Why Warsh won’t be remembered for cutting rates

If Warsh maintains the fake-market approach, it is likely to produce a crisis even larger than that of 2008. Thanks primarily to policy choices made in response to that crisis, specifically the Dodd-Frank Act, the Fed is now authorized to support a much broader set of systemically important nonbank financial institutions. Markets understand that in a systemic event, authorities now possess—and have shown the willingness to use—an array of tools to support failing institutions and markets. That expectation lowers perceived downside risk, encourages leverage, and spurs risk-taking across the much larger array of institutions. When losses eventually materialize, as they always do, the scale of intervention required will be larger.