{"text":[[{"start":7.85,"text":"Kevin Warsh is the dog who caught the car. Since he resigned from his role as Fed governor in 2011, he has devoted a lot of time and energy to criticising his former employer. Now, after years as an outsider far from power, he has been handed the keys. No wonder markets are struggling to decide what kind of Federal Reserve chair he will be: it is one thing to bark at others’ mistakes, another to carry the burden of leadership. "}],[{"start":34.45,"text":"Two questions have attracted attention. Will Warsh bend to the will of Donald Trump, who appointed him and yearns for low rates? And will Warsh’s desire for a quieter, more oracular Fed open the door to dangerous market volatility?"}],[{"start":48.6,"text":"Neither is cause for much worry. Trump tried to bully the last Fed chair, Jay Powell, and failed spectacularly. Given that, Warsh would be a fool to risk his reputation in the eyes of history to win the friendship of a lame-duck president. And it is unclear, to put it mildly, how much Fed “forward guidance” matters. Policy shouts; the accompanying verbiage whispers, and is often ignored."}],[{"start":72.45,"text":"What will be more consequential, especially for financial markets, is Warsh’s view of the Fed’s $7tn balance sheet. His doubts about sustained “quantitative easing” — central bank purchases of government bonds to smooth markets and support demand — were part of the reason he left the Fed 15 years ago. He still loathes the balance sheet, mainly because he believes it encourages fiscal deficits. Last year he said that “policymakers . . . found it considerably easier appropriating money knowing that the government’s financing costs would be subsidised by the central bank . . . It’s no longer obvious whether monetary policy is downstream or upstream from fiscal policy.” He sees a danger that “the central bank becomes the ultimate arbiter of fiscal policy”."}],[{"start":118.85,"text":"This argument has a certain logic: a large Fed balance sheet holds down interest rates; low interest rates encourage borrowing; the US borrows too much; so the balance sheet needs to get smaller to curb fiscal excess. But scepticism is in order. "}],[{"start":133.25,"text":"The idea that members of Congress looked at QE and said: “Yippee, let’s borrow!” is absurd. How many members of the appropriations committees could explain, even in outline, how the Fed balance sheet works? My guess would be roughly zero. Warsh doesn’t need to think this happened, though. It would be enough that QE brought the interest rate on Treasuries down, making it easier for elected officials to borrow. There is not, however, much evidence that outside moments of acute market crisis (when Warsh agrees that asset buying is a good idea) QE has brought down interest rates dramatically — less than half a percentage point, perhaps. Not enough to get a senator excited."}],[{"start":171.2,"text":"But one doesn’t even need to believe that QE has left a big imprint on rates to be sympathetic. Part of the point is that it smooths market functioning, by pushing liquidity (cash) into the financial system. But market volatility sends a signal to policymakers and everyone else that something has gone wrong — for example, that government debt issuance has become excessive. QE, and the accompanying flood of liquidity, turns off the fiscal alarm system."}],[{"start":199.14999999999998,"text":"Even this charitable interpretation of Warsh’s view is contentious. It is not obvious that there is a strong relationship between US market crises and fiscal excess, or that US politicians respond to market crises by pushing for austerity. But even if we reject the QE-fiscal connection, we should agree with Warsh on the broader point: that the central bank has taken on too much risk that belongs in private hands. This suppresses day-to-day volatility and encourages recklessness, storing up rather than removing risk. A smaller balance sheet is, in this more modest sense, the right goal. "}],[{"start":235.79999999999998,"text":"The big worry is that Warsh’s commitment to the unlikely fiscal story marks him as a small-government ideologue, rather than a pragmatist who simply aims for a financial system fit to support employment and price stability. He might go too far, too fast."}],[{"start":252.54999999999998,"text":"The flip side of the balance sheet is that banks have big piles of reserves — cash held at the Fed and earning interest there. These reserves keep payments among banks and their counterparties moving smoothly, because the cost of liquidity is low. But as the Fed balance sheet shrinks and reserves become scarcer, banks will pay more for liquidity, pressuring their profitability. They may pull back on the liquidity they provide to other market participants — private equity and private credit funds, for example. At the same time, new buyers will have to be found to hold all the government bonds. Ideally, these will be stable long-term holders, from sovereigns to insurance companies. But it could be leveraged hedge funds, or stablecoin managers. The ways all this could go wrong are easy to imagine. "}],[{"start":299.25,"text":"What is the right way to reduce the importance of the balance sheet? Go slowly. Just capping it might be hard enough at first. And as the reserve buffers shrink, do not relieve stress on banks by loosening their liquidity or capital requirements. Banks need more margin for error in a scarce reserve regime, not less."}],[{"start":320.15,"text":"What are Warsh’s deep commitments? Is he an ideologue? As he takes on the Fed’s balance sheet, it won’t take us long to find out. "}],[{"start":335.84999999999997,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1782978752_4958.mp3"}