The Fed Turns a Page: Warsh and Greenspan

Kevin Warsh’s first meeting as Fed Chair last week and the death of longtime Fed Chair Alan Greenspan yesterday signaled that the Federal Reserve is embarking on a new chapter in its history. The Fed is now turning a page as it leaves its policies for the first quarter of the 21^st Century behind. Under Warsh the Fed is abandoning its policy of forward guidance and with that the so-called “dot plots” that were introduced in 2012 which presented the forecasts of individual members of the Open Market Committee will soon go by the wayside. As a result, the Fed Put that worked as a floor underneath the stock market since 1987 has been removed. Look for more volatility in stock prices. As if on cue, the stock market is responding today. Over the longer term the four task forces authorized by Warsh, which will include outside members, may end up having a far more lasting effect on the Fed.

 

Ten years ago, I reviewed Sebastian Mallaby’s biography of Alan Greenspan so there is no need to recount his remarkable career here. (See: https://shulmaven.blogspot.com/2016/10/my-amazon-review-of-sebastian-mallabys.html ) In a nutshell a kid from the Washington Heights neighborhood of Manhattan rose to become the conductor of the global economic orchestra as I wrote then. Both Henry Kissinger and Henry Kaufman, my old boss at Salomon Brothers came from the same neighborhood. Something must have been in the water.

 

I met Alan Greenspan twice as an outside consultant to the Federal Reserve Board. The first time was in December 1991, when the Fed invited a group of real estate experts to discuss the then ongoing meltdown in commercial real estate. Greenspan listened and maintained a sphinxlike expression. Two days later he announced an inter-meeting 100 basis point cut in the discount rate and a 50-basis point cut in the federal funds rate. He obviously took seriously my comments and those of others on the gravity of the situation.

 

The second time was in December 1996 when the Fed called in several Wall Street equity strategists and few academics including Robert Shiller. The topic was whether or not the roaring bull market in stocks was getting out of control. A few days later Greenspan gave his famous “Irrational Exuberance” speech. When the formal meeting was over, I sat with him and a few others at a small table over lunch. There he gave me a marked-up copy with his autograph on “Comments on Credit,” Salomon Brothers weekly publication on the credit markets and the economy. He noted a small error. When I got back to the office I gave the copy to Robert DiClemente, the author of the report. Bob was flabbergasted that Greenspan read his work in such detail and he immediately had it framed. One of the secrets to Greenspan’s success was that he was very meticulous. He knew every data point in most economic series, both current and historical.

 

Under Greenspan’s leadership the Fed helped lead the U.S. economy into an extended period of moderate growth, with low unemployment and low inflation. Along the way he rescued the stock market after the 1987 crash giving rise to the Fed Put, organized the rescue of Long-Term Capital Management 1997, the Asian crisis of 1998. The whole period form 1982 -2007 was known as “the great moderation.” Unfortunately, it came crashing down with the financial crisis of 2008. Just as in the days of ancient Rome, a slave in the chariot of a conquering general would warn that all glory is fleeting, the ghost of Hyman Minsky should whisper in the ear of every Fed chair that “stability leads to instability.” I think Warsh understands that and let us hope he won’t be a slave to President Trump.

 

All that said, Alan Greenspan was a giant in the world of central banking. May his memory be a blessing.

The Purim War- Part 8: Trump Capitulates

 As we noted in a prior post, Trump is completely transactional and has no loyalty to his ally Israel. (See: https://shulmaven.blogspot.com/2026/06/the-purim-war-part-7-israel-learns.html ) Little did we realize at the time how craven Trump would be with his capitulation to Iran. Trump has gone from “unconditional surrender” to practically whatever Iran wants. The 14-point Memorandum of Understanding (MOU) leaves open Iran’s nuclear program and enables them to continue their ballistic missile program. Indeed, the MOU calls the termination of the war in Lebanon without mentioning Hezbollah and without Israel being a signatory to the deal. Recall Israel entered the war cheek by jowl with the U.S. in the most coordinated inter-allied cooperation since World War II.

 

Perhaps more troubling is that Iran is now given sanctions relief to sell its oil on the market thereby funding the regime that is now desperate for cash. Although the deal keeps the Strait of Hormuz to be free from tolls for 60 days, it leaves open the very real possibility of tolls going forward. This is in complete contradiction to international law and America’s long held position on freedom of the seas. (See: Shulmaven: The Purim War- Part 5, Deadlock in the Strait of Hormuz* )

 

Put bluntly, in exchange for temporarily opening the Strait of Hormuz, which was wide open prior to the war, Iran has conceded nothing. To be sure, if Iran fails to move forward on eliminating its nuclear capacity, the U.S. reserves the right to resume the war.  Trump has threatened this, but his threat has zero credibility with the midterm elections just around the corner. What we have ended up with is something worse than Sherman-Malley-Obama-Biden deal of 2015.

 

In 1938, just after the Munich summit with Hitler, Winston Churchill called out Neville Chamberlain with the following:

 

   “You were given the choice between war and dishonour. You chose dishonour, and you will have war.”

 

I fear that instead of peace, Trump has set the stage for the next Iran War in the not-too-distant future.

My Review of Liaquat Ahmed's "1873: The Rothschilds. the First Great Depression......"

A Good Deflation

Liaquat Ahmed of “The Lords of Finance” fame has written a new account of the long depression of the last quarter of the 19^th Century. To me, Ahmed mixes up depression with deflation. A depression signals a massive decline in aggregate output, which did not happen and a deflation signals a sustained decline in the price level, which did happen. I have covered some of the ground here in two prior reviews (See:  https://shulmaven.blogspot.com/2016/02/my-amazon-review-of-robert-j-gordons.html and https://shulmaven.blogspot.com/2017/09/my-amazon-review-of-richard-whites.html )

In the late 1860’s Europe witnessed a great railroad boom that was interrupted by the Franco-Prussian War of 1870. France was required to pay a huge indemnity to the newly united Germany. Instead of being a burden, it turned out to be a boon as the Rothschild banks, who are featured prominently in the book, fund the payment with two massive bond issues. Money came out of the woodwork from all over Europe to buy the bonds and that lead to a surge in economic activity leading to a boom in lending to eastern Europe and to Latin America. It all came unglued when the Vienna stock market crashed that rippled into Germany. Sixty years later a bank failure in Vienna would also deeply impact Germany, but to a far greater extent. In the U.S. the trigger was the collapse of the Jay Cooke & Co. banking operation that financed the Union during the Civil War and became undone with the failure of the Northern Pacific Railroad. 

 

According to Ahmed the crash was exacerbated by Europe moving away from a bi-metallic standard (gold and silver) towards a full gold standard. Similarly in the U.S., the Coinage Act of 1873, later known as “The Crime of 1873” limited the use of silver coinage. With the U.S. and Europe operating under the straitjacket of the gold standard, money in circulation declined and a deflation ensued. Indeed, in the U.S. both leaderships of the Republican and Democratic parties supported hard money

 

All of this was going on against the backdrop of improved global transportation which lowered shipping costs worldwide. For example, both the Suez Canal and the U.S. transcontinental railroad were completed in 1869. Later in the 1870’s and especially in the 1880’s there were huge advances in farm and industrial mechanization. Thus, if other things being equal, prices should have fallen and fall they did.

 

The wholesale price index fell from 140 in 1870 to 116 in 1878, a decline of 2.3% a year. Prices continued to fall and did not bottom until 1899 at an index level of 81. Thus, for the entire period prices declined at an annual rate of 1.9%. This price deflation obviously wreaked havoc for indebted farmers, triggering a populist revolt across the prairie. Their cause was to allow for unlimited silver coinage to expand the money supply and increase prices. Of course, the urban workers would have issues with this.

 

In Europe the political climate darkened with moves against free trade and the creation of the modern version of antisemitism partly tied to the Jewish Rothschild banking family. Indeed, the term “antisemitism” was coined in the Germany of the 1880’s. Further exacerbating the sour mood was the level of opulence of the bankers and industrialists of the gilded age.

 Although there were depressed conditions on the farm, industrial production boomed. There was only a modest decline in U.S. industrial production between 1873 and 1876, but by 1880 industrial output was one third higher than the decade before and it would double in the 1880’s. Industrial production was aided by the surge of immigrant workers flooding into the country from eastern and southern Europe. This explosive growth in industrial activity is the opposite of a depression. Further, in 1879 three major inventions would soon change the world: the incandescent light bulb, the telephone and the internal combustion engine.

 

By the end of the century gold discoveries in South Africa and Alaska eased the monetary pressure and prices started to increase. The deflation was over, but not before the hard money McKinley would defeat the soft money Bryan in the 1896 presidential election.

 

Although I come to a different conclusion than Ahmed, I do recommend his book. He brings insight into the popular feelings of the day, and you get a sense of the people and personalities of that era. 

The Purim War- Part 7* - Israel Learns a Lesson about Trump

Israel is learning a lesson about Donald Trump. Put bluntly, Trump has no loyalty and is completely transactional. Thus, it should not come as surprise that Trump pressured Netanyahu to call off his second and massive strike against Iran in retaliation to a missile attack on northern Israel over the weekend. It seems that Trump, contrary to “The Art of the Deal,” wants a deal with Iran more than Iran does.

 

Of course, it goes without saying that the U.S. and Israel have different interests with respect to Iran. To Israel Iran is an existential threat while to the U.S. Iran is more of a problem to be managed, shades of Obama/Biden. Moreover, Hezbollah’s presence in Lebanon represents a direct threat to Israel, while to Trump, Lebanon is a sideshow. Thus, from Israel’s point of view any Iran deal that leaves Hezbollah with a free hand in Lebanon is a bad deal for Israel.

 

As a result of Trump’s actions, Netanyahu is between a rock and a hard place. His room to maneuver is limited and he might be forced to accept a deal not of his liking or face an aid cut-off from the U.S. The alliance that began with high hopes last June has become very fragile and is on the verge of shattering.

*-See: https://shulmaven.blogspot.com/2026/05/the-purim-war-part-6-cracks-in-home.html

My Review of Sebastian Mallaby's "The Infinity Machine: Demis Hassabis, Deep Mind......."

 The Prophet of AI

 

Sebastian Mallaby, Council on Foreign Relations fellow, tells us the story of artificial general intelligence through the life of Demis Hassabis, the founder of Google’s Deep Mind. The story is not limited to Hassabis as Mallaby discusses his rivalry with Sam Altman’s OpenAI and Mark Zuckerberg's Meta. Along the way we meet venture capitalist Peter Thiel and Elon Musk. Mallaby also goes into great detail as to how AI works and how AI agents can hallucinate and go rogue. Thus, in a way the book is primer on AI.

 

Hassabis is the son of immigrants to North London, with a Chinese Singaporean Mom and a Greek Cypriot father. As a child he was chess prodigy and was a champion by age 13. From chess Hassabis moves on to gaming, first a player and then as a successful designer. He gets degrees from Cambridge in physics and neuroscience which gives him an excellent background to pursue his interest in AI.

 

He forms Deep Mind in 2010 with the support of Peter Thiel and other venture capitalists. There he and his colleagues do pioneering work in deep learning and reinforced learning. In 2014 Google bought out Deep Mind for $650 million, making Hassabis worth $134 million. His interest is not in money but rather pursuing the science of artificial general intelligence. Their models became experts at the highly complicated game of Go, so much so that they defeat the world champion in a globally televised event in Korea.

 

The reinforced learning technique used for GO was then used to detect the shapes of proteins using their Alpha Fold model. This innovation is hugely important in the drug discovery process, so much so that Hassabis along with his colleague John Jumper win the Nobel Prize for chemistry in 2024.

 

One of Hassabis’ colleagues at Deep Mind was Mustapha Sulayman, another immigrant son from North London. Sulayman was very concerned about AI safety, so much so that Google delayed releasing its early AI models to the public. After an intital misstep, Google's Gemini has become a world beater. However, when Open AI released ChatGPT, the competitive juices began flowing and the safety issues were put on the back burner. Ultimately Sulayman ended up heading Microsoft’s AI efforts. In a strange quirk of history, we now two immigrant children from North London running the AI efforts of two of the major players in the field.

 

Mallaby hardly mentions Dario Amodei, the head of Anthropic, which is fast becoming an industry leader. Amodei was at OpenAI and then left to form his own company. Anthropic is the developer of Claude which is fast becoming the AI model of choice in the enterprise. My guess is that Mallaby did not have the time to interview or understood the significance of Amodei in the AI race. That aside Mallaby has written an important book on what is becoming a revolution in how we approach the world around us.

American Politics has gone Batshit Crazy

On the eve of the 250^th anniversary of the signing of the Declaration of Independence, American politics has gone completely batshit crazy. Where the Republican leadership spent millions of dollars only a few weeks ago pillorying the highly flawed Texas Attorney General Ken Paxton in Senate primary, they are now falling over themselves to support him. It no longer matters that he has been investigated for securities fraud, been impeached by his own party and that is wife is divorcing him over his adultery.

 

On the Democratic side leading Democrats continue to support Graham Platner, their preferred Senate candidate in next week’s Maine primary. Those leaders choose to ignore the fact that Platner is a Jew-hating neo-Nazi who has a habit of sexting a half dozen women while still being married. Several years ago, Anthony Weiner’s New York City’s mayoralty campaign collapsed over his infamous dick-pix.

 

What is going on? It seems that the hatred of MAGA-Republicans for their Democratic counterparts overwhelms any sense of decency and the Democrats hatred of the MAGA-Republicans, if anything, is greater than the Republican hatred of them. Of course, the polarizer-in-chief, Donald Trump has set the tone for the divisions in our land. However, I would caution to note that Trump is the product of something that has been brewing in our politics for a long time.

 

My guess is that the infighting we are now witnessing is reminiscent of the religious wars of the late Middle Ages. Thus, if we are in a religious war where politics has substituted for religion, compromise is impossible. Recall that our founders wanted to separate religion from the state, but the fanatics in both parties are now making that difficult causing our founders to turn over in their graves.

My Review of Adrian Woodridge's "The Revolutionary Center"

Liberalism Under Siege

Adrian Wooldridge, formerly political editor of The Economist and now an opinion columnist at Bloomberg, has offered up a history of liberal political thought from Montesquieu to John Stuart Mill and on to Hayek, Keynes, and Friedman. That liberalism faces attacks to today from the authoritarian Right and the identitarian Left reminiscent of the 1930’s. (See: https://shulmaven.blogspot.com/2023/11/reliving-1930s-part-5.html ) And it goes without saying that the concept of free speech is now under a withering assault. Wooldridge wants to reclaim liberalism’s revolutionary history that brought freedom and prosperity to much of the world. Thus, you can call him a revolutionary centrist, and the world truly needs hm today.

 

For whatever reason, too many people have abandoned the basic tenets of liberalism which include freedom of thought, a free market, room for heterodox views and the removal of obstacles to self-development. In short, Wooldridge believes in a meritocracy that offers a ladder up for those folks who have been left behind.

 

In terms of government liberalism stands for the separation of powers as articulated by the U.S. Constitution. He quotes Lord Acton about power corrupting, and we are getting a real-life lesson with the antics of Donald Trump.

 

Wooldridge sees three strands of liberalism today. The first being neoliberalism with its faith in markets to solve society’s problems. Second, managerial liberalism, which is characterized by an elite consensus coming out of Davos, the universities, and the NGOs. The third form is progressive liberalism which exalts rights over responsibilities especially for groups. I would not call this liberalism.

 

Wooldridge offers political solutions reanimating liberalism. He moves to the right and the left at the same time by calling for higher taxes, antitrust enforcement of the tech companies, immigration restrictions, and a return to merit-based admissions to the universities. He also doesn’t believe that Muslim fundamentalism is compatible with liberalism. If the Muslim population of Europe can’t be integrated into the broader society Europe will (is) be in a world of hurt.

 

To me the solution is in governing, not only in making political compromises as necessary as they are. In order for liberalism to succeed, it has to govern successfully. That means a wholesale repudiation of the “blue model” that now governs most of America’s large cities. The high tax-low service model of the blue cities and today’s U.K. for example, is forcing voters to move towards the authoritarian right and to the socialist left in the U.S.

 

We are living in a time where the horseshoe theory of politics holds as both the right, and the left ending up in opposition to the liberal order that has served us well for of these years. It is a real shame, and it is very disheartening. Wooldridge points us a way out of this malaise.