As his past speeches have shown, Fed Chairman Kevin Warsh knows well that the Fed monetary policy follies of 2009-22, with their money printing and artificially low interest rates, have left the U.S. with a huge overhang of overinflated stocks, dodgy debt and tottering real estate. He must thus burst this gigantic bubble, while avoiding a deep recession, huge blame for his tight monetary policy or a surge in support for the left that would produce a Democrat President in 2028 and leave him without a job. There is only one way to achieve this combination of aims: ensure that the forthcoming market crash is blamed on the AI oligarchs and largely confined to the overblown tech sector. Here’s how he can achieve this desirable outcome.

A few weeks ago, I forecast a gigantic crash in October, due to the massive overhang of worthless assets in debt, equity real estate and crypto markets. Warsh would presumably prefer to push such a crash beyond the November 3 midterm elections and President Trump certainly would prefer that. The AI bubble with the debt associated with it, the massive defaults impending in private credit and the grossly overextended level of the stock market all point to trouble ahead, certainly in a timeframe of months, not years. Depending on the economic aftereffect of such a crash, there would then be considerable political implications, both short-term and long-term.

To examine the worst-case scenario, the October 1929 stock market crash resulted from a lengthy period in which the Fed, managed at that date by the New York Federal Reserve Bank, kept interest rates too low in the face of rising speculation. Britain had overvalued the pound and linked it to gold in 1925, so despite high unemployment and economic sluggishness (the British 1930s were much better than the 1920s, unlike everywhere else) British interest rates were raised from 4% to 5.5% in order to protect the gold parity of the pound, with the real economy’s continuing sluggishness preventing further rises. The effect of this was very similar to the pound’s misguided entry to the European Monetary System in 1990-92. It produced the same artificially tight money and artificially sluggish economy and might well have produced, before 1929 instead of in 1931, a collapse of the gold parity similar to the pound’s collapse of September 1992 — had George Soros been around or the great Bank of England Governor Montagu Norman been absent.

Britain’s pound overvaluation in the late 1920s, its economic sluggishness, U.S. economic exuberance and a rising U.S. stock market caused a flood of money into the United States, with the usual bubble-producing effects in the real economy. The Fed, however, did not wish to be blamed for bursting the stock market bubble, even though as in 1907 much of the froth was caused by an over-expansion of brokers’ loans by the New York banks. It therefore raised the discount rate only modestly, from 3.5% to 5%, before raising it again to 6% in August 1929, thereby precipitating the immediate downturn, which became the Wall Street Crash in late October.

Later historians (notably Milton Friedman, Anna Schwartz and Ben Bernanke) blamed the Fed only modestly for raising rates in 1928-29, though contemporaries certainly did blame it vociferously. Instead, modern historians have focused on the Fed’s errors after the collapse of the Bank of United States in December 1930 and the European banking crisis sparked by the Creditanstalt collapse in May 1931. Although lowering rates, the Fed then did nothing to inject further money into the system, as the U.S. banking system spiraled downwards, with money vanishing into thin air as each bank failed, towards full closure of the banks in March 1933.

In my own view, the Fed was certainly to blame, but Hoover’s two major errors of the 1930 Smoot-Hawley Tariff, imposed when (unlike today) world trade was already in sharp decline, and even more egregiously his increase in the top rate of income tax from 25% to 63% in June 1932 were much more salient causes of the unprecedented economic collapse of 1930-33. That collapse would not have taken its full ferocity without Hoover, since in a Hooverless world, with no Smoot-Hawley and no tax increase, the Fed’s 1930-33 monetary policy would have been roughly appropriate; there would thus have been no banking collapse and the economic decline would have been moderate.

As George Selgin and Amity Shlaes have demonstrated, the full unpleasantness and duration of the Great Depression were due not simply to Hoover’s errors, but to the draconian and anti-market policies of Franklin Roosevelt’s New Deal, notably the ubiquitous government meddling through the National Industrial Recovery Act, the extra costs imposed by unionization after the 1935 Wagner Act and Henry Wallace’s Stalin-inspired program of agricultural price supports, alas with us still. Other countries, notably Britain and Germany, had deep recessions, but exited into recovery half a decade before the U.S., for which only the November 1938 midterm elections stymied the New Deal’s bureaucrat fanatics and brought relief.

In summary, the Great Depression was caused primarily by misguided government policy overall, but the crash that sparked it off was partly the Fed’s fault. The Fed’s punishment was that, after the appointment of Marriner Eccles as Fed chairman in 1934, monetary policy was effectively run by the U.S. Treasury until 1951 (which did not improve it, needless to say). Warsh clearly wants to avoid that outcome, so he will raise interest rates only gradually, even though inflation is above the Fed target and the U.S. economy is strong. (Official statistics have been understating the economy’s strength, because the available workforce has effectively declined through illegal immigrant repatriations, and per capita growth probably exceeds reported growth).

The other suboptimal outcome is a recession so deep that the Democrats sweep back to power in 2028, with Trump’s tariffs or the Iran War being blamed. Warsh may not care much about Trump’s legacy, but he cares about his own and being booted out in early 2030 (four years from his installation) by a left-wing Democrat who then reverses all his policies and returns to Bernankeism is something he doubtless wants to avoid. After a market crash but without a near collapse of the banking system, it is unlikely that the U.S. economy would go into the kind of deep depression for which it was heading in late 2008, with an additional 700,000 unemployed every month, but if it showed signs of doing so, Warsh would doubtless loosen monetary policy quickly to cushion the blow. Unlike Bernanke however, he would not engage in massive Treasury bond purchases and would rely on Treasury Secretary Scott Bessent and OMB head Russell Vought to keep fiscal policy tight, rather than indulging in a program of unproductive spending followed by tax increases, as Hoover and Bush/Obama did.

To minimize the blame on both the Fed and the Trump administration from a market crash that is probably inevitable and the economic downturn that may follow, Warsh needs an alternate scapegoat. Fortunately, one is available. Dario Amodei of Anthropic has pinned his colors to a $2 trillion company valuation for his Initial Public Offering, currently expected in November. He has not yet launched his sock puppet to achieve this, as Pets.com did in 2000, but a puppet Claude, possibly animated, may be impending. However, Amodei and his fellow AI giants have wrecked his chance of a $2 trillion valuation by demanding government or international regulation of his product. Government regulation would slow AI development to a crawl, as well as ensuring that, as in solar power cells, the business would move to China, which would seize the global AI market by ignoring foolish regulations imposed by anybody but itself. With that prospect, surely even the doziest tech investors would see that a $2 trillion Anthropic valuation was too high by a factor of at least 10.

An IPO of $2 trillion in market capitalization that plummets in price immediately after the offering would undoubtedly cause the market to examine other values that are excessive or shaky, very likely causing a substantial crash. That crash would very clearly be caused by the AI barons, not by the Fed or Trump. Such a market crash, concentrated in AI and the more foolish debt creations of the private credit market, could be expedited by the Fed in a myriad of ways, for example by keeping the money market tight and uncertain as Anthropic’s gigantic IPO is priced.

Should a downturn be set off by a failed AI IPO, led by a leader of the “effective altruism” movement and a leading supporter of the “woke” wing of the Democrats, public attention will focus on the bubble valuations in the market and the monetary follies of the Bernanke era, though doubtless the media will try very hard to blame Trump and Warsh. Furthermore, an inevitable scandal in one of the major AI companies (which is bound to emerge in such a situation) should concentrate attention on the corruption of tech and the effective altruists. The only danger then is some kind of idiotic regulation of AI, but at that point Trump can invoke national security grounds to “rescue” the industry from such a foolish outcome, thereby ensuring that the AI golden goose remains in flourishing shape, if with a few gaudy valuation wing feathers clipped.

The 2028 election would then be highly uncertain, but at least it would not be lost in advance, as was that of 1932. There would be a good chance of a Trump-like succession, probably in the form of J.D. Vance, under which Warsh would presumably be offered a second 4-year term in office. As Paul Volcker demonstrated in 1979-87, two 4-year terms should be enough to embed Warsh’s monetary policy approach in place and cement his legacy.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)