MARCH 6, 2006
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YOU DIDN'T HAVE to be Karl Rove to figure out that George W. Bush needed a respected economist to fill Alan Greenspan's shoes. Coming on the heels of the p.r. disasters that were Michael Brown and Harriet Miers, the last thing the White House could afford was another crony appointment. And so, in October, Bush nominated former Princeton economist Ben Bernanke to replace the outgoing Greenspan. Bernanke happens to be one of the world's leading experts on monetary policy.
Then came January. It turns out that, in addition to appointing a new Fed chairman, the Bushies also had two seats to fill on the Federal Reserve board, whose interest rate-setting power makes it by far the most influential actor in the global economy. One of these seats went to a University of Chicago professor and former White House economist named Randall Kroszner. Kroszner is an impeccably credentialed right-of-center candidate who, though a little young (he's 43), is basically the kind of person you'd expect a Republican president to nominate. And the other? It went to a 35-year-old White House aide named Kevin Warsh. Other than a Harvard Law degree and four years in the White House, the only qualification that jumps out at you is the $165,000-plus his father-in-law has donated to various Republican committees since 2002. Warsh may be perfectly capable of hazarding opinions about the future of the economy. But, by that standard, there are tens of thousands of people entitled to a seat on the Fed. That makes Warsh's appointment a big step down a slippery slope that could eventually erode the institution's competence.
MOST FED-WATCHERS believe that an ideal Federal Reserve board would contain some combination of Ph.D.-level monetary economists and a smaller subset of top banking or finance executives. To get a sense of how far Warsh is from this profile, it's helpful to consider other nominations that have been second-guessed in recent years. In 1991, the first President Bush nominated a 36-year-old economist named Lawrence Lindsey. Lindsey had been a protégé of Martin Feldstein, the Harvard economics pooh-bah and former top White House economist. At the time of his nomination, Lindsey had held a handful of White House staff positions. Critics worried he was too political. But at least Lindsey had a Ph.D. in economics from Harvard and had briefly taught there as well. Then, in 1997, Bill Clinton nominated Roger Ferguson, a 45-year-old partner at the business consulting firm McKinsey, to take Lindsey's seat on the board. Ferguson was unfamiliar to the Wall Street and academic economists who follow the Fed obsessively. But he, too, had a Ph.D. in economics from Harvard. (Ferguson came to be such a valued member of the Fed that he was subsequently promoted, with then-Chairman Alan Greenspan's support, to the role of vice chairman.)
Warsh clearly lacks either man's academic credentials. And, unlike Lindsey, he is a complete unknown among economists--even among the economists who have populated the Bush administration. "I really don't know much about him," says Kent Smetters, a professor at the University of Pennsylvania's Wharton School who served as a deputy assistant Treasury secretary from 2001 to 2002 and then as a Treasury consultant the following year. "We might have interacted a few times--but I really can't recall" (emphasis added). Says Mike Moore, a George Washington University economist who worked in the Bush Council of Economic Advisers between 2002 and 2003: "I don't know him…I was a bit puzzled by" the nomination.
Similarly, Warsh's experience at the investment banking firm Morgan Stanley, where he worked for almost seven years, is fairly middling compared with Ferguson's background at McKinsey. Ferguson was a partner at the prestigious firm--the highest attainable rank. Warsh left Morgan Stanley in 2002 as an executive director, the level before one faces the critical sorting-out within the company's hierarchy. "Getting promoted [to executive director] is not the issue. Everyone pretty much moves in lockstep. The significant promotion is to managing director," says Tom Clayton, who sat across from Warsh during their first year at Morgan Stanley and has been a friend ever since. In any case, Warsh was either an associate or a vice president for most of his time at Morgan. These are lower-level positions involving numerous rote tasks, such as overseeing the production of spreadsheets and PowerPoint presentations.
According to Clayton, Warsh worked mostly on mergers and acquisitions within the technology sector. To the extent Warsh ever negotiated deals himself, the substance of the work would have drawn on his legal background--navigating regulatory issues, antitrust issues, et cetera--and other noneconomic know-how. "The skills you need to be strong in are corporate finance, accounting," says Clayton. "It is not a position that requires advanced education in economics." Of the Fed job, he adds, "It seems to me a post that's more kind of academic than his--he is not an ivory tower guy. …I don't know if there is a long-term compatibility with his interests."
Clayton points out that Warsh was frequently in the top of his class at Morgan Stanley when he came up for evaluation. But some former colleagues found him exceedingly glib. "He was all form, no substance," says one. "He called everyone `bra.' `Hey, bra. Whatcha working on, bra? Got any capacity? I've got a new deal for you.'…He was good at little speeches: `Guys, you should be excited to be at Morgan Stanley. There's lots of cool stuff going on.'"
In 2002, Warsh married Jane Lauder, heiress to the Estée Lauder cosmetics fortune and daughter of longtime Republican contributor Ron Lauder. That same year, he accepted a job on the staff of Bush's National Economic Council (NEC), where his portfolio included banking and financial market issues. As before, Warsh performed ably enough. But his job was heavy on administrative work. Dylan Glenn, a friend and former NEC colleague, says it fell to staffers like Warsh to "communicate the president's wishes throughout the government" and build consensus across lower levels of the federal bureaucracy. So, for example, if the White House wanted to propose new regulations, someone in Warsh's position would have conveyed this to all the relevant assistant secretaries in various Cabinet agencies and then synthesized their proposals. "Kevin's responsibility, and mine, was to make sure the president had all the information he needed," says Glenn. White House spokesman Trent Duffy doesn't dispute this, but he says Warsh also helped develop policy the way a top congressional staffer might.
THE PROBLEM WITH having someone of Warsh's stature on the Federal Reserve board is twofold. First, all Fed chairman are fallible, even brilliant ones like Bernanke. Though interest rate decisions technically come up for a vote, the Fed's Open Market Committee tends to arrive at them through consensus, and most chairmen prefer to minimize the number of dissenters. That means a strong board can rein a chairman in. By contrast, a pliant board will defer to the chairman too much, as occasionally happened in the Greenspan era. Warsh's Senate testimony last week was not entirely encouraging in this regard (though he was nonetheless confirmed). Asked about the recent divergence between wage and productivity growth, Warsh partially blamed the war on terrorism and the recent corporate scandals, a theory with little currency among economists. True, the Fed has other responsibilities besides economic policy--such as bank regulation--for which Warsh's background is more relevant. But these are secondary functions where the board is already strong.
The broader problem is the precedent Warsh sets. Appointing someone like him to the Federal Reserve board dramatically lowers the bar for future appointments, which makes it more likely that the body of powerful technocrats will come to be dominated by political hacks. (Wednesday's announcement that Ferguson will resign in April gives Bush yet another crack at the Fed.) This is, needless to say, not advisable. If you want to know what happens to an economy without a strong, independent central bank, just take a look at the economic performance of, say, Mexico over the last 30 years and see how you feel about it. Even the heyday of Reagan-era economic quackery didn't produce a Fed nominee as lacking in qualifications or experience as this one. The only way you appoint Kevin Warsh to a seat on the Federal Reserve board is if you have little respect for the practice of economic policy-making and you're not ashamed to admit it. But, then, we already knew that about George W. Bush.
This article originally ran in the March 6, 2006, issue of the magazine.