Edward Lotterman

Economic news had an upbeat ring this week, at least on first impressions.

President Donald’s Trump’s nomination of Kevin Warsh to chair the Federal Reserve Board was broadly characterized as “well, it could have been a whole lot worse!”

Then many economists, including me, greeted news of a continuing slide in the value of the U.S. dollar against virtually all other major currencies by saying, “well, it really isn’t as bad as many people think.”

As songwriter Harold Arlen advised us in the middle of a war that killed 70 million people, one should always “Ac-Cent-Tchu-Ate the Positive” regardless of how bad things get.

But it is also prudent to understand the full scope of these developments and how they affect us all.

So start with the Fed chair nomination. Warsh is not as highly-recognized an economist as Ben Bernanke and Janet Yellen were before they were named chair. But fame as an academic does not have a great track record.

Paul Volcker, a great American of the 20th century who, like Gen. George Catlett Marshall, combined high intelligence with tremendous resolve and moral courage, had an MA from Harvard and coursework at the London School of Economics, but no doctorate. Willian McChesney Martin, perhaps the greatest Fed chair ever, had a BA in English and Latin from Yale with some coursework in econ at Columbia, but no advanced degree.

At the other end of the scale, Arthur Burns, the near single-handed cause of the great inflation of the 1970s, was the most highly honored scholar to hold the Fed post. His election at age 39 as a fellow of the highly prestigious American Statistical Association was followed by identical elections to American Academy of Arts and Sciences and the American Philosophical Society. He was president of the American Economic Association and one of his students, Nobel Laureate Milton Friedman, said Burns was one of two professors who inspired him to become an economist. Yet despite all these accomplishments, Burns not only allowed inflation to gather momentum, but did so by colluding politically with the White House unlike any other Fed chair.

So the fact that Warsh has a mere JD from Harvard Law School should not be held against him. Moreover, he is experienced, including five prior years on the Board of Governors during the great financial crisis of 2007-09. His nomination to the Board at age 35 in 2006 was a minor scandal because at that time, he had virtually no obvious qualifications. It was openly acknowledged that his choice back then was prompted by a donation of at least $300,000 to the re-election campaign of President George W. Bush by Warsh’s in-laws, owners of the Estee Lauder cosmetics empire.

However, despite his thin background, when the financial crisis of that decade broke out, Warsh was by all accounts knowledgeable and effective in the Fed’s efforts to prevent a disastrous meltdown of financial markets. And after leaving the Fed he has requited himself in a number of scholarly, managerial and corporate directorship positions. He is now 55 and has a solid track record.

This contrasts with “the other Kevin,” as Trump deemed him, Kevin Hassett, who has gotten much more ink. Within the economics discipline, if not regarded as a buffoon for his slavish attachment to Trump, Hassett is seen as a lightweight whose career has included a lot of time at institutions funded by conservative plutocrats like the Koch Brothers; during Trump’s first term, many of Hassett’s policy assertions got harsh criticism outside of the administration.

Christopher Waller, a current Fed governor and Bemidji State B. grad with a Ph.D. from Washington State, probably has a more sound background than either of the Kevins. But while appointed to the Board by Trump in 2020 and supporting many actions Trump wants, Waller somehow did not have the same level of regard in Trump’s eyes as did Warsh. That can best be explained by the fact that the president has little real interest in the tradeoffs or long-run implications of policy issues. Trump reacts on a short-term basis driven by how outcomes will affect his personal status. Waller is too committed as a policy analyst for that.

But then, while Warsh is not a policy wonk, choosing him raises the question, “what the heck was Trump thinking?” Warsh may mesh personally with Trump or Treasury Secretary Scott Bessent. He may be viewed with favor by the Wall Street operators who fund Trump. But he is a harsh critic of the 21st century Fed that he, himself, helped create 20 years ago. In this he is right.

Yet not for reasons Trump would necessarily support.

By pumping far more money into the economy on an on-going basis, the contemporary Fed has gone far beyond what the congressional creators of the original system had in mind in 1913. It is far beyond what was envisioned when the Fed was overhauled in the 1930s with the creation of the seven-member Board of Governors and the 12-member policy-making Federal Open Market Committee. Warsh is far from alone in thinking that it needs to be reined in. I, myself, think that true.

The problem is that doing so necessarily would entail a harsh crimping down on the measured money supply specifically, and the broader level of liquidity generally. In other words, it would mean raising interest rates pretty much across the board, including on home mortgages and on what the U.S. Treasury has to pay on every new issue of its bills notes and bonds — the short-, medium- and long-term national debt.

However, this directly counters what Trump incessantly calls for — lower interest rates, “the lowest of any country in the world.” As Fed chair, Warsh would surely be pressured to do Trump’s bidding in the same way current Chair Jerome Powell has been, relentlessly. In other words, do exactly the opposite of what’s needed to rein the Fed in.

And therein lies the dilemma. Trump wants lower rates. But that would raise the market prices of houses, cryptocurrencies and publicly traded investment funds specializing in “private equity” and “private debt” sharply. The Donald would be outraged, not pleased.

And so, to the dollar.

By making interest earnings in our country greater, higher interest rates might also reverse the fall in the value of the dollar relative to other currencies. That might please the president, but it would also erase the benefits of a weaker dollar to farmers, U.S. car manufacturers and steel mills. A weaker dollar means U.S. products are cheaper to foreign buyers and foreign products more expensive to U.S. buyers. In effect, it functions as a tariff on imports and a subsidy to exports.

Agriculture, where the hangover from a four-year spree of bidding up land prices is coming home with a vengeance, is in particularly bad shape. Conditions are bound to get worse for a crucial MAGA-friendly voting bloc just as a pivotal midterm election nears. (But haven’t we seen Trump supporters voting against their own financial interests before? Don’t take anything in politics for granted.).

In other words, if Warsh were to succeed in persuading his colleagues on the Board and FOMC in slimming down the Fed — something not at all sure given the limited power of the Chair — there would be difficult tradeoffs. The president flees these tradeoffs as a matter of course and flip-flops unpredictably when pressures rise. So Warsh will not have an easy time. Neither will the rest of us.

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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.