Federal Reserve Chairman Warsh: Bitcoin ends bank profiteering; AI ignites productivity.

On January 30th, Kevin Warsh was nominated as the next Chairman of the Federal Reserve. He is considered a "golden boy" on Wall Street, having served as a member of the Federal Reserve Board of Governors for five years at the age of 35. Prior to his nomination, on December 5th, in an in-depth conversation with the founder of AVEN on his latest podcast, he analyzed from a macroeconomist's perspective how artificial intelligence and encryption technology are reshaping the global economic landscape. Regarding financial innovation, Warsh championed encryption technology, viewing it as key software for modernizing financial infrastructure and breaking the banking oligopoly. He emphasized that reducing payment and credit costs through technology and activating existing assets such as home equity are important ways to help ordinary people build wealth and achieve upward social mobility. Warsh concluded by offering advice to entrepreneurs: In an era of frequent trends, the only way to survive through cycles is to refuse blind following, remain true to oneself, and uphold long-term beliefs. The following is the full transcript of the conversation: for reference only. Q: Thank you for joining us today, Kevin. Today, our goal is to discuss a range of interesting topics, from cryptocurrency to artificial intelligence to governance. Your career has been remarkable. Obviously, you did your undergraduate studies here, have a law degree from Harvard, worked at Morgan Stanley, and then you were the youngest member in the history of the Federal Reserve. Obviously, today you work in the Stan Druckenmiller family office. And many other achievements. When I browsed the career section of your Wikipedia page, I was wondering, Kevin, how do you manage to do so many things at once? It's obvious you have an incredible career. But first, I'd love to take a moment to talk about your childhood. We'd love to know, looking back on your childhood and education, what were some of the key moments that truly shaped you and helped you become who you are today?

Wash:Okay, Sadi, it's great to be here with you. I'm a huge fan of AVEN. We met about six years ago, when it was just an idea of ​​yours. So it's exciting to be here. Regarding childhood, I was always a nerd. I grew up in upstate New York. I went to public schools. My friends were cool kids. They were cool athletes. They were the kind who would sneak out, drive around the streets, and get into bars with fake IDs. They always encouraged me to, but I always had homework. So I was a nerd in high school. I was a nerd in college too.

Q:That's great. That's a great story. Let's change the subject and talk about the technological innovations you've observed in your career. You witnessed the invention of the internet. You witnessed the invention of mobile devices.

Q:That's great. That's a great story. Let's change the subject and talk about technological innovations you've observed in your career. You witnessed the invention of the internet. You witnessed the invention of mobile devices.

Q:That's really interesting. I'd love to delve into two elements of that. One is, when you talk about this, I noticed you mentioned two things. One is this awareness of upward mobility. I'm assuming that if people are moving upward, they are also likely to be moving downward in socioeconomic mobility. We have, at least I've always felt, been unique in the U.S. in providing socioeconomic mobility to its citizens, relative to the rest of the world. I think the ability of people to move upward, and the ability to potentially fall down and be able to get back up and try again, are two very unique things. One thing I've noticed, growing up in many different countries around the world—Bangladesh, Zambia, living in the UK, Canada—is the protections that American consumers have to prevent them from falling and having a serious event that affects the rest of their lives. Even something as simple as this, you know, bankruptcy laws, they protect consumers, they have seven years to start over, they have seven years to polish the boards, try again, and be able to access debt and capital again. What do you think we might be eroding today in the world, especially in the United States, that might prevent us from having this upward or downward liquidity? What do you think we should be doing to accelerate this?

Wash:So we've talked about this wave of productivity, we've talked about how America and our best citizens can utilize it, how knowledge workers with this new tool can become more efficient. But in having this discussion, we can't ignore the situation of at least a large portion of our nation. My way of thinking about this is that the United States has been in a race, one side is technology moving upwards to the right, and the other side is K-12 education, which I have to admit is moving downwards to the right. We can fill this gap in two ways. For example, I won't name any foreign country or continent. They see this new technology, and they want to ban it.

Q:When you consider the productivity gains brought by AI, there's a discussion about how long it will take to see those productivity gains. Just like when the internet came along, we had similar expectations of productivity gains, and it took, you know, more than a few years, but less than a few decades, to start seeing the incremental effects of those productivity gains. How long do you think it will take us to see those productivity gains brought by AI? Will it be shorter? Because its distribution is faster than any previous technology.

Q:When you consider the productivity gains brought by AI, there's a discussion about how long it will take to see those productivity gains.

Q:When you think about this kind of productivity gains, one interesting thing we've been thinking about when we're deploying AI into our systems at AVEN, we call it "Project Prometheus." We're rolling out AI across the company. An interesting question we've had to work on is, where is it most efficient? Is it at the edge—if you'll say so—where an operations specialist talks to a consumer, and we can provide the specialist with as much background information as possible so they can interact with that consumer in the best possible way, all the way up to the point where the consumer might be talking directly to the AI ​​agent itself? Or B, where there's a significant amount of productivity gain coming from our agent's quality control, where AI is arguably better suited to be the manager of operations specialists than AI as a better operations specialist. Have you seen this more broadly elsewhere, where AI is more useful and productive at management levels than at individual contributor levels?

Wash:Yes. So companies your size, born tech companies, but many of you, if I'm wrong, grew up and learned in the internet-native era, but you're AI-native. So I have a few points to make. First, because you're a dynamic company, because you're essentially a disruptor, you're looking at the established players in your industry and saying, "How can I do this better?" You'll be on the efficiency frontier relative to them. That's in the DNA of companies like yours, and I've learned that over the past five years. For most companies, whether startups or more advanced growth companies and public companies, my feeling is that their first priority is cost savings. Their first thought is, "Can I make these people better, more efficient? Can I sideline some workers who might be overseas and replace them with AI?" Most haven't yet said to themselves, "How can I drive revenue? How can I scale my business? How can this make me better, faster, and smarter than my competitors?" So it's a bit like moving up on the profit and loss statement. You can even judge whether it's better to move up or down from the top. Q: One of the most interesting things about this is that we're actually very excited about increasing revenue because one of the best places we've found is where we can respond more accurately to more customers. So a very simple manifestation of this is that we can now support a wider variety of products with fewer people—and I think in some ways this is still an efficiency argument. But if you push it to the extreme, we can now use AI to build a customized product for every single consumer, which was simply impossible five years ago. It would have been impossible for Capital One or Bank of America to build a customized credit card for every American because they simply couldn't support such a huge level of differentiation. Our premise for starting this company was that we should be able to support customized products for every consumer, because we should have the technology to support this Cambrian explosion of consumer configurability. We see it as Facebook's news feed; everyone who opens Instagram, LinkedIn, or Facebook sees a completely different version of the app. Our app is AI that allows us to do that in the lending field, in the loan field. I think that's a unique thing. It obviously unlocks more revenue, but I think a better customer experience was impossible before.

Wash:I mean, my inner macroeconomist gets really excited about this for the following reasons. You think you've recruited the best talent to your company. So what does AI do? It lets them do more, expands their possible responsibilities, lets you build more products, expands the range of things you can do, so a five-year plan might become a two-year plan. You're not replacing people; you're letting that person do more. You know, the history of technology isn't about machines replacing people, it's about people and machines working together to do things they couldn't do before.

The most radical thing about this new technology is that everyone can use it; they don't need to be computer coders like you used to be. They can pick up the phone, they can ask a question, they can explore things in an unstructured way. For the economy, that's the source of the big breakout. It's those "Ahhh" moments that are exciting. So the question is, will more "Ahhh" moments happen in the US, or in China, or in Japan and South Korea? It might sound like a narrow-minded view, but I bet it's possible. I bet the broad range of macroeconomic policies currently in place will make it even more likely. Q: How do you see the trajectory of AI and cryptocurrency today, two major technological evolutions, revolutions happening roughly at the same time? How do you see this interaction? Today they are mostly two separate things, happening somewhat independently. Where do you see this interaction? Walsh: I don't think economics is a zero-sum game. I don't think that if the U.S. grows faster, it's a loss from other countries' growth. But when you tell the story of these two revolutions, they happen more here, are born more here, are created more here, and more engineers are working on them here. I don't think it's a coincidence. To audiences around the world, I'm going to sound like a narrow-minded American again. But I don't think it's an accident. Maybe on the other side of the world, the application of these technologies is happening at an extremely rapid pace. But if innovation happens in the U.S., it means a very promising future for American activity. I think the president calls it a "golden age." I believe there are many people in your company who like the president and some who don't. But I think he might be right about this, probably because these two technological revolutions, at least as important as the Industrial Revolution, happened about ten years apart. What's interesting on campuses like this is that if you ask 18-year-olds whether they're going into cryptocurrency or AI after their first computer science class, for a while it was all cryptocurrency, then it was all AI, and for this year's freshmen, it's a mix of both. Part of that is because I think there's a much better understanding of cryptocurrency now. Ten years ago, or even earlier, when the Bitcoin white paper came out, I was hanging around this campus, and you and one of my best friends explained it to me in 2011. I'd say even then I didn't fully understand it. Then, shortly after, most of the people in Silicon Valley showed up in Washington and said, "We're here to tell you about cryptocurrency." I remember thinking it was a huge mistake. Why? It's just software, you could say, you could write it better than I could. It's just cool new software. But somehow they marketed it as "cryptocurrency," which to people in Washington, Crypto means "secret" and Currency means "money." Unsurprisingly, for a decade Washington has been saying, “We don’t like secrets, we manage money, stay away.” So I think cryptocurrency and that revolution could have happened faster, more gracefully, more efficiently, and with more applications. There would have been an explosion of discussions about what this means to improve the financial system, to improve payment tracks, instead of the past, because I think it was misunderstood. But I would say that in the last 6 to 12 months, people now understand what it is and what it could be. Most Silicon Valley people historically didn’t go to Washington and say, “Can I get a license to implement new software?” I think now those software decisions are made by users, implementers, customers, who say what they want. Washington can draw up the overall fences and provide some specific regulations. But if it’s really going to be a productivity boost, it won’t be set by Washington, but by the customers here or the products being built. I think the transition from great announcements to implementation for AI is faster. I still think Washington saw this, initially out of fear. But if the truth is that AI is a revolution in every country in the world, whether for peace or prosperity, you would want the United States to be a leader in it. I am more confident than a year ago that the United States will be a leader. Incredible.

Q:What do you think, you know, do you believe in cryptocurrency? Do you think other regulators and others in Washington don't believe in it?

Wash:That's a good question. I think the gap between my intuition and theirs may be narrowing. For the past ten years, I've felt there's been too much confusion. I feel like it's been described as: "We're going to build an alternative universe, you're in the central bank, you're in Congress, you're in the White House, you don't need to worry about it, but we're going to destroy you." Just feels like that's neither true nor accurate. The reality is that most financial services are built on the tracks of 20 and 30 years ago.

Q:What do you think, you know, do you believe in cryptocurrency? Do you think other regulators and others in Washington don't believe in it?

Wash:That's a good question. I think the gap between my intuition and theirs may be narrowing.

For the past ten years, I've felt there's been too much confusion. I feel like it's been described as: "We're going to build an alternative universe, you're in the central bank, you're in Congress, you're in the White You know, that old joke isn't entirely wrong. What's the best way to transfer a million dollars from a South American country to the United States? Put the cash in your luggage, board a plane, bring it over, and come to the US without declaring it, perhaps violating United Airlines' laws and regulations. But for a long time, that was quite efficient compared to the three or four days it would take to transfer that money, the uncertainty of the process, and the fees charged by intermediaries. Cross-border payments are a perfect example. And what the new software allows us to do, as you know better than I do, is to make these transfers in a safer, more reliable, more transparent, and instantaneous way. For those worried about whether this is a way to circumvent the law, this software, which we can describe as cryptocurrency, isn't anonymous; it's pseudonymous. If the authorities want a search warrant, they want to know everything about it, and the paperwork is there. So this isn't something we should be afraid of. The fact is, financial services need a lot of innovation. For years, some established companies have said, “We’re not interested, we don’t need it, we don’t trust it.” Well, they have a very different attitude now. Similarly, I think for people in the lower socioeconomic strata, who have been paying far too much to send money to relatives overseas, or even to deposit money into bank accounts, send it to cousins ​​around the world, or even to finance it, the cost of that financing has the potential to drop dramatically. These products have the potential to be better understood, more transparent, and, well, I think I just advertised for your great companies. This is a moment that didn’t exist 10 or 20 years ago. Paul Volcker, who managed the Federal Reserve for many years, until a long part of the last decade, went on to say that the best invention in financial services in his lifetime was the ATM. Well, we can certainly do better than that. We can certainly develop transparent, low-cost products that are accessible to all our fellow Americans, allowing them to achieve the American Dream without having to navigate some maze and pay the five percent they were initially charged. That’s the market opportunity. I think this is good for the United States. I want to make one last point. I think it's good for competition in the financial services industry. If I were to be honest about my time in government, I was in office during the 2008 financial crisis. I had hoped that we would have a more competitive banking system after the crisis. Instead, our banking system became less competitive. That's the market opportunity. Technology has the potential to drive a range of products and services that might not have been possible five or six years ago. I think this is a huge opportunity that the U.S. economy will likely benefit from.

Q:I think one point you made that I really liked, albeit slightly biased, is that the innovation of cryptocurrencies helps to improve the efficiency of transactions in consumer financial products, and these savings help consumers save money every day. One of the largest asset classes accessible to U.S. consumers is obviously their home equity, which has been a source of wealth for U.S. consumers for decades. How do you think this will evolve? Do you think things will be different in the next 50 or 100 years compared to the past 50 or 100 years?

Q:Yes. There's obviously a lot of innovation in the home equity space, including companies like ours and others that make home equity more accessible and efficient for consumers. Another interesting innovation in this space is home equity investing, HEI products. What are your thoughts on these, and how do you think they will evolve?

Warsh:

Yes, I would give three main explanations. It's hard for me to rank them. But I would say three things. First, the sovereign risk-free rate has fallen. The United States has established itself as a world leader in the 21st century, compared to the struggles between empires hundreds or thousands of years ago, especially after World War II. As a result, all else being equal, that sovereign risk-free rate has fallen. Now, it fluctuates. Irresponsible policies can make it rise. More prudent policies, higher growth, and lower inflation can make it fall. But the risk-free rate in major countries has structurally fallen because people believe it will last a long time. Second, with national progress, there is a clear expectation of the rule of law. If you don't know what your rights are on any side of a financial instrument, you will have to build a huge risk-free premium on top of that risk-free rate. So the rule of law is important. Precedent is important. Expectations are important. So I'd say that's the second component. We start with the risk-free rate, then we start adding risk, and then we decide whether to lend to you. So the second important piece is: "Do I understand the risk of that group?" Ideally, in the next generation of the world you're talking about, I don't need to understand the risk in that bucket because I know you better than anyone else, so I can offer you the best product. So I'd say that's the second broad part, the rule of law. The third benefit is liquidity. As these markets develop, more transactions go through. The fixed costs of building machines, the fixed costs of building infrastructure, decrease. So the marginal cost is zero. And then the fourth, I said I only gave three, the fourth idea I thought of for cost reduction is competition. The longer we look back, the more we see monopolists and oligopolies in the market structure. We still see this in parts of the U.S. and global economies, but nothing drives productivity more than competition. Nothing makes people say, “I’d better innovate or I’m doomed.” So, without any particular order, I’d say all four combined. Nothing is certain. We need good policies from sovereign nations to keep low risk-free interest rates. For example, if the world starts to believe that the U.S. central bank is going to make another big mistake on inflation like it did in 20 and 21, all those financing costs, including our government’s, will rise. So governments need to buckle down and look like they know what they’re doing. When we do that, we can solve the problem. But given the moment we’re in, I’d say the really optimistic thing is that competition is coming. Those traditional, established businesses that have been doing business the same way all along have perhaps become a bit rigid after the global financial crisis. Maybe they’re saying there won’t be any competition because they’re now “too big to fail.” I think in real time, they’re realizing there is competition. This competition is very beneficial to consumers. This competition is very beneficial to productivity. I think what it can do is bring the opportunities that the top half of people have to others. So I'm very excited about the prospects.

Q:This has been a great conversation so far. If you had to give one piece of advice to an entrepreneur like me, what would it be? What do you think I and people like me should do more of? What do you think people like me should do less of?

Wash:So? This has been a great conversation. I enjoyed it. This is much more serious than I thought. I mean, I thought we were just going to kick our legs and have a cup of tea. But you see, economics is serious. This moment is serious. So this is my fault. You've been great. I enjoyed it, Thor. I'm not the right person to give advice to a founder like you who is developing a product that will change the world in the next five years.

All I can say is that since graduating in '92, I've been hanging around places like Stanford. I've always been that boring guy in a jacket and tie. I've never been a tech expert. What I'm trying to say is that the most successful founders I've ever seen, the most successful companies, didn't change with the times. They didn't follow the latest trends. They didn't run from one idea to another. The most successful people have faith in what they see in the future, and that's often unpopular. The most successful companies are born in times when craze and fashion aren't at their peak; they break conventional wisdom. If you're an optimist like me, the economy will always improve. Markets will always become more favorable. But if you're just following the crowd, you're following the crowd. Frankly, what has impressed me since we met in 2019 is that even from that time until now, software, technology, this new software we call cryptocurrency and AI, have all gone up and down. And you're stuck on a product, what the product expansion will be, and your company's culture. It's that same trigger word again: culture. What you do isn't always popular, and that doesn't mean you don't change when things change, but you don't just run from one end of the court to the other. My most successful friends from the class of '92 understand what their strengths are, and they're not hypocritical about it. Of course, we all try to improve our weaknesses, but when it's cool, not all of them decide to put on a hoodie. If they're the hoodie type, they're the hoodie type. But they show their true selves, and people can tell who's real and who's fake. The world is changing faster than ever before. Economic turning points are moving faster than ever before. When this focus is on industries like AI, it's easy to go with the flow, but there will be a reshuffling. The winners will be those who were there early, those with conviction, those who aren't afraid to distance themselves from where the crowd is going. That's one of the reasons I'm so confident in the direction you're heading. Q: Thank you so much, Kevin. It's an honor. A wonderful conversation. This was probably much more interesting to me than you think. I learned a lot, and I think many of our viewers will appreciate all the lessons they'll learn from this video. Walsh: Sadi, it was great to be with you, good luck. Thank you, Kevin.