past in place, all the while limiting the flow of precious resources to their highest use. It should be added that at least in its early days, the Fed opened its doors as a lender of last resort to solvent institutions, only for it to become quickly apparent that no solvent institution would ever come to the Fed for a loan.
It all raises a question about how serious Cogan and Warsh are about real change. How much will Warsh in particular critique his former boss? It’s important because if the scholars truly believe their words, then they must surely look back at 2008’s machinations from the Fed as not just barriers to recovery, barriers to new ideas and enterprising individuals, but also arguably the cause of the “crisis.” Think about it. If market intervention from non-market players is bad in good times, and it is, it must be truly bad in trying times when it becomes most important for resources to reach their best use. Again, will Warsh offer a public critique?
Judging from the interview, it seems he won’t. Instead, he punts toward what happened after. Cogan joins him. They “contend that the ‘Fed’s continued backstopping of financial markets’” via QE and other forms of intervention have “retarded the generation of new ideas in the economy.” Implicit in what they argue is that markets are a bit thick, and that the meddling with price discovery that is so essential to economic progress doesn’t matter when the Fed is the meddler. Put another way, the Fed can decree good times for years, and perhaps decades? If so, what happened in Japan? Why no rally there despite decades of QE? Why a much more muted rally in Europe?
More important, why would markets be fooled in the first place? The answer is that they weren’t. The QE that Cogan and Warsh intimate as the source of modern market exuberance quite simply wasn’t. Their own words tell us why this is true. Figure that Warsh exited the Fed in 2011? What was the world’s most valuable company then? Memory says it was ExxonMobil. In 2022, it’s no longer even part of the Dow Jones Industrial Average. Looked at more broadly, Warsh started at Morgan Stanley around when the 21st century began. At the time, GE was the world’s most valuable company, Enron was the best managed, Tyco was billed as the next GE, AOL and Yahoo were the most prominent internet companies….As the aforementioned reigned supreme, Amazon was Amazon.org, Apple was limping out of near bankruptcy, Google was private and largely unknown, Facebook wasn’t formed yet because Mark Zuckerberg was still in high school, Tesla hadn’t opened its doors yet….
Hopefully readers see where this is going. Without defending the Fed for a second, to pretend that its interventions backstop markets is pandering, it’s baseless, it’s insulting to the world’s most dynamic economy (on par with Barack Obama’s “you didn’t build that”), plus it gets things backwards. Assuming the Fed could hold the present in place (which is all the Fed would be doing assuming it could exist as a barrier to market decline), its actions would in reality bring on the mother of all market corrections. If you doubt this truth, and believe Cogan and Warsh’s assertion that the Fed can decree market booms, just re-read the previous paragraph about what dominated when the 21st century began, and what dominates now.
A truly honest paper would also require Cogan to critique his co-author. Cogan correctly asserts that without the errant lockdowns in response to a virus that had been spreading around the world for months, the “fiscal packages” passed by Congress would have been unnecessary. So true. Except that Warsh was prominently writing opinion pieces when lockdowns were at their most stringent explicitly calling for all sorts of federal intervention meant to prop up businesses being suffocated by the lockdowns. The “fiscal packages,” including Warsh’s calls for the Fed to provide “liquidity,” were the ultimate non sequitur. Illiquidity doesn’t just happen as much as it’s a consequence. Which means Warsh was looking at symptoms, instead of the lockdown problem. One guesses he knew this, but just as he was unwilling to speak truth to Bernanke’s power in 2008, it seems he once again wasn’t willing to rock the boat. As Wall Street Journal columnist Andy Kessler put it in a column from yesterday, if you’re a critic you’re on the outside. Warsh is an insider.
Which brings us to inflation. Historically inflation was monetary, and by monetary, inflation was the effect of the dollar declining versus foreign currencies, gold, commodities more broadly, etc. This is notable simply because Warsh was appointed to the Fed by President George W. Bush, and during Bush’s presidency the dollar price of gold went up four times, oil did too, and the dollar fell substantially against the every major foreign currency.
The above is worth mentioning only because Warsh doesn’t, at least in the interview. Instead, he tacks toward another non sequitur with his assertion that inflation is running higher, and in Warsh’s words, “it’s no coincidence that it’s happening at the same time as they’ve wandered into other areas outside their remit such as ESG and the role that the Federal Reserve should play with respect with racial equality.” About both issues, the view here is that the Fed should stay out of both. No mission creep. Still, is Warsh serious in wanting us to believe that the Fed’s pandering on ESG in any way measures up to what occurred while he was at the Fed, and working for Bernanke? Warsh decries those who “want to adapt a set of industrial polices, to ensure that certain institutions are too big to fail, to make some private institutions quasi-public so that they’ll take their orders from central command.” Full agreement with Warsh here, but then this is what the Fed and the Bush administration did. Is this a veiled swipe at Bernanke and Bush?
Better yet, what do Warsh and Cogan expect? Cogan at least decries the lockdowns; lockdowns that to varying degrees eviscerated trillions of global commercial relationships entered into by billions of workers over the decades. In other words, the prices that prevailed pre-lockdown were miracles born of remarkable symmetry. To presume those same prices would prevail today is much less than serious. That prices for all manner of goods are higher is a statement of the obvious. What’s not obvious is that these higher prices are “inflation.” There’s an ocean of difference between rising prices and inflation, but neither Cogan nor Warsh seem to acknowledge this truth.
The scholars critique China on the supposition that the CCP controls much of the economy, but if true, China wouldn’t be a discussion point. Cogan must in particular know this given his service to Ronald Reagan. Reagan properly knew the Soviet Union would fail because it was there that the powers-that-be really and truly controlled the economy, with disastrous results. Conversely, China’s cities increasingly shimmer with tall buildings, McDonald’s everywhere you look, Starbucks, Apple Stores, Nike Stores, and on and on. This rates mention simply because if China’s economy were state planned, there’s no way so many powerful symbols of U.S. capitalism would be so prominent there. Are U.S. companies dense to Chinese communism in the way that U.S. equity markets are apparently dense to the Fed’s meddling?
Cogan is so right that what drives the real U.S. economy is “millions of individuals working, investing, saving and making allocation decisions….” You see where this is going. It’s hard to disagree with Cogan and Warsh, but easier to considering past and present.
Simply put, Republicans close to Warsh and Cogan quarterbacked all manner of policies and policy solutions inimical to the individual pre-2008, certainly during 2008, and in 2020. It’s all important given the basic truth that it will be hard for Republicans to lead a charge to more freedom in the future absent a willingness from them to acknowledge their substantial role in bringing us to where we are today by virtue of them taking it away in the past.
Originally published by RealClearMarkets. Republished with permission.
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