If confirmed, Kevin Warsh would be the latest Federal Reserve chair whose career took place primarily on Wall Street rather than in academia. The ascent of Wall Street veterans in the Fed risks skewing monetary policy to favor large investors and the wealthiest, writes Franny Philos Sophia.
On January 30, President Donald Trump nominated Kevin Warsh to chair the Federal Reserve. Warsh previously spent seven years in Morgan Stanley’s mergers and acquisitions unit before becoming the youngest Fed governor in history in 2006 at age 35. He is currently a partner at billionaire investor Stanley Druckenmiller’s family office and a lecturer at the Stanford Graduate School of Business. If confirmed, he would be the second Fed chair in a row whose career was primarily shaped not in academia but on Wall Street.
That history matters. On September 20, 2008, when Morgan Stanley was on the brink of collapse, Warsh received an ethics waiver to negotiate directly with his former employer as a governor for the Fed. The next day, the Fed approved Morgan Stanley to convert to a bank holding company, which gained it access to Fed loans that saved the firm. The man who received an ethics waiver to rescue his former employer now returns to determine what constitutes ethical regulatory practice.
Warsh’s nomination epitomizes the hold that Wall Street has over the Fed: where Wall Street veterans rather than academic economists staff the regulator from the chair on down. This hold has been driven by epistemological capture—a pervasive culture at the central bank of seeing the financial world through the eyes of Wall Street—and a revolving door between regulator and industry.
The Fed put is real—and asymmetric
The most striking evidence of the Fed’s orientation toward financial markets comes from Anna Cieslak and Annette Vissing-Jorgensen’s landmark 2021 study in the Review of Financial Studies. Analyzing the behavior of the Federal Open Market Committee, which effectively adjusts interest rates and money supply, from 1994 (when the FOMC began to release public statements) to 2016, they found that a 10 percent stock market decline predicts a 32 basis point rate cut at the next meeting and 127 basis points of cumulative cuts over the following year. The effect is strikingly asymmetric: when markets fall, the Fed eases; when markets rise, there is no corresponding tightening.
This is not a peripheral finding. Roberto Rigobon and Brian Sack showed that a five percent decline in the S&P 500 raises the probability of a 25 basis point cut from 30 percent to roughly 80 percent. Textual analysis of 975 stock market mentions in the same FOMC minutes from 1994-2016 found that 38 percent reflected what the authors call a “driver view”—treating market declines as causing economic damage—while only eight percent treated markets as merely predicting future conditions.
The question is: who decides what counts as a crisis requiring intervention? And does it matter that the people making those decisions increasingly come from the institutions most affected by them?
From academia to Wall Street—and the Warsh case
From Alan Greenspan (1987-2006) through Janet Yellen (2014-2018), no Fed chair brought substantial investment banking experience (Greenspan ran an economic consulting firm serving financial industry clients for nearly three decades before his appointment). Ben Bernanke (2006-2014) came from Princeton’s economics department, Janet Yellen from UC Berkeley. Then Jerome Powell (2018-present) broke the pattern: 20-plus years in the financial sector, including eight years as a partner at the Carlyle Group leading leveraged buyouts, plus stints at Dillon Read and Bankers Trust. He is the wealthiest Fed chair since the 1940s.
Warsh concretizes this disposition toward Wall Street. Christopher Adolph documents that career backgrounds systematically predict monetary policy preferences: central bankers with financial sector experience demonstrate greater sensitivity to financial market conditions and more conservative regulation. Silja Göhlmann and Roland Vaubel found similar patterns across 391 central bank council members.
Warsh’s 2008 ethics waiver illustrates the mechanism. Bernanke’s memoir describes Warsh as his most frequent companion on crisis-fighting conference calls, valued for his “many Wall Street and political contacts and his knowledge of practical finance.” Journalist David Wessel called Warsh “Bernanke’s bridge to Wall Street chief executives.” This bridge allowed information to flow in both directions during a crisis affecting institutions where Warsh maintained relationships.
To be fair, defenders of employing governors and staff at the Fed with financial sector expertise have a point: practical knowledge of market plumbing proved indispensable during the 2008 crisis, and Warsh’s supporters argue his Morgan Stanley background was precisely what enabled effective crisis management. Wall street is essential to the United States’ financial stability. Furthermore, as Bernanke shows, coming from academia does not make one unsympathetic to Wall Street’s needs or perspective.
Nor should it necessarily. The question is not whether such experience on Wall Street or a predisposition toward its perspective has value—it clearly does—but whether it introduces structural biases in how policymakers define crises, set intervention thresholds, and allocate emergency resources. Warsh’s own FOMC record is instructive: in March 2008, as Bear Stearns collapsed, he warned of persistent inflation. In September 2008, amid Lehman’s failure, he still would not “relinquish concerns on the inflation front.” By September 2009, with unemployment at 9.5 percent, he argued for pulling back stimulus. This pattern is consistent with the worldview of investment banking, where revenue models depend on low-inflation, low-rate environments that sustain mergers and acquisitions activity, leverage, and asset price appreciation. A regulator more concerned with labor and everyday Americans may have tailored its response to prioritize the unemployment crisis.
The inflation Warsh warned of never materialized. Yet when Morgan Stanley faced collapse, emergency action came within 24 hours of his ethics waiver.
A pattern of documented conflicts
Warsh’s case is not isolated. A 2011 audit from the Government Accountability Office found that at least 18 Fed directors were affiliated with institutions that used emergency lending programs during the 2008 Financial Crisis. Jamie Dimon served on the New York Fed board while JPMorgan received $391 billion in emergency funds. NY Fed Chairman Stephen Friedman owned Goldman Sachs stock when Goldman received bank holding company approval. Analysis from Senator Bernie Sanders’ office found that $4 trillion out of the $16 trillion dollars in near-zero-interest loans the Fed made available during the Financial Crisis went to banks and businesses of current or former Fed directors: a disproportionate sum.
Inside the New York Fed, the culture of deference was captured on tape. Carmen Segarra, an examiner for the New York Fed placed inside Goldman Sachs in 2011, made 46 hours of secret recordings revealing systematic accommodation of the institution. When she determined Goldman lacked a required conflicts-of-interest policy, she was pressured to change her finding and ultimately fired. Thomas Lambert’s 2018 study found more broadly that banks engaging in lobbying are approximately 45 percent less likely to face enforcement actions. David Lucca, Amit Seru, and Francesco Trebbi’s 2014 study in the Journal of Financial Economics found a complementary pattern: regulatory staff who later transition to the private sector are associated with more lenient enforcement in their final years of public service, suggesting the revolving door and lucrative promises of future private industry work directly shapes supervisory behavior.
The 2020 COVID crisis provided a real-time demonstration. The Fed hired BlackRock to manage up to $750 billion in corporate bond purchases—despite BlackRock being the world’s largest asset manager with obvious conflicts of interest. Of the initial $1.58 billion in ETF purchases, 47 percent came from BlackRock’s own iShares products. The House Select Subcommittee on the Coronavirus Crisis found the program’s “primary beneficiaries have been corporate executives and investors, not workers.”
The distributional consequences of the Fed’s responses to these crises are stark. According to the Fed’s own data, the top 10 percent of households own 87 to 89 percent of all corporate equities and mutual fund shares. The bottom 50 percent own roughly one to two percent. The Bank for International Settlements found that following quantitative easing, net wealth of the richest quintile grew four times as fast as the second quintile. Juan Antonio Montecino and Gerald Epstein concluded that while employment and refinancing effects of quantitative easing were equalizing among income brackets, they were “swamped by the large dis-equalizing effects of equity price appreciations.” Every 10 percent market decline that triggers 127 basis points of cumulative rate cuts sends the largest benefits to the households and institutions that hold the most financial assets.
Incentive alignment, not conspiracy
None of this requires conspiracy. When Warsh negotiated Morgan Stanley’s survival, he likely believed he was serving the financial system’s stability. When BlackRock managed the Fed’s bond purchases and 47 percent flowed to its own products, the firm likely believed it offered the best capabilities. When Fed officials monitor stock market volatility with documented asymmetric concern, they likely believe wealth effects genuinely threaten economic stability.
But the policy results remain: a central bank that systematically cuts rates when markets fall, hired the world’s largest asset manager to buy that manager’s own products, employed governors who warned of phantom inflation while rescuing former employers, and implemented programs where the top 10 percent captured the overwhelming majority of gains.
George Stigler identified regulatory capture as a structural feature of the relationship between industries and their regulators. The evidence presented here extends his framework to what scholars now call “epistemological capture: the shaping of the informational ecosystem through which policymakers understand markets. When the people designing crisis responses spent their careers at the firms being rescued, the distinction between public interest and private benefit becomes structurally difficult to maintain.
Kevin Warsh’s nomination crystallizes the question. It is not whether he is personally conflicted. It is whether an institution increasingly led by Wall Street veterans and whose staffers leave for lucrative roles at the financial institutions they once oversaw can maintain the independence necessary to serve the broad public interest.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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