President Trump has chosen Jerome Powell to be his successor in the position of Fed Chairman, moving forward in the wake of the Albany native’s established credentials from prestigious schools. This decision is notable, especially considering Powell was initially selected in 2017, when Kevin Warsh was also being considered for the spot. It was suggested that Warsh’s youth might have made him seem less fit at that time.
This time around, however, things seem different. Trump has, perhaps unexpectedly, expressed a favorable opinion of Warsh, who, with his investment banking background and connections to major Wall Street players, appears to fit the mold that the President now favors.
From Wall Street to Washington
Kevin Warsh, who Trump nominated to take over from Powell, once served on the Federal Reserve’s board during the tumultuous 2008 financial crisis. A graduate of Stanford and Harvard Law School, Warsh spent seven years at Morgan Stanley, eventually rising to the position of divisional vice president.
In 2002, he left Morgan Stanley and began working as a senior economic policy aide under President George W. Bush. That same year, he married Jane Lauder, whose family is significantly wealthy due to the Estée Lauder cosmetics brand. Jane’s father, Ronald Lauder, is a long-standing Trump associate and a notable Republican supporter.
Inside the FRB with cracks in the system
When Warsh was nominated to the Federal Reserve Board in 2006, he became one of the youngest individuals to be confirmed. During the 2008 crisis, he was closely involved with then-Chairman Ben Bernanke, leveraging his Wall Street connections to help navigate the sale of struggling banks.
Warsh has been noted for his role in facilitating JPMorgan Chase & Co.’s acquisition of Bear Stearns during this chaotic period. He also took a firm stance against bailing out Lehman Brothers, a finance company hit hard due to its over-investment in real estate as the market declined.
In fact, as the situation with Lehman Brothers worsened in September 2008, Warsh internally expressed concerns that a bailout would only reinforce the notion that major financial firms were “too big to fail.” He stated: “I hope we don’t protect anything.” Ultimately, the failure to bail out Lehman did lead to severe market instability, necessitating a quick reversal of course with the AIG bailout shortly afterward.
In the aftermath, Wall Street leaders and Fed officials praised Warsh for his composed demeanor amid the turbulence. Lloyd Blankfein of Goldman Sachs remarked on Warsh’s steadiness during difficult moments, while former Fed Vice Chairman Don Cohn acknowledged his knack for communicating essential information rather than letting bankers dominate the conversation.
Why Warsh left the Fed
Warsh ultimately left the Federal Reserve following the financial crisis and began voicing strong criticism of the central bank’s aggressive use of unconventional monetary tools. In 2010, he opposed the Fed’s second round of quantitative easing, which involved a significant bond-purchasing initiative. He argued that, with the crisis behind, ongoing stimulus could distort markets and spur inflation.
His resignation in March 2011 came before the completion of his term and was perceived by many as a protest to these policies. Warsh expressed concerns that the Fed’s growing involvements in financial markets would compromise its independence.
Recently, though, he seems to have softened his stance somewhat, aligning with Trump’s advocacy for lower interest rates. He continues to stress the need for credibility and independence yet argues that rates might drop significantly if the Fed acts decisively to condense its balance sheet.
