Kevin Warsh New Fed Chair will Change EVERYTHING

Key Concepts

• Quantitative Easing (QE): A monetary policy where a central bank purchases assets (like treasuries and mortgage-backed securities) to increase the money supply and lower interest rates.
• TARP (Troubled Asset Relief Program): A program enacted during the 2008 financial crisis to purchase assets and equity from banks and other financial institutions.
• Federal Funds Rate: The target interest rate set by the Federal Reserve for the overnight lending between banks.
• Supplementary Leverage Ratio (SLR): A regulatory requirement for banks limiting the amount of assets they can hold relative to their capital.
• Yield Curve: A line that plots the interest rates of bonds with different maturity dates. A steepening yield curve indicates rising long-term rates.
• Bank Term Funding Program (BTFP): A Federal Reserve program allowing banks to borrow against their holdings of U.S. Treasuries and other securities.
• Deflationary Death Spiral: A scenario where falling prices lead to decreased economic activity, further price declines, and ultimately economic collapse.

The Potential Impact of Kevin Walsh as Federal Reserve Chairman

This analysis details the implications of President Trump’s selection of Kevin Walsh as the next Chairman of the Federal Reserve, contrasting expectations with Walsh’s historical stance on monetary policy and outlining potential economic consequences. The market reacted negatively to the announcement, with a slight overall decline and a significant 9% drop in gold prices, reflecting concerns about reduced Federal Reserve independence.

Kevin Walsh’s Background and Critique of Fed Policy

Kevin Walsh is a veteran of the Federal Reserve, having served from 2006 to 2011 during the Great Financial Crisis. He played a role in establishing the TARP program and the initial implementation of QE – the direct purchase of assets like treasuries and mortgage-backed securities to inject liquidity into the market. However, post-Fed, Walsh became a vocal critic of continued expansionary monetary policy. He argued that the Fed’s actions, even after the emergency period, contributed to widening wealth inequality.

Specifically, Walsh highlighted the disproportionate rise in asset prices (stocks, homes, gold) benefiting asset owners while wages, purchasing power, and employment lagged behind expectations. He noted the Fed underestimated the magnitude of asset price appreciation resulting from QE and low interest rates, making it harder for average citizens to build wealth. As he stated, the Fed’s policies have made it “more dollars to purchase assets like stocks than it used to,” while wage growth hasn’t kept pace.

Historical Context: The Fed’s Balance Sheet Expansion

The transcript details the evolution of the Federal Reserve’s balance sheet:

• 2008: Increased from under $1 trillion to over $2 trillion due to initial asset purchases during the financial crisis.
• 2011-2013: Expanded to $3 trillion through further rounds of QE.
• 2013: Reached a peak of $4.5 trillion before a brief attempt to reduce it in 2018 (which failed).
• 2019-2021: Massive expansion due to the COVID-19 pandemic.
• Recent Months: A period of balance sheet reduction followed by a recent resumption of asset purchases.

Walsh has consistently criticized each phase of this expansion, arguing it fuels asset bubbles and exacerbates inequality.

The Interplay of Interest Rates, Government Debt, and the Money Supply

The analysis delves into the complex relationship between interest rates, government borrowing, and the money supply. While President Trump desires lower interest rates, Walsh’s appointment presents a nuanced scenario.

The transcript explains that lowering short-term interest rates (the Federal Funds Rate) allows the government to borrow more cheaply. However, this increased borrowing expands the money supply, potentially leading to inflation. Rational investors, anticipating this inflation, will demand higher interest rates on long-term bonds (like 20-year or 30-year Treasuries), causing the yield curve to steepen.

This dynamic means that even if Trump achieves lower short-term rates, the overall cost of servicing the national debt may not decrease, and long-term rates could rise. The speaker emphasizes that the money supply has been increasing despite recent temporary declines, currently sitting at an all-time high.

Bank Deregulation and the Potential for “QE by Banks”

A crucial element of the analysis centers on potential deregulation of banks, specifically regarding the Supplementary Leverage Ratio (SLR). Currently, the SLR limits the amount of U.S. Treasuries banks can hold. Governor Steven Moran is pushing to remove this restriction, potentially allowing banks to purchase an unlimited amount of Treasuries.

This deregulation, coupled with the Bank Term Funding Program (BTFP) – which allows banks to temporarily sell Treasuries back to the Fed for full price – effectively makes Treasuries “risk-free” for banks. This could lead to a scenario where banks engage in “QE by banks,” absorbing government debt and keeping long-term interest rates low, even as the Fed potentially reduces its own balance sheet.

The speaker argues that this arrangement benefits banks (due to the spread between what they pay depositors and earn on Treasuries) and the government (through lower borrowing costs), but ultimately disadvantages the average citizen.

The Inevitability of Monetary Expansion and the Corruptive Influence of Power

The analysis concludes with a pessimistic outlook, arguing that the Federal Reserve is inherently compelled to expand the money supply to avoid a deflationary spiral. The speaker contends that regardless of who leads the Fed, the system will always find ways to accommodate the government’s borrowing needs.

He draws a parallel to Alan Greenspan, who initially criticized easy monetary policy but ultimately implemented it during the dot-com bubble. The speaker warns against underestimating the “corruptive ability of the power of leading the Federal Reserve,” suggesting that even someone like Walsh, with a history of criticism, may succumb to the pressures of the system.

As the speaker states, “the money supply must continue to expand, otherwise we go into a deflationary death spiral.”

Notable Quote

“Do not underestimate the corruptive ability of the power of leading the Federal Reserve.” – The speaker, emphasizing the potential for even well-intentioned individuals to compromise their principles once in a position of authority.

This analysis suggests that Kevin Walsh’s appointment, while initially appearing hawkish, may ultimately result in a continuation of expansionary monetary policies through a different mechanism – bank deregulation and “QE by banks” – ultimately perpetuating the cycle of wealth inequality and government debt.