Compiled by: CoolFish
Source: Hoover Institution
Note: The original video was recorded in May 2025
Host: Welcome to Uncommon Knowledge. I'm Peter Robinson. Kevin Warsh was born in upstate New York, earned his undergraduate degree from Stanford University, and later obtained a law degree from Harvard University. Early in his career, Mr. Warsh worked on Wall Street and in Washington. In 2006, President George W. Bush appointed him to the Federal Reserve Board, where he served until 2011. Notably, Mr. Warsh served as a Federal Reserve Governor during the 2008 financial crisis—the most severe financial storm in over half a century. Today, Mr. Warsh splits his time between New York and Stanford: he works at an investment firm in New York while also serving as a research fellow at the Hoover Institution at Stanford University.
Kevin, welcome back.
Kevin Warsh: It's great to be back. You deliberately omitted the most important thing—I happen to work for the investment firm of Stan Druckenmiller, arguably the greatest investor in history. But I appreciate your attempt to keep it low-key. I just wanted to praise my friend and partner.
Host: Go ahead, we'll have him on the show eventually. Okay, Kevin, first question: The Federal Reserve, established over a century ago, is the only U.S. institution tasked with maintaining the value of the dollar.
Criticism of the Federal Reserve
Host: I want to quote two passages. The late legendary investor Charlie Munger once said: "Destroying the monetary system would have unthinkable consequences." The second quote is from your speech this April at the 'Group of Thirty' bankers' organization. I excerpted a few of your descriptions of the current Fed: institutional drift, failure to fulfill statutory duties, fueling a surge in federal spending, expanded role with poor performance. Kevin Warsh, how dare you criticize this sacred institution—the pillar we rely on daily for the value of our income and spending. What do you think you're doing?
Kevin Warsh: In the central banking system, we are trained to keep criticism to ourselves. Clearly, I haven't done a good enough job. Peter, on the same occasion, I emphasized that this was more of a love letter than a cold critique. Perhaps you didn't take it as a love letter. The current officials probably didn't get it either. I deliberately toned down the more effusive language. I called it a love letter because, as you said, this institution is crucial. I called it a love letter because if this institution can reform itself, it will bring immense benefits to the institution itself and the nation. But it also means it's time to get things back on track.
One more point to add: This is America's third attempt at establishing a central bank. It's the third not because the first two were tremendously successful—quite the opposite, they both failed.
Peter, this isn't like winning a third Super Bowl trophy where you get better with each win. The reason the first two failed was the loss of public trust, the loss of the ability to deliver on promises. This isn't just a history lesson, but think of the Jacksonians back then—they believed the central bank of that era was focused only on the special interests of the East Coast, ignoring the people in the heartland.
This is similar to my concerns today. This central bank has been around for a hundred years. If it can reform itself, it will likely see another glorious hundred years. Otherwise, I am deeply concerned.
Host: I'm a layman, and you are a seasoned central banker and investor. I have a few basic questions to clarify, but let me set the stage first.
The Fed, established in 1913, has the power to set interest rates and adjust the money supply to achieve price stability. Nobel laureate Milton Friedman said in 1994 that no institution has such high public stature with such poor performance as the Fed. Friedman pointed out that the Fed presided over a doubling of prices after WWII and funded the inflation of the 70s. He believed the Fed did more harm than good and advocated for its abolition. Kevin, why do we need the Fed?
Kevin Warsh: Friedman was my teacher and had a huge influence on generations of students. I've studied his correspondence with Fed Chairs like Paul Volcker and Alan Greenspan in the Hoover Institution archives.
What's most amazing in Friedman's letters is his constant re-examination of his own prior assumptions. During the tenures of Volcker and Greenspan, he expressed relief at certain policy shifts. I don't think he felt the Fed was a terrible institution; he believed they had good periods and bad periods, both missteps and achievements. I can only speculate what he would say if he saw the great inflation of the past six years. He would certainly have issued warnings, and the Fed likely wouldn't have listened.
Inflation is a "Choice"
Peter Robinson: Friedman asserted: "Inflation is always and everywhere a monetary phenomenon." Since inflation stems from money, and the Fed controls the money supply, the ultimate responsibility for inflation must lie with the Fed. When Carter appointed Volcker, we were experiencing the worst inflation since the Civil War. And when Paul Volcker left office, inflation was down to around 2%. So Milton Friedman argued the Fed is always responsible?
Kevin Warsh:Yes, inflation is a choice. Congress revised the law in the 70s, making this one institution responsible for prices. Yet what have we heard during the great inflation of the past five or six years? Blame Putin, blame Ukraine, blame the pandemic and supply chains.
Milton would have been hopping mad hearing that. Those factors can cause price changes, but that's not inflation; that's just a one-time fluctuation in the price of a certain category of goods. True inflation is when such price movements create a self-reinforcing cycle. That is, high prices beget even higher prices. This means inflation ultimately permeates every family's dinner table, every boardroom, because decision-makers cannot anticipate future price levels.
This isn't about Putin; it's about the Fed. We love to shift blame, saying 'it's not my fault, it's someone else's fault.' The central bank can absolutely push the price level to any height, the inflation rate to any target. We might not agree with the methods, but the idea of blaming others seems to me contrary to a sound understanding of economic history.
Host: In the following discussion, we need to repeatedly emphasize that inflation is the result of a deliberate choice, and maintaining dollar stability is equally a controllable choice. Volcker achieved it in our lifetime. This is not just talk—we experienced inflation, and the Fed ultimately controlled it.
Kevin Warsh:They did control inflation. But then... I suspect this is just the cyclical rhetoric economists use; they became complacent about controlling inflation. After the so-called 'Great Moderation' period—a time of price stability lasting more than a generation—I think some in the profession mistakenly thought it was easy, even concluding that inflation was completely under control since we had all become so skilled at it. We perhaps all became somewhat complacent about this science, but economics is not that simple. It was the crises of 2008 and 2020 that made me realize we had let our guard down.
Host: You've mentioned this concept several times; let's define it. The so-called 'Great Moderation' began in the mid-80s when Volcker's Fed, with President Reagan's support, brought inflation down to very low single digits. Inflation then stayed in that range for a long time, the economy expanded continuously, with only two quarters of recession in the next quarter-century until the 2008 crisis. Is my understanding correct? Is this the period you refer to as the 'Great Moderation'?
Kevin Warsh: I don't believe there is a 'status quo' to return to; the gold standard is a thing of the past. We must deal with the problems at hand. Between 'letting the machine run' and 'leaving it to the whims of central bankers,' there should be a third choice.
A central banker needs to resist impulses. Economics is not a perfect understanding; otherwise, we would be physicists or mathematicians. Our understanding of how the economy works is far from perfect. If we truly discern its laws, we could design precise economic models, but the reality is the economic system is ever-changing and incredibly dynamic. Precisely because of this, I dare not claim there exists a flawless economic law.
The 2008 Financial Crisis
Host: You were in office during the 2008 financial crisis when unemployment reached 10%. The Fed responded by injecting massive liquidity into the system, doubling its balance sheet from $1 trillion to $2 trillion. You strongly supported this decision. Why?
Kevin Warsh: Friedman believed the core of monetary policy and inflation was money, but in modern academia this is almost considered heresy; they lean more Keynesian, barely mentioning the word 'money' in discussions. In fact, if you review Fed meeting minutes, you'll find the word 'money' appears very infrequently in FOMC internal discussions. You have to search a long time to find it.
Back when I was 19 or 20, sitting around a round table (a bit larger than this one) with several classmates, I asked Friedman a question—probably wanting to show off my knowledge of some area, though I only had a superficial understanding. He replied: 'Kevin, in economics, the only thing we can truly understand is the basic principles. Everything else is made up.' At the time I thought: 'Peter, is this old guy losing it? Maybe he's past his prime.' It wasn't until the financial crisis hit that I realized he was right. No one could predict it because all real knowledge is in Economics 101.
At least in Economics 101—before elite departments were captured by schools of economic thought—we said money is related to monetary policy. I still believe that to this day.
Host: By the way, as we speak now, it's been nearly twenty years since that financial crisis broke out. What did it feel like back then?
Kevin Warsh: I was 35, it was the calm before the storm. Bernanke was a very strong field commander; we were like fighting in the trenches. He was always open to the few people who could sit around the table and debate the situation fiercely, and even more tolerant of heterodox views. But looking back at the darkest days of the crisis—our response might only be considered passable. We could have acted sooner and done more; we made many mistakes, but we also had successes.
The real economy deteriorated faster than historical experience suggested, financial market stock prices plummeted 60% to 70%. Perhaps most frightening was the Treasury auction. At least in the initial stages, market participants were absent, bid-ask spreads kept widening. We feared the U.S. economic system was on the brink of a cliff.
Host: From my memory, injecting liquidity into the system, pumping money into the market, was an emergency measure aimed at keeping the exchanges running, ensuring market function. The theory was: keeping the markets operating, keeping them open and functional, providing people with enough money to buy and sell, was the most effective and direct response at the time. I thought the market itself would gradually resolve the crisis. Is that the justification?
Kevin Warsh: Central banks were born to deal with panics. The panics of old (what we now call deep recessions or financial crises) are essentially states of market failure. When the quotes from buyers and sellers have a spread, the central bank needs to step in with sufficient funds (there's that word again) to restore market function. Its job is not to set prices, but to ensure buyers and sellers can transact.
Our job was to provide liquidity, to be the backstop (the last line of defense). That was an 'extreme mandate' for an emergency. But we had a promise: once the crisis was over, we would exit the game. We would return to being a rather boring central bank, appearing only on page B12 of the newspaper—a six-paragraph brief saying the Fed met today and decided to raise or lower rates by a quarter point. But from that moment until now, the central bank has consistently occupied the front-page headlines. I think the role it plays has exceeded what the Founding Fathers anticipated, and beyond what the central bank's founders could have envisioned.
Host: Let's trace the journey from 2008 to today: QE1 happened in 2008. We just discussed the Fed's balance sheet expanding from under a trillion to over two trillion. QE2 was implemented in 2010, the Fed's balance sheet rose to nearly three trillion. QE3 started in 2012, the Fed's balance sheet expanded to $4 trillion. QE4 was launched during the 2020 COVID lockdowns, which needs a bit of discussion as it was an emergency. By the end of 2022, the balance sheet had reached $9 trillion. Since then, the Fed has reduced it to $7 trillion. As you said, the Fed's balance sheet is now nearly an order of magnitude larger than when you joined in 2006.
Kevin Warsh: Printing money heavily during peacetime changed everything. It almost signaled to other members of Congress: we can do this, so can you. Let's go back to the nature of quantitative easing. QE1—by the way, when we tried to package it as 'credit easing,' that only worked for a week, it was the term we preferred. But the term QE came uninvited.
The situation was roughly this: Secretary Paulson planned to issue bonds on Monday, Tuesday, should we buy them on Thursday, Friday? I don't want to divulge secrets from the meeting room, but I remember someone saying bluntly: 'This is like a Ponzi scheme.' What else could save us from the global financial crisis? Many explanations were given. The Bank of Japan had done a similar small-scale operation about a decade earlier, but on a much smaller scale. We weren't sure how it would work either, but it turned out it did. At the time, it was indeed a radical move. Now open an economics textbook, even an introductory one, and this is considered standard operating procedure. Back then, it was a huge gamble. But we were in an era of gambling, so we went all in.
QE1 was radical, but we thought we should stop after the crisis. I resigned in early 2011 because I opposed QE2. My colleagues, including Chairman Bernanke whom I mentioned—I have immense respect for his abilities as a strategist—he and his Fed colleagues decided to continue quantitative easing. The Fed at the time thought it was a 'free lunch.' Look around: asset prices rising, markets flush with liquidity, economy doing well. My god, if we withdraw the policy, who knows what will happen. In a sense, they violated the consensus reached back then. Could we really predict the consequences in all scenarios?
Host: Herbert Stein once said, if something cannot go on forever, it will stop. The problem is—we are essentially running a Ponzi scheme. The Fed and the Treasury issue bonds, the Fed buys them directly. This is almost like directly starting the printing press. Yet the global market is still buying U.S. Treasuries. In other words, why hasn't the international market punished the U.S. yet?
Kevin Warsh: I'd rather hold America's cards than those of any other country in the world. I think we are on the cusp of a productivity explosion, U.S. economic growth is crucial, it can化解 these debt risks better than any other means. If we can grow one percentage point more than the budget office forecasts, it would bring in $4.5 trillion in revenue. This is the perfect solution to the debt crisis.
Quiet the Printing Press, Get Lower Rates
Host: Debt interest now exceeds defense spending. How should the Fed reduce its $7 trillion balance sheet?
Kevin Warsh: Two policy tools: interest rates and the balance sheet. If we quiet the printing press a bit, we can have lower interest rates. Many central bank practitioners insist: the balance sheet has nothing to do with monetary policy. But if the balance sheet expansion was related to monetary policy, then its contraction should also be related. We must face the nature of these two tools. I believe real economic growth is the key to achieving fiscal revenue, fair distribution, efficiency gains, and economic growth. Because balance sheet expansion caused inflation to rise, we must reduce its size.
We cannot do it overnight. I hope the Treasury and the Fed can reach a consensus, like the agreement they reached in 1951. Who is responsible for what? Who manages interest rates? The Fed. Who manages the fiscal account? The Treasury. Currently, the lines of responsibility are blurred. When a president takes office, his Treasury Secretary should act as the head of the fiscal authority, not vaguely transfer responsibilities to the Fed—this only introduces political factors into the Fed, which I believe interferes with its normal operation.
In my view, we should shrink the central bank's balance sheet and, barring a crisis, have the Fed exit these markets. Doing so would effectively suppress inflation.
Host: The financial crisis changed the world格局, the COVID lockdowns intensified the turmoil. Over a decade of fiscal irresponsibility and market-distorting loose monetary policy has been fermenting. Now even financial experts like James Grant and Ray Dalio question the entire monetary system, young entrepreneurs flock to Bitcoin because they no longer trust the dollar. Kevin, something fundamental has ended and is irrecoverable. How do you view this opinion?
Kevin Warsh: This view is wrong; I am not one to give up easily. We are on the eve of a productivity explosion, AI will bring huge changes. The overall implementation of public policy doesn't need to be perfect. You, I, and our colleagues might be able to conceive perfect trade policy, regulatory policy, or tax policy. But perfection is not a necessary condition. We just need to make policies slightly better than the status quo, return monetary and fiscal policy to a reasonable track, and the U.S. economy will flourish.
This is not a return to Reaganism. We need new economic policies in a new world to inspire the American spirit, promote individual freedom and liberation. The key is to restore the original functions of institutions like the Fed—these important institutions should mostly stand aside, intervening only in emergencies.
Host: So the Fed doesn't need a revolution, just some kind of 'fix' and adjustment?
Kevin Warsh: Exactly. Like restoring a great golf course: be true to the original architectural idea, but not bound by its literal interpretation. When you mentioned Bitcoin, I seemed to detect a somewhat condescending attitude—as if saying people buying things like Bitcoin are ridiculous.
Host: But didn't Charlie Munger criticize Bitcoin two or three years before he died? He called it evil, partly because it would shake the Fed's ability to manage the economy.
Kevin Warsh: It could bring market discipline, or it could signal to the world that certain mechanisms urgently need repair.
Bitcoin Doesn't Bother Me; It's Not a Dollar Substitute
Host: Doesn't Bitcoin make you nervous?
Kevin Warsh: Bitcoin doesn't make me uneasy. I just mentioned Marc Andreessen—it was he who showed me that whitepaper. It was the original whitepaper. How I wish I had understood Bitcoin and the disruptive nature of this new technology as clearly as he did back then. Bitcoin doesn't bother me. I see it as an important asset that can help policymakers discern right from wrong in decision-making. It is not a substitute for the dollar. I think it can often be an excellent supervisor of policymaking.
To elaborate more broadly on what Charlie Munger and others might have intended, a plethora of securities under various names are emerging. Many—even the vast majority—are trading at prices severely disconnected from their true value. So how did Charlie and his dear friend Warren discuss this? Innovators, imitators, and the incompetent coexist. The innovators truly driving new technology forward do exist. What I try to convey to entrepreneurs and bankers is: the core technology Marc was展示 (or trying to展示) in the whitepaper is essentially just software—just the trendiest software, it gives us unprecedented capabilities. Can software be used for good and evil? Of course, like all software has two sides. Therefore, I don't make such assertions.
If there's one last point, it's that these technologies are developing here. I don't just mean the Stanford campus, but also top engineers across the U.S. and globally, they come from China, Europe, and all over the world. Even now, they still come to the U.S., trying to build these things. I believe building it here gives us more opportunities.
