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Fed Governor: U.S. Faces “Significant Economic Challenges”

With unemployment “stubbornly” high and government deficits rising, Fed warns of upcoming dangers.  The United States still faces “significant economic challenges”, with unemployment at “stubbornly” high levels and businesses that are reluctant to spend as government deficits rise.  This is the opinion of Federal Reserve Governor Kevin Warsh, who said “Taking account of the broad range of economic and financial conditions, there is no wonder that the electorate in the United States and abroad is unnerved.”  Nevertheless, Warsh feels “much better about the state of the real economy” than he did at this time last year.

Speaking at a symposium hosted by the Shadow Open Market Committee, Warsh, a former Morgan Stanley banker, noted that “Unemployment remains high and stubbornly so.”  Fed policymakers “still have tough times ahead” as they work to prove that their long-term goals are not being compromised.  The Senate Banking committee, under the leadership of its Chairman Christopher Dodd (D-CT), has proposed a financial rules overhaul that would result in the most significant restructuring of Wall Street oversight since the 1930s.  The Senate bill would limit the Fed to supervising bank holding companies with assets in excess of $50 billion.  Smaller and mid-sized banks would be regulated by other agencies.

According to Warsh, the Fed must act with “consistency” to protect its credibility.  “The Federal Reserve must do its utmost to stay foursquare within its role as liquidity provider,” Warsh said.  “The Fed, as first responder, must strongly resist the temptation to be the ultimate rescuer.”  Warsh believes that even though securitization has become a dirty word, the financial vehicle ultimately will return to the market.

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