Kevin Warsh, President Bush’s recent appointee to the Federal Reserve’s Board of Governors, has thin qualifications for the job — to put it mildly. What message the president is trying to send in nominating someone with so little relevant experience or education is unclear, but speculation abounds.
The appointment also illustrates how little the general public cares about the Fed Board. Warsh’s nomination is somewhat akin to Bush’s failed nomination of Harriet Miers to the U.S. Supreme Court. Like Warsh, Miers worked in the White House and gained the president’s confidence. By all accounts she was intelligent, hard-working and competent. But it also was clear that she was not well-qualified to sit on the nation’s highest court.
Warsh apparently is bright — he graduated cum laude from Harvard Law School. He may have been quite competent in the few jobs he has held since leaving Harvard in 1995. He apparently earned the president’s confidence in the three years he worked in the White House. No one alleges any wrongdoing on his part at any time.
But in terms of education and experience, Warsh is much less qualified than any other recent Fed appointee. He has a law degree but little training in economics. His experience consists of seven years with investment bank Morgan Stanley and three years in an administrative position on the National Economic Council. At 35, he is the youngest person ever nominated as a governor since the Fed was created in 1913 and the one with the fewest evident qualifications.
Yet, in contrast to the firestorm of criticism ignited by the Miers nomination, Warsh was confirmed without ever appearing on the national radar screen. Specialized business media like the Wall Street Journal and Bloomberg News did cover his nomination and raised the issue of his qualifications. Some quoted harsh comments by former Fed Vice Chairman Preston Martin, a Reagan appointee, on Warsh’s inexperience.
Others noted the new governor’s father-in-law, Ronald Lauder, son of cosmetics entrepreneur Estee Lauder, has donated large sums to the Republican Party in recent years. This is the first time in history that there is even a hint that campaign contributions played any part in a Board of Governors appointment. But general news media didn’t pick up on the story.
The interesting backdrop is that Roger Ferguson, the sitting vice chairman, resigned at the same time Warsh was confirmed. Ferguson was the last Clinton appointee on the board. When he is replaced, President Bush will be the first president since Franklin Roosevelt to have appointed all seven governors.
This is not the intention of the law. Governors theoretically are appointed to 14-year terms. One such term expires on Jan. 31 of even-numbered years. Even two-term presidents can only nominate the majority to the board near the end of an eight-year presidency.
In practice, few governors stick out a full term, however. Most resign to pursue other interests. Thus, Bush not only has named a four-vote majority, but also all seven members. And, he has nearly three years to go as president.
That brings us to what message the Warsh appointment sends. Critics warn that the board will now be a complacent lapdog of the administration, keeping quiet about budget deficits and suppressing interest rate increases that might be unwelcome at 1600 Pennsylvania Ave. The fact that three Bush appointees served directly on the White House’s economic staff compounds such anxieties.
A few supply-side gurus share the same belief, but hail it as good news. For them, all of the old academic fuddy-duddies have been swept away. The coast is now clear for a supply-side campaign — i.e., continued tax cuts for the rich and a blasé attitude about budget deficits — unhampered by a benighted central bank.
Others interpret the appointment as a sign that the administration has scant respect for the Fed Board. Some think it is considered an unimportant backwater, like the Federal Emergency Management Agency, that can serve as a haven for political favorites who need a cushy position.
Still others see evidence that the Bush administration is hard-pressed to find respected economists who support its economic policy. Even many economists who are staunch Republicans are uneasy about the administration’s expansion of non-defense spending and its unwillingness to rein in deficits.
I don’t worry that the Fed will become a complacent respondent to White House economic initiatives. Despite the fact they are Bush appointees, new Chairman Ben Bernanke and new governor Randall Kroszner of the University of Chicago are fine economists. And Donald Kohn, promoted from the ranks at the Fed, is no dove in monetary policy matters.
In any case, the District Bank presidents who also participate in Federal Open Market Committee meetings are not political appointees, ideological flakes or fools. Once again, the dispersed power structure of the Fed system will safeguard the nation.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.