I write in support of Kirstjen Nielsen, President Trump’s nominee for Secretary of Homeland Security, and to recommend the President nominate Kevin Warsh for Chairman of the Federal Reserve. I worked with both of them in the Bush White House, and they are in both cases the best candidates for the job.
First, a few words on Kirstjen. She worked on the Homeland Security Council staff when I worked on the National Economic Council staff. She was a skilled, effective professional who delivered results and could make cumbersome bureaucracies move. Some Cabinet secretaries play mostly public-facing roles, acting as the face and voice of the department while others do the inside management and policy work. While I think she can be an effective communicator, I support Kirstjen primarily because I know she will be a hands-on leader, driving policy (and the bureaucracies) forward to produce results. She has expertise in cyber policy and natural disasters, two important priorities for the department. She has the trust and confidence of the President’s Chief of Staff, and her stint as John Kelly’s White House deputy means she knows the President and the senior White House staff, increasing her effectiveness when she moves over to lead the department. General Kelly has McMaster at NSC, Mattis at Defense, Tillerson at State, Pompeo and Coats on intel, and he will have Nielsen at Homeland. That’s a solid and stable team that gives me confidence. In this dangerous world and with an unpredictable and sometimes volatile Commander-in-Chief, I want to have confidence in his national security team.
Nielsen’s confirmation will further increase that confidence, and I urge the Senate to quickly confirm her as Secretary of Homeland Security.
I likewise have confidence in and recommend the President nominate Kevin Warsh to be Chairman of the Board of Governors of the Federal Reserve Board beginning early next year. Kevin and I worked closely together for 3 1/2 years on the Bush National Economic Council staff, when he handled the financial policy portfolio. He went down the street to become a Federal Reserve Governor in early 2006, and I renewed regular contact with him from late 2007 through January 2009 during the financial crisis. I recommend him in part based on my experience working so closely with him. Kevin’s free-market instincts, his sound judgment, and his effectiveness in designing and implementing policy inspire my confidence. The President’s senior team trusted and relied on Kevin’s judgment, as did I on a daily basis. He is an expert in the practical aspects of economic policymaking, with experience honed during a financial crisis. He is also just a solid, good guy, and a pleasure to work with. Those personal characteristics are sometimes underappreciated among senior policymakers.
My recommendation of Kevin Warsh also derives from my policy views and my view of what we need in a Fed Chair.
I will start with monetary policy.
- I’m a dual-mandate discretionary inflation hawk. I support maintaining the Fed’s dual mandate: stable prices and maximum sustainable employment. Others right-of-center would like to move the Fed to a single, inflation-only, mandate. That’s not my policy preference. Even if it were I can’t see how one would enact legislation changing the mandate, and I don’t think it’s worth the legislative effort to try to change it.
- At the same time, I’m an inflation hawk. All things being equal, I would place more weight on avoiding inflation risk than maximizing short-term employment. Of course, all things are never equal, but that’s my general lean.
- I’m a discretionary guy, not a rules-based guy. I think monetary rules are useful inputs into a collective decision-making process that ultimately works best when relying on the FOMC members’ judgments, and especially the Chair’s judgment. While I’m attracted to the concept of a rules-based policy, I think the macro models and forecasting tools that would interact with such rules are so imprecise as to make it dangerous to rely too heavily on rules. Our sensor system just isn’t good enough to put the car on autopilot. Maybe someday macroeconomics will be closer to a real science and we can rely more on rules, but we’re not there yet.
- I place a high priority on keeping monetary policy independent of pressures from both the Executive and Legislative Branches. A strong, independent monetary authority is one of the great strengths of the U.S. economic system.
While none of the four candidates are a perfect match, my policy views most closely align with Warsh’s. Yellen is more dovish than I; Taylor would lean too heavily on rules for my taste; Powell is a policy enigma to me (in all respects). At the same time, I shouldn’t overstate the case here. The policy distance among the candidates here is not that big, even between the “extremes” of Yellen and Taylor. Yes, it matters a lot to short-term investors, and yes, I have preferences, but the policy differences among the candidates are not significant enough to determine my recommendation.
On regulatory and macroprudential policy, I’m an outlier. I think I’m more aggressive than Warsh, Taylor, or Powell on pre-emptive policy changes to reduce the risk of another TBTF (Too Big To Fail) scenario. We are once again bearing too much long-term crisis risk, and are still too vulnerable to large financial institutions failing again with potentially catastrophic effects. I favor even higher capital and liquidity standards, size caps on financial institutions (!!), and dramatically less complex detailed micromanagement of large institutions’ finances. I want smaller, more liquid, more highly capitalized banks that have more freedom to do what they want and can’t do major harm if/when they fail. I am fairly certain this is farther than any of these three (and Vice Chair Randy Quarles) would go, and it is a fundamentally different approach than the Dodd-Frank implementation path implemented by former Governor Dan Tarullo and continued by Chair Yellen. Given how far I am from all the candidates on these questions, this does not help me make a recommendation for Chair.
While I care a lot about these policy questions, the non-policy differences among the candidates are even more important in this personnel decision, and they drive my recommendation of Kevin Warsh.
My top priority for a Fed Chair is someone who can lead and manage effectively if we have another financial shock. This is where Kevin’s experience from 2007-09 distinguishes him from the rest. In addition to being a Fed Governor at the time, he was effectively Chairman Bernanke’s consigliere, his right-hand man. He helped Bernanke lead and run the Fed during a time of tremendous economic, financial, policy, and political stress. From a White House perspective, we could talk to Ben and/or Kevin almost interchangeably at any point during the crisis. We knew they were tightly coordinated and that Kevin could speak for the Chairman if needed. When “New York Fed weekend” happened, Chairman Bernanke sent Kevin to New York as his proxy. Kevin was also interacting with counterparts at the other major central banks, especially during the critical times in September and October of that year, coordinating central bank actions to slow and mitigate the global effects of the U.S.-centered shocks. Kevin was at the center of the action, exercising tremendous responsibility and authority, during the most significant financial crisis since the Great Depression. He was essential to the Fed’s component of preventing that crisis from being far, far worse and mitigating the damage. None of the other candidates have such experience. This distinction and Kevin’s experience are, by themselves, determinative for me. I know he can succeed in a crisis because he has already done so. I can’t say that for the other candidates, and that worries me a lot.
My second priority is someone with the strength and credibility to represent the U.S. at the G-7 Finance Ministers Meetings. The U.S. seats at those meetings are for the Treasury Secretary and the Fed Chair. Given Secretary Mnuchin’s inexperience in international economic policy, as well as the protectionist leanings and unpredictability of the Secretary’s boss, it is even more important that the Fed Chair be globally credible. Yellen and Warsh have this credibility from their global experience as central bankers. Taylor has international experience from his time as the international Undersecretary at Treasury, but from a fiscal rather than a monetary perspective. Again, I’m just not sure about Powell, who has been so low profile as to be almost invisible. He might be globally credible. I just don’t know, and that concerns me.
Third, given the instability in and ineffectiveness of other parts of the U.S. government right now, for the next few years I place a high priority on stability and incrementalism at the Fed (even given my somewhat radical views on structural reform of financial institutions). Just as John Kelly knows he can rely on the Mattis-McMaster-Tillerson-Pompeo-Coats-Nielsen team to address foreign military and terrorist threats, I want to know we can rely on the Fed Chairman to provide monetary policy stability and confidence. Warsh and Yellen fit this criterion. I just don’t know if Taylor or Powell can do this, and in the current environment, I very much want to know.
To those who have suggested 47-year old Warsh is too young to chair the Fed, I’d point out that Tim Geithner was the same age when he became Treasury Secretary. Kirstjen Nielsen is 45; Paul Ryan is 47; Ben Sasse is 45. Kevin’s seven years working in senior economic policy jobs and his experience in the heat of a financial crisis are far more important than his birth date. He has the judgment and wisdom essential to such a critically important role. And frankly, it’s time for the Baby Boomers to move over for a new generation of policy leaders, the next of whom are Kirstjen Nielsen and Kevin Warsh.