A conversation that best reflects Walsh’s policy stance: Inflation is a choice made by the Federal Reserve.
Here is the English translation as requested, without explanations or notes: ---
Recently, Trump’s confidants have recommended Kevin Warsh as the new Fed Chairman. If Kevin Warsh takes over the Federal Reserve next year, the market might witness one of the most significant policy shifts in decades.
Earlier this year, in a conversation with Hoover Institution host Peter Robinson, Warsh did not shy away from pointing out the chronic maladies in the current Fed system and asserted: “Inflation is a choice.” He refuted excuses that attribute inflation to supply chains or geopolitics, insisting that the central bank is fully capable of deciding the price level and that the present situation is the result of the Fed’s mistaken choices.
Warsh's core argument is a critique of “complacency.” He points out that after the "Great Moderation," the Fed mistakenly believed inflation was dead, and thus maintained an overly large balance sheet during non-crisis periods. In Warsh’s words: “When you keep printing a trillion here and a trillion there, sooner or later it’ll come home to roost.” He believes that the Fed did not withdraw in time during the stable period from 2010 to 2020, so when a real crisis (such as the pandemic) arrived, it was forced to cross more red lines, resulting in today’s inflationary aftermath.
As a potential successor as Fed Chairman, Warsh is not just a critic but also a reformer. He has proposed specific policy paths: “If we quiet down the printing press a bit, our interest rates can actually be lower.” This is a crucial incremental insight—Warsh is likely to favor controlling inflation by shrinking the balance sheet (QT), thereby creating space for lower nominal rates.
This logic aligns with the Trump administration's desire to lower borrowing costs. He terms this strategy “pragmatic monetarism,” advocating that the Fed and Treasury must “do their own jobs”: The Fed manages interest rates, the Treasury manages fiscal accounts, and the two must reach a “new accord” to address the problem of excessive debt interest—not muddle boundaries and entangle like in the past.
Addressing market concerns about “radical reform,” Warsh has offered reassurance. He makes it clear that it is not necessary to “smash and reform” the Fed, but rather to pursue a “revival.” He gives this analogy: “It’s like refurbishing a great golf course, inspired by the past but not shackled by it.” He looks forward not to a U.S. recession, but to an AI-driven productivity boom reminiscent of the Reagan era. As long as policy returns to rationality, the U.S. economy will show extraordinary resilience.
With current Fed Chair Jerome Powell set to step down in May 2026 (note: his Governor term ends January 31, 2028), former Fed Governor and Hoover Institution fellow Kevin Warsh has become one of Trump's top choices for the nomination. At this key time window, revisiting Warsh’s in-depth interview at Hoover in May is likely essential to understanding the potential future path of U.S. monetary policy over the next four years. Not only was Warsh a witness to the 2008 financial crisis, he also remains a steadfast monetarist.
Key takeaways from the interview:
Return to core mission: The Federal Reserve has deviated from its mission to maintain price stability, experiencing “institutional drift” and must reform to regain credibility.Inflation is a policy choice: Warsh says plainly: inflation is not an accident caused by Putin or supply chains, but the Fed’s “choice.” The central bank is fully capable of controlling prices by controlling the money supply.Fed “Restore not Revolution”: For the Fed’s future, he advocates “restoration” rather than “revolution”—keep the core architecture but remove errors of the last decade, not overturn entirely. The heart of reform is to shrink the $7 trillion balance sheet to curb inflation, which in turn may create space for lower rates, with such cuts being more important to the real economy than mere rate moves.Severe criticism of normalized QE: He supported the emergency (QE1) during the 2008 crisis, but strongly opposes continued money printing during stable periods (such as QE2, QE3 and post-pandemic), arguing that it is not only ineffective but fuels asset bubbles. He believes this broke the original “exit after crisis” consensus, leading him to resign in protest.Pragmatic monetarism: Warsh charts a unique path: Inflation control by shrinking the balance sheet (QT), thereby creating room for lower nominal rates.Fed’s “mission creep”: Warsh posits that the Fed has shifted from banks’ “lender of last resort” to a ubiquitous “first intervener”—this overreach must stop.Treasury and Fed must stick to their roles: He calls for a new Accord like 1951 to clarify that the Fed controls rates; the Treasury manages fiscal accounts; the two must not mix roles.Fiscal-monetary collusion: He points out that Fed buying of Treasuries (fiscal dominance) implicitly encourages unchecked Congressional spending, driving soaring U.S. debt.Optimistic on U.S. productivity and AI: Despite policy criticism, he remains extremely bullish on America’s future, believing AI and deregulatory trends will bring a productivity boom akin to the 1980s.
[Full Interview Transcript]
Recording date: May 28, 2025
Host: Peter Robinson
Guest: Kevin Warsh
Organization: Stanford Hoover Institution – "Uncommon Knowledge"
(The following is the Chinese translation, assisted by AI tools)
Host Peter Robinson 00:00
The Federal Reserve System has been responsible for maintaining price stability and fighting inflation for over a century. How has it done? Today’s guest says it could have done better. Kevin Warsh joins “Uncommon Knowledge.”
Welcome to “Uncommon Knowledge,” I’m Peter Robinson. Kevin Warsh hails from upstate New York, with an undergraduate degree from Stanford and a law degree from Harvard. Mr. Warsh started working on Wall Street and in Washington early in his career. In 2006, President George W. Bush appointed him to the Fed Board of Governors, where he served until 2011. Note: during the 2008 financial crisis—one of the greatest crises in half a century—Warsh was at the Fed. He now splits his time between New York and Stanford, works at an investment firm in New York, and is a fellow at the Hoover Institution. Kevin, welcome back to “Uncommon Knowledge.”
Kevin Warsh 01:10
Glad to be back. You’ve hidden the most important thing, which is that the investment firm I happen to work for, is run by one of history’s greatest investors: Stan Druckenmiller (Soros’s former chief strategist). But you’re trying to keep it low key, and I appreciate that. No, I just want to praise my friend.
Peter Robinson 01:24
Sure, keep going, since I want him on the show too. Let’s butter him up now. Okay, Kevin, first question. The Fed was created over a century ago to maintain our currency—the dollar's—value. Two quotes. First, the late legendary investor Charlie Munger: "Destroy the currency, heaven knows what will happen."
Peter Robinson 01:53
Second quote comes from your speech to the Group of Thirty bankers this April. I’ve picked out your critique of today’s Fed: institutional drift, failing statutory obligations, fostering massive federal overspending, overweighted role and underperformance. Kevin Warsh, you’re attacking a holy institution. We all rely on it daily to ensure our money's integrity. What do you want?
Kevin Warsh 02:33
In central banking, we’re taught to bury our criticisms. In that speech, I didn’t do a great job. Peter, I described it as a love letter, not a cold critique. Maybe you didn’t feel it as love. Not sure current board members...
Peter Robinson 02:53
I skipped the mushy bits.
Kevin Warsh 02:54
It’s a love letter because, as your intro implied, this institution matters. It’s a love letter because if it reforms itself, it could achieve greatness—for itself and the nation. But yes, it’s time to get things back on track.
Kevin Warsh 03:14
I should add: This is America’s third central banking experiment. It’s the third not because the first two went well—they messed up, right? It’s not like winning a third Super Bowl—the more, the better. The first two failed because they lost the public’s recognition and the ability to deliver on promises.
Kevin Warsh 03:37
This isn’t a history lesson, but think Jacksonian era: The central bank seemed to focus only on East Coast special interests, forgetting the Midwest.
Kevin Warsh 03:54
That’s similar to my concerns now. This central bank’s been here a century. If they can self-reform, they’ll gain another century of glory. Otherwise, I worry. Okay.
Peter Robinson 04:07
We'll return to your speech later, but first, walk me through the basics. I’m a layman with basic questions. Give me some time.
Peter Robinson 04:25
The Fed was founded in 1913 with—this may be oversimplifying—power to set interest rates and regulate money supply to achieve price stability. That’s huge. How has it done?
Peter Robinson 04:41
Nobel laureate Milton Friedman said in 1994: “No American institution has a higher public profile with such a poor record. The Fed began in 1914, doubled prices in WWI, caused a major recession in 1921. The Great Depression’s main culprit was surely the Fed. After that, it doubled prices again after WWII, funded inflation in the 1970s. The Fed’s harm far outweighs its good—I’ve long advocated abolishing it.” Kevin, why do we need the Fed?
Kevin Warsh 05:29
So…
Peter Robinson 05:31
You know all this. Milton Friedman was at Stanford during your undergrad.
Kevin Warsh 05:35
Milton… I was lucky to be his student. He made a huge impact, not just for me but generations of students. I spent time in Hoover’s archives studying Milton, his correspondence—including with Paul Volcker, Alan Greenspan, as covered in Jennifer Burns’s book.
Peter Robinson 06:06
Dates: Volcker was appointed by Carter in late 70s/early 80s...
Kevin Warsh 06:14
Mid Carter administration. Don’t recall exact date.
Peter Robinson 06:17
Then Reagan reappointed him; then Greenspan, till Bernanke in mid-2006 crisis?
Kevin Warsh 06:26
17 years, until Bernanke took over in 2006.
Peter Robinson 06:30
Okay.
Kevin Warsh 06:30
I recall as a junior White House aide, when Bernanke came from the Fed to the White House, then wanted me at the Fed with him. That’s how I remember that day.
Kevin Warsh 06:55
Back to Milton. Strikingly, in his letters, he always returned to reassessing his own ideas, reexamining data and conclusions year after year. He found comfort in methods and new ways of economic thinking—what became the “Great Moderation.” I wouldn’t say he saw the Fed as purely bad—there were good and bad periods. My guess is, if he saw the last five or six years’ “Great Inflation,” he’d have foreseen and warned about it—and likely the Fed would…
Peter Robinson 07:46
Not listen. Okay. Another basic question. Friedman’s famous: “Inflation is always and everywhere a monetary phenomenon.” Since the Fed controls the money supply, inflation is ultimately always its fault. Can you describe what Volcker did? Carter appoints Volcker during the highest inflation since the Civil War; when Volcker left, inflation was about 2%. So Friedman’s right: The Fed is always responsible.
Kevin Warsh 08:34
Yes, so I share Milton’s view—as you said, “Inflation’s a choice.” Congress gave the Fed responsibility for price stability, especially after a 1970s review—one institution tasked with prices. No more blaming others. Go fix it, central bank. But over recent years, you wouldn’t hear inflation described as a choice. In the past 5–6 years, in the lead-up to Great Inflation, what did people blame? Putin and Ukraine. Yes. COVID and supply chains. Milton would be furious. I’m, in my own understated way, uncomfortable with those excuses, too. Those things do affect prices—after all, in a market economy, Walmart’s prices change daily. That’s how markets work. It’s not the central bank’s job to police those prices. That’s not inflation. That’s a one-off price level change of goods. Inflation is when those changes become self-reinforcing—higher prices beget higher prices. It ends up affecting every family’s table, every company's board, because decision makers no longer know where prices will go. That’s not about Putin or COVID. That’s about the Fed. That’s about the central bank. I’m afraid, lately, because the central bank has become part of our culture, people say, “Well, it’s not my fault, it’s someone else’s.” That’s where Milton would be most angry. The central bank can achieve any price level, any inflation level it wants. We may dislike how they do it—but blaming others is contrary to economic history.
Peter Robinson 10:35
So, not just “inflation is a choice,” but “sound dollars are a choice.” Volcker proved it. We suffered inflation—Fed got it under control. One more basic question.
Kevin Warsh 10:59
They got inflation under control—and, this is a bit of an economist cliché—but after the “Great Moderation” period, complacency set in. For a generation, prices were stable. Some thought that was easy—that inflation control was just us all becoming great at our jobs. Maybe we became too complacent, but economics isn’t that simple. COVID and the 2020 crisis shifted our focus.
Peter Robinson 11:42
You’ve said this word a few times—let’s define it. “Great Moderation,” starting mid-80s, Volcker and Fed (in Reagan years) reduced inflation to low single digits, with continued growth until the 2008 crisis, only brief recessions—a quarter century of expansion. That’s the “Great Moderation?”
Kevin Warsh 12:12
Exactly right. Not every year was perfect; central bankers made mistakes, but they were minor and manageable. For the audience, inflation remains an abstract concept. We hope price movements are so small, no one talks about them. Then we’ve done our job. But in the last five or six years? Nearly everything, anything—people are talking about it. Right?
Peter Robinson 12:42
Last basic question. Gold. Nixon ended the gold standard in 1971. Before that, the dollar was redeemable for a set weight of gold (commodity basket). That constrained money supply.
Peter Robinson 13:00
Journalist/investor James Grant wrote last year: “The opposite of the gold standard—the system America runs today—might be called the ‘PhD standard.’” It’s a system where economics PhDs freely adjust rates. Grant suggests, if not gold, at least some objective commodity basket.
Peter Robinson 13:31
Milton Friedman, at about the same time, argued to scrap the Fed; replace it with a mechanically announced fixed money supply increase each year—very transparent, allowing markets ten-year planning. Both want objective standards; some way to constrain money supply, rather than leaving it to Fed officials’ subjectivity. What’s your answer, Kevin Warsh?
Kevin Warsh 14:24
There’s no “good old days” to return to. Many right-wing friends want to bring back gold. The world’s changed. If we had made different choices, maybe things would be better—or worse. But we have to deal with the here and now. That’s Orwell. And there has to be a “third way” between “let the machine do it” and total central bank discretion.
Kevin Warsh 14:52
Maybe you and I learned from Edmund Burke the essence of conservatism: resisting clever schemes. We central bankers—past and present—need to resist clever schemes. There’s a way to clarify the central bank’s reaction function to incoming information. If Milton were here today—I’d hesitate to speak for the great man—I think he’d say, “There’s too much scientism, too much scholastic philosophy, trying to precisely define what we still don’t fully understand.”
Kevin Warsh 15:27
Most of us in economics, if better than average, focus on the numbers to the left of the decimal, not the right. If we were smarter, we’d be physicists and mathematicians. Most of us started in those fields, moved to economics—honestly, because it’s easier. So, we don’t perfectly understand how the economy works. If we did, we’d make machines and formulas. But the economy is dynamic; it changes daily. So I hesitate to say we have a perfect rule. Okay.
Peter Robinson 16:07
Moving to recent history—yours and the Fed’s—including the financial crisis. You were on the Fed during the 2008 crisis, which caused the worst contraction since the Great Depression; America...
Kevin Warsh 16:27
10% unemployment. Are you suggesting causality? I’m not...
Peter Robinson 16:31
Just steering the discussion. Pure luck. The Fed took many actions, but perhaps most dramatic was injecting massive liquidity. For scale: In 2008, Q1 to Q2, the Fed’s balance sheet—indicator of bank system reserves—doubled from $1 trillion to $2 trillion in one quarter. You’ve written you strongly supported that decision. So, before QE2, 3, 4 (which you worried about)—first explain why you supported the 2008 liquidity injection.
Kevin Warsh 17:26
First, we keep saying “money.” On this I should clarify. Milton believed money policy and inflation are about “money.” That’s heresy in modern academia—rarely taught in top econ 101 classes. Most professors belong to another school—not the money/currency school, but the more Keynesian. In Keynesian schools, money is barely mentioned. If you check Fed transcripts—what’s said in FOMC internal meetings—you have to search hard for the word “money.”
Kevin Warsh 18:07
I think money, oddly enough, is tied to monetary policy. It’s been absent from the discussion. That’s part of why inflation returned. Because, well, even Milton wouldn’t stick exactly to his old model—he’d say money is related. In pre/post-pandemic inflation buildup, we saw money surge—whether measured by the money supply or velocity.
Peter Robinson 18:37
MV=PQ—I’m struggling to remember my old classes… I’d assumed this was central at the Fed.
Kevin Warsh 18:46
It’s not present in most modern economics discussions. Milton used to say—this is my last tribute to him, then we’ll move to current events—yes, Milton: I was about 19 or 20, in a small group at the table. I asked him a question, maybe trying to show off, pretending to know something I didn’t. He said, “Kevin, the only thing we know in economics is Econ Principle #1. Everything else is made up.” I remember thinking, Peter, maybe the old man was confused, his time had passed, Nobel was a while ago. Until the crisis you mentioned, I realized he was absolutely right. Nobody saw it coming—what we really know is taught in Econ 1. At least before other dominant schools took over 101, teaching money matters in monetary policy. I still believe that.
Peter Robinson 19:50
As we sit here, it’s almost 20 years since the crisis. Take a bit and explain what it felt like? You were in DC as a Fed Governor, calling New York friends—how bad was it? What was needed?
Kevin Warsh 20:10
That crisis? Sometimes I teach at the nearby business school. Over the years, I’d discuss the global financial crisis—students would look, some remembered as kids their parents coming home, or seeing it on TV. Now, for them, I might as well be talking about the Great Depression—right? It was long ago.
Kevin Warsh 20:35
How did it feel for me? I was 35, got the job thanks to President Bush and Bernanke. Lovely office for 6–8 months—life was good. Someone tended the fireplace; someone else refilled my water pitcher. I thought all was well.
Kevin Warsh 20:58
I had no idea it was the calm before the storm. In hindsight, I think it was scarier than it felt, since we were all sort of together in the bunker.
Kevin Warsh 21:10
I don’t know if Bernanke agrees with what I said at IMF G30 a few weeks ago—he’s a great battlefield commander. We were in the bunker; he was open to debate among a small group on what was happening and why—even open to heresy. Not sure such heresy is tolerated now.
Kevin Warsh 21:42
In the darkest days, maybe we earned a “B” grade. We could have done more, sooner. Made lots of mistakes, had some successes. The real economy deteriorated faster than any historical reference. Stock markets fell 60–70%. Perhaps worst: Treasury auction—the world’s most important security, synonymous with the dollar—had low participation; huge bid/ask spreads. We feared the U.S. system was at a cliff’s edge.
Peter Robinson 22:24
So, if I understand, liquidity injection was an emergency measure to keep markets functioning; theory being: keep markets open, people with enough cash to trade. That’s the best, fastest thing to do. The market itself would gradually sort things out, I guess. Right?
Kevin Warsh 23:05
Back to first principles—that third central bank experiment, created in 1913 in response to a panic. This central bank was created to deal with panic. In the past—now called deep recessions, financial crises—when the market fails, when bid/ask spreads are wide, the central bank’s job is to show up with "dirty" money to get markets going—not to set prices, but to let buyers and sellers meet, provide liquidity when no one else will.
Kevin Warsh 23:57
We’re the banking system’s backstop—not just for America, but the world. If we mess up, it’s worse for others. That’s what we did in the crisis. Our right-wing friends, including some respected voices, thought we should let the system burn, phoenix from the ashes. No need for rescue.
Kevin Warsh 24:23
That’s not my view. The central bank was created for panics. We hit one. We recognized late but showed overwhelming force. Your word, “emergency,” is right. Ready to cross more lines in a crisis—in a sense, reaching our power’s edge, as Volcker said. But we made an implicit promise to each other at the table, and to Treasury and Congress (and the rest of government).
Kevin Warsh 25:00
When the crisis ends, we’ll exit. We'll return to being a boring central bank. That should be on p.12 of the news, six lines: “Fed met, raised or lowered rates by ¼ point.” But the central bank has since been on the front page. It now has a much larger role than the Founders or original architects would have wanted.
Peter Robinson 25:30
Let’s review from 2008 till now—I may get it wrong, so correct me. QE1: Quantitative easing; injecting funds into the system. QE1 in 2008—we just covered. Fed’s balance sheet went from just under $1 trillion to just over $2 trillion. Kevin supported it. QE2 in 2010: Balance sheet up to just under $3 trillion. QE3 in 2012: Up to $4 trillion. QE4 during COVID lockdown (2020)—an emergency. By 2022, balance sheet hit $9 trillion. Since then, down to $7 trillion. As you noted, that’s almost 10× the size from when you joined (in 2006). Okay. We’ve covered pre-COVID QE1, QE2, QE3.
Kevin Warsh 26:52
When you keep printing a trillion here, a trillion there, it eventually catches up, Peter. In Washington, various agencies might spend millions here, billions there; our economy is huge and robust, we can absorb that—even imperfect projects. But when the Fed prints trillions, especially during stable periods, it changes everything. It’s almost a signal to Congress: We do it, so can you. On QE: QE1, we tried marketing it as “credit easing”—that worked for about a week—“Kleacher” ("Nominal Kleacher?"), but "QE" caught on anyway.
Kevin Warsh 27:41
Internally, we debated whether to do it. Story was: Treasury Secretary Paulson issues debt on Monday, Tuesday; we buy them on Thursday, Friday. That sounded like a Ponzi scheme, someone said. Any other way out of the crisis? Some explanations—Bank of Japan had done a small-scale version a decade earlier, but not so large. We didn’t know how it would work—but it did. It was radical. Now, economics textbooks treat it as standard procedure.
Kevin Warsh 28:32
It seemed like a bet, but we needed to take that bet in that moment, so we did. That was QE1. I supported it, with colleagues, on the premise: Dangerous stuff should go back behind glass once the crisis is over until the next. But we never really did that. So the subsequent QEs happened in a period of fairly strong growth, stable markets, prices stable for a reasonable period. We started doing it for no reason, out of season. This raised the bar for what’s needed during a real crisis—whatever you did before isn’t enough. One point: You covered my resume; thanks. I resigned. Yes.
Kevin Warsh 29:26
QE2 launched in 2010; I left in early 2011. Colleagues—including Bernanke, whom I respect as a leader, and others at the Fed—decided to continue.
Peter Robinson 29:44
Their rationale? Make their best case.
Kevin Warsh 29:50
That was: “We don’t see any cost. We’ve found a free lunch.” Asset prices higher, markets more liquid, economy good. If we withdraw, who knows what will happen. In a sense, they broke the original consensus. Did we know what would happen in every scenario? No—economics isn’t like physics, no control group. Unlike physics and math, in economics, “atoms”—individuals—change minds. So, no prediction. But their case: Low cost, big benefit—let’s do more of the same. Okay.
Peter Robinson 30:46
QE4 during COVID. Economist Paul Sheard wrote in 2021: “As the government suppressed economic activity to fight the pandemic, fiscal policy needed to provide household and small business income support… As central bankers demonstrate commitment to hitting inflation targets by radical QE (injecting more liquidity), they gain more credibility in fighting inflation.” Kevin, there’s much to unpack here.
Peter Robinson 31:30
Please unpack.
Kevin Warsh 31:31
In crisis—like 2008 and COVID—you know, I’m known for saying, “If you’ve seen one crisis...” None is the same. But transplanting my 2020 pandemic thoughts—I was a bystander at Stanford and New York—I’d say, yes, that was a time for radical action. But the issue is, for most of 2010–2020, we weren’t in an emergency. That’s when the central bank should step back, yet it was always on the front page. Also, during that relatively peaceful and prosperous period, Congress said—since the Fed buys all the bonds—we can spend trillions. So, fiscal authorities (Congress and President) saw spending as cheap, since the Fed subsidizes by being the main buyer.
Kevin Warsh 32:41
Then, in crisis, yes, I sympathize with my crisis colleagues—do what’s needed during a crisis. But if you treat every day for over a decade as a crisis, when a real one hits, you have to cross even more lines, intervene deeper in private sector. Back to your starting point, the economic agency ceases being “first among equals,” and becomes the world’s dominant institution. You see Republican and Democratic administrations…
Peter Robinson 33:14
And…
Kevin Warsh 33:16
You see Congressmen. Importantly, businesses now hire lobbyists to the central bank for relief. That’s unprecedented—and dangerous. It brings fiscal policy responsibility and accountability into the central bank. For all their good intentions (and even some good decisions), much is not their job.
Peter Robinson 33:42
Let me answer on the Fed’s behalf: Yes, all you said, but here’s today’s reality—Inflation is below 2.5%, and the economy is still growing. So instead of criticizing the Fed, you should say, “Ladies and gentlemen, well done.”
Kevin Warsh 34:07
“Mission accomplished” is dangerous for Washington officials. That’s what you just tried. So let me say: After most crises—like 9/11, the global financial crisis—you get reviews, Congressional studies, blue-ribbon panels: “How did this happen?” Over this “Great Inflation,” I’m still waiting for such review. Instead, we did a bit of clean-up, but the institution still greatly exceeds its proper role, and inflation is still above target. The Fed says it’s doing a review, looking at its targets, with a report coming out in August. I doubt the report will really tackle the serious mistakes. In the past five or six years, prices of goods and services are up over 30% since pre-pandemic, federal spending is up 63%. Five years ago, I don’t recall thinking government was so efficient or well-run. Let’s not sweep these consequences under the rug. Appreciate the snapshot. Situation is better, but the mistake has cost us—mostly the least wealthy bear the brunt.
Peter Robinson 35:37
Let’s—You’ve touched on it, but I want to spell out the Fed’s damage. The Wall Street Journal—As a tribute, you were on both sides of its editorial page the same day, speech excerpt as Op-Ed, and main editorial commenting. That’s bigger than a Nobel. WSJ says: In 2006, when you joined the Fed, federal debt was 34% of GDP. Today, federal debt’s ~100% of GDP, heading for 124%. WSJ quotes your speech: “Irresponsible spending surge after the pandemic. I can hardly excuse the Fed’s role in national profligacy. Fed leaders encouraged spending during tough times, but failed to call for discipline during growth and full employment.” Now, I’ll flip and ask: Ferguson recently pointed out: No nation ever remained a great power after debt interest exceeded defense. Rather than ringing the alarm, you’ve been too gentle on the Fed—this is criminal.
Kevin Warsh 37:31
Now you want me to defend the Fed.
Peter Robinson 37:34
Role reversal. Let me see how you answer…
Kevin Warsh 37:39
I believe the Fed is essential; it can reform. For any institution, “Physician, heal thyself” is vital. It’s not too late, but they must ask and answer hard strategic questions—not just brush things aside. Congress too deserves blame: reckless, irresponsible spending—and the Fed’s bond-buying, sending signals (“water’s warm, come on in!”), made spending easier to justify. But presidents and Congress pushing massive spending in peace and prosperity deserve major criticism. So—it’s dangerous.
Kevin Warsh 38:37
Finally, irresponsibility is two-way: Fiscal spending (Congress) and money printing (Fed) are linked. When one is irresponsible, the other often is too. The damage is never obvious at first. As Milton famously said, “Long and variable lags”—but there’s no free lunch here. Bigger point: When the key economic institution treats normal times as a crisis, the world follows. No one matches us in irresponsibility. Others long saw America: They may dislike us at G7, G10, G20, but pre-2008 they thought: “Americans—maybe pushy, but they know banking.” Until we didn’t. Then pre-COVID: “They believe in federalism, freedom, agency”—until we didn’t. The central bank: “They maintained price stability for 40 years—until they didn’t.” When these institutions fail on the big things, the world is watching. Today, they’re watching the central bank. If the Fed gets its act together, vanishes from the headlines, Congress becomes more responsible on spending—America can be a shining city on a hill again, Kevin.
Peter Robinson 40:24
Okay. Herbert Stein, late Nixon economic advisor—never worked at the Fed…
Kevin Warsh 40:38
Not as far as I know.
Peter Robinson 40:39
He used to say: “If something can’t go on forever, it won’t.” We’ve been running what amounts to a Ponzi scheme: Treasury issues bonds, Fed buys them. It’s close to running the printing presses. Why do markets, why does the world still buy U.S. Treasuries? Why hasn’t the market punished us?
Kevin Warsh 41:17
Let me clarify…
Peter Robinson 41:18
Because it seems Bernanke was right. There’s no cost.
Kevin Warsh 41:24
That was Peter Robinson, not me, throwing out the “Ponzi scheme” label. I actually believe America—I’d rather have our hand than anyone’s. I think we’re on the verge of a productivity boom. U.S. growth matters more for handling the debt than anything else. For data: Look at CBO’s report—I’m on their economic advisors panel. They don’t always listen to me. They say 10-year growth is projected at 1.7% or 1.8% annually. My bet—um, in ten years…
Peter Robinson 42:17
They don’t know. I’m not on your panel, but they don’t know ten years out.
Kevin Warsh 42:25
We don’t know ten minutes out—so yes. But whatever government does, my bet is growth will be higher. America is an especially productive society, even after 15 years of QEs. Americans will show great vigor and adaptability. If GDP grows 1% faster than CBO projects, that means an extra $4.5 trillion to the federal treasury. Good way to deal with debt. It’s not too late. On “if it can’t go on...”:
Peter Robinson 43:16
Where’s the market’s warning signals?
Kevin Warsh 43:18
Or our own markets—we don’t want to reach the tipping point with yellow and red flashing lights, even now—I think we’re the best, on track for hopeful times. We see some worrying signs; not unfixable. The longer we wait, the closer to the edge. Best way to avoid the edge is not to get near it. Okay.
Peter Robinson 43:52
House Budget Committee's March paper: “To temper inflation from Biden deficit surge, the Fed hiked rates 11 times (March 2022 – July 2023). Average real interest on national debt rose from 1.7% to 3.4%; net interest cost went from $352 billion to $881 billion.” That $881B means interest now exceeds Pentagon spending (~$800B).
Peter Robinson 44:36
So, Kevin, with $7 trillion on the Fed’s balance sheet, how does it shrink that without hiking rates—how does it take funds out? We’re stuck—a tough dilemma. The present board might say, “Kevin, can’t you see? We’re doing our best.” So, what reform agenda do you offer?
Kevin Warsh 45:09
This might upset some viewers, Peter, so I’ll offer a “trigger warning”—the current government inherited a mess—fiscal and monetary. It has a responsibility to fix it. No one said it’d be easy. We didn’t get in overnight; won’t get out overnight.
Kevin Warsh 45:32
To put your numbers in plain language: Day before COVID, we paid $1 billion daily in interest; now it’s over $3 billion a day. None of that strengthens the military or assists the poorest. It’s wasted.
Kevin Warsh 45:53
So what do I propose? As you noted—and as we’ve discussed (I’m not sure the economic profession agrees)—monetary policy has two tools: setting rates and the “money”—the central bank balance sheet (QE). If we quiet the money printer, we can have lower rates—injecting massive money into the system causes inflation above target. That’s your $7T balance sheet—10x larger than when I was at the Fed. Your other tool is rates. They’re not perfect substitutes, but both are monetary policy; too many Fed folks say, “Balance sheet isn’t monetary policy.” Well, if expanding it affects policy, shrinking it should too. We have to be honest about both tools. Because I believe real economic growth is more important for revenue, equity, efficiency and growth:
Kevin Warsh 47:17
As a bigger balance sheet leads to higher inflation, we want to shrink it—not overnight. We want Treasury and Fed to reach a kind of accord, like in 1951.
Kevin Warsh 47:34
Who controls what? Who manages rates? Fed. Who does fiscal accounts? Treasury. We've blurred the accountability lines. When a President takes office, his Treasury Secretary should be responsible for fiscal, not fuzzily dump it on the Fed, which only politicizes the central bank, hampering its role.
Kevin Warsh 48:04
So, in my judgment, we should shrink the central bank balance sheet, let the Fed exit these markets unless/until there’s a crisis. That will reduce inflation. You and I might call it “pragmatic monetarism.” Maybe that’s where our mentors’ thinking would go. Doing this, you could achieve lower rates—and rates matter more for the real economy than the balance sheet. Okay.
Peter Robinson 48:37
Kevin, at the end, two national visions. Some quotes to set up. You, Kevin Warsh: “For about 40 years—starting with the ‘Great Moderation’ in the mid-80s—Americans hardly thought about price changes. That’s what should happen. We could take it for granted because smart, diligent people made the rest of the country function.”
Peter Robinson 49:14
Right. Then: Former Fed Chair Alan Greenspan, testifying in 2008 to Congressman Henry Waxman: “I made a mistake—assuming organizations, especially banks, would act in self-interest to protect shareholders and equity.” Waxman: “So your free market ideology failed?” Greenspan: “That’s what shocked me—I’d believed it for 40 years, with mountains of evidence it worked.”
Peter Robinson 50:10
So, that’s one vision: From Volcker and Reagan in the 1980s, low inflation, sound dollar, federal spending low enough to allow growth—growth faster than spending, even surpluses expected as Bush arrived before new wars. The crisis changed everything. COVID, more than a decade of irresponsible fiscal policy and distorting easy money. Market professionals like Grant and Ray Dalio now doubt the whole system. Young entrepreneurs buy bitcoin—they don’t trust dollars. Kevin, some fundamental thing has ended, irreversibly. Your view?
Kevin Warsh 51:18
That’s absurd. Really—I’m not a pessimist. This country isn’t a pessimist. This country is on the verge of a productivity boom. This makes the Reagan-era boom you saw as a presidential speechwriter seem like something that can happen again. AI.
Peter Robinson 51:42
Not just AI. So, what's your vision? What happens if we stop messing up?
Kevin Warsh 51:50
For over 15 years, the government has tried its hardest to meddle in and impair the market economy. Despite our best efforts to weaken America and its global role, we've failed.
Kevin Warsh 52:03
The 21st century can be America's century. We face real rivals—a G2 contest as you once saw with the USSR. We must take it seriously. But I'd much rather have our hand than theirs. Policy implementation needn't be perfect. We can imagine—with colleagues here—ideal trade, regulatory, or tax policy. Of course, perfect isn't necessary. We just need to make policy a bit better, directionally return to sensible monetary and fiscal policies, and the U.S. economy will boom.
Kevin Warsh 52:46
Some colleagues want to do what Reagan did. But those days are gone. Hayek said, our job is to restate past ideas and rethink them for new generations. So, not a return to Reaganism, but crafting new policies for a new world—to drive the American spirit, personal liberty, empowerment. Importantly, institutions like the Fed must return to what they once were—mostly in the background, intervening only when needed, then stepping back. That way, more responsible fiscal policy, higher growth, powered by new tech—and America as biggest beneficiary. Not a given, not a birthright, but entirely possible—and probable.
Peter Robinson 53:56
Final two summary questions. The Fed doesn't need smashing or revolution—it just needs a few degrees of course correction. The aircraft carrier turns slowly, but just a few degrees could do it. Do I get that right?
Kevin Warsh 54:17
I think so. The Fed doesn't need a revolution. It's already had a revolution. It needs a revival. Now, you're not a golfer, but I learned this from famous course designer Gil Hans. He reviews golf courses, considers what would make them great again—draws inspiration from the past, but isn't bound by it. Loyal to the original designer’s vision, but not recreating it literally.
Kevin Warsh 54:56
That’s why we can't return to Reagan-era regulation, fiscal, tax, or monetary policies. We can review the institution and try to restore its best elements, mindful the world is changing. You mentioned bitcoin; I detected slight disparagement, suggesting people buying bitcoin and such.
Peter Robinson 55:20
Isn’t that so—Charlie Munger, a few years before he died, bashed bitcoin, called it evil partly because it would undermine the Fed.
Kevin Warsh 55:32
Or it could impose market discipline, or tell the world something needs fixing. Bitcoin…
Peter Robinson 55:39
Doesn’t make you nervous?
Kevin Warsh 55:40
Bitcoin doesn’t make me nervous. I remember a 2011 dinner here with someone else who’s been on your show—I won’t mention his name. Well, I just did.
Kevin Warsh 55:55
Marc Andreessen—he showed me that original white paper. I wish I’d understood as clearly as him then, just how revolutionary bitcoin and its tech would be.
Kevin Warsh 56:08
Bitcoin doesn’t bother me. I think it’s an important asset; it helps inform policymakers when they do right or wrong. It’s not a replacement for the dollar. It's often a good policy overseer. More broadly, as Charlie Munger and Warren Buffett suggest, many assets trading under fancy names are vastly overvalued.
Kevin Warsh 56:42
So Charlie said—maybe Warren too—there are innovators, imitators, and incompetents. Around new tech there are true innovators. What Marc showed me in that white paper? It’s just software—the newest, coolest software lets us do things we could never before. Like all software, it can be used for good or evil. So I don’t disparage it. These technologies are being built here—not just at Stanford.
Peter Robinson 57:49
Last question, Kevin. You’re back in Manhattan, working with Stan Druckenmiller, one of the greatest investors. You’re known for macro investing. You see global trends.
Peter Robinson 58:03
So you see—because I know you also travel to China—China has lifted hundreds of millions out of poverty and built a modern economy since the late 70s. We see India opening up, catching up to China, and even, I say "even" because these places were seen for decades as troubled, but in sub-Saharan Africa, places like Nigeria and Kenya, there are real signs of growth. Considering all this, Kevin Warsh is still long on America?
Kevin Warsh 58:52
Absolutely. If I may say a few things: As you noted, almost all these technologies are U.S.-originated. They may be used elsewhere, sure. The world's most talented people still want to come here—and the most talented Americans want to build here.
Kevin Warsh 59:19
In the past half-year, economic policy is moving in a better direction than before. Not perfect, never will be. But Americans are ready to be liberated from the burdens they've borne.
Kevin Warsh 59:37
All the policies discussed here and elsewhere—we didn’t mention the regulatory tax on American growth over the past decade. That tax burden is now easing. We spoke of this productivity revolution, and of technology. People are underestimated, especially Americans—their ability to adapt to and thrive with new technologies is real. That may sound blindly optimistic to some listeners, but what we used to call "the micro-foundations of macroeconomics," I’ll broadly translate to another trigger: a culture of risk-taking, failing, trying again. Those happen more in America than anywhere. Less so in France and Germany. This is exciting. As we ease the regulatory tax, restore better policy—
Kevin Warsh 01:00:55
As we now reform institutions, I’m betting on America’s economic upside. I bet the Fed fixes what’s broken; price stability returns. Others may not love us, but they’ll look to America and say—even if imperfect—our growth is faster, and that’s where they want to send their capital.
Peter Robinson 01:01:23
Kevin Warsh, thank you.
Kevin Warsh 01:01:25
Thank you, Peter. Honored to be back.
Peter Robinson 01:01:28
This is “Uncommon Knowledge”, Hoover Institution & Fox Nation. I’m Peter Robinson.
Note: The Chinese translation may not be 100% accurate.
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