Tuesday, November 21, 2006

Warsh on the Fed's (Surprising) Sources of Input for Policy

Federal Reserve Governor Kevin Warsh speaks plainly and clearly on this audio/video report at Bloomberg.

You will hear some surprisingly transparent admissions of humility on his part (speaking only for himself, of course.) He is aware of what he has called the Fed's "mirror problem," i.e. the fact that the Fed looks at the markets for information about business-related expectations, but that the markets reflect back an opaque mix of dynamic financials and muddy Fed-watching.

[Thanks to students.sbc.edu/mckinney03 for the image.]

He admits that the Fed just doesn't know that much about inflation, money, liquidity, and financial markets. His candor is refreshing. Has the Fed turned over a new, more transparent communication leaf?

He seems also to be saying to his listeners that the Fed intends to make sure that markets realize the US government does not intend to play the role of lender of last resort for speculators, i.e. that given the current level of risk-taking, the securitization and risk-derivative markets had better get their act together. This statement is long overdue, and it may be the Fed's attempt to warn the markets that any moral hazard will accrue unto themselves, and not to the public, i.e. the US government.

Makes me wonder if the hazards haven't already been assumed, if the risks haven't already been underestimated by market participants, and if the Fed isn't trying to effect preemptive damage control.

Too bad the public won't be watching and learning from this very informative piece, but such openness is shuttered behind closed doors.


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