The Case For A Smaller, Humbler Federal Reserve

For two decades, the Federal Reserve has behaved less like a central bank and more like the nation’s emergency room physician, trauma counselor and part-time life coach.

Markets sneeze, the Fed reaches for liquidity. Congress overspends, the Fed absorbs the debt. Asset bubbles inflate, then burst, and somehow the cure is always another round of intervention.

Enter Kevin Warsh, confirmed on May 13 as the 17th Chair of the Federal Reserve in a 54-45 Senate vote, one of the most contentious confirmations for a Fed chair. The margin reflects not the weakness of his qualifications, but the depth of resistance to what his appointment represents: a genuine rethinking of what the Fed is for, and what it should stop trying to do.

I first met Kevin in 2002, when we both worked in the White House. He was sharp, relentlessly prepared, and — this is the thing I remember most — genuinely skeptical about whether Washington’s instinct to intervene was always as helpful as it looked.

He later became, at 35, the youngest person ever to serve on the Federal Reserve’s Board of Governors, sitting alongside Ben Bernanke during the darkest moments of the 2007-08 financial crisis. Even then, what distinguished him was his willingness to question whether the Fed was doing too much, too often.

The case for reform rests on a straightforward proposition: the Federal Reserve has become too large, too discretionary and too confident it can manage outcomes it cannot predict. Since the financial crisis, it has evolved from lender of last resort into allocator of capital, guardian of asset prices and financier of chronic federal deficits. The Fed’s