Former Fed Governor Warsh Admits "There Is No Plan B"

Tyler Durden's picture

At the very crux of the financial crisis, former Fed governor Kevin Warsh notes, "experimental extreme monetary policy," had the "right risk-reward", but, he warns, in this excellent (and somewhat chilling) discussion at the Milken Institute, "we left a financial crisis more than for years ago." While the politicians may 'prefer' to think of this as a crisis - and indeed "for them it is a crisis as they preside over an economy that refuses to grow," which has tended to lead to loss of office, but, Warsh condemns, "they have run out of excuses." Over the last several years, "[the Fed] has over-promised and under-delivered," and the bank's most important asset - credibility - is under attack.

The Fed has "enabled" Washington to do nothing, since the politicians expect the same "rabbit out of the hat" rescue that occurred in the darkest days of the financial crisis. This means no growth strategies ("the mix of policies has to be right") will occur. Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, "There Is No Plan B."

The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue; and furthermore "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

The entire discussion is worthy of attention but Warsh's comments begin around 18:00:

...but "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

 

...The Fed is taking on the problem of the shortfall in aggregate demand alone. Warsh does not believe that the Fed means to do this alone but their "good intentions" are simply not enough to get the economy to a 3-4% growth rate needed to create sustainable improvements in the labor markets.

 

... Warsh adds, "over the last several years, [the Fed] has over-promised and under-delivered," and the bank's most important asset - credibility - is under attack.

 

...The Fed has "enabled" Washington to do nothing, since the politicians expect the same "rabbit out of the hat" rescue that occurred in the darkest days of the financial crisis. This means no growth strategies ("the mix of policies has to be right") will occur - until the Fed draws the line.

 

...Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, "There Is No Plan B." The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue.

 

...In light of our status as reserve currency, the rest of the world's central banks feel empowered to match the Fed's efforts since "we do not act in a vaccuum" which due to economic and comptetive reasons, means "the US economy will not break out to the upside."

 

...It is not bad luck that is creating this medicority, it is bad policy

Then at 36:30, Warsh expands on the Fed's awful alternatives and his views on whether Bernanke's transmission channels via Animal Spirits and portfolio rebalancing will have any lasting impact...