Central bank policy is obscuring market values, Warsh tells Stanford audience

10:04p ET Thursday, January 26, 2012

Dear Friend of GATA and Gold:

Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values, former Federal Reserve Board of Governors member Kevin M. Warsh told the Stanford University Institute for Economic Policy Research tonight.

This influence is especially evident, Warsh said, with the Fed's purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.

Warsh, who disclosed during GATA's freedom-of-information litigation with the Fed in 2009 that the central bank has secret gold swap arrangements with foreign banks (http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf), added that the Fed is trying to do too much and the rest of the government not enough to encourage economic growth.

While he said nothing explicitly about gold, Warsh seemed to come pretty close to your secretary/treasurer's observation almost four years ago that there are no markets anymore, just central bank interventions. (Seehttp://www.gata.org/node/6241.)

... Dispatch continues below ...

 

Warsh was especially critical of the federal government's efforts to stimulate the housing market. "The government-sponsored housing entities remain sources of vulnerability to the U.S. economy," he said, "and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive." Such efforts have not succeeded, he added.

 

Warsh said higher real incomes are far more important to economic growth than recovery in the housing sector.

He said he opposed pursuing economic recovery through inflating debt away and devaluing the currency.

Warsh was the youngest person ever appointed to the Fed board, resigning eight months ago after five years in office, and is now a distinguished visiting fellow at the Hoover Institution at Stanford and a lecturer in the university's Graduate School of Business. He received his undergraduate degree at Stanford in 1992 and a law degree at Harvard three years later. He was special assistant for economic policy under President George W. Bush and executive secretary of the National Economic Council. He was also a member of the President's Working Group on Financial Markets, commonly known as the Plunge Protection Team.

Warsh spoke tonight from an outline he provided to GATA and then answered questions from his audience, which included Stanford faculty and students. The outline is appended.

Warsh's talk was broadcast live at the Internet site of the Stanford Institute for Economic Policy Research --

http://siepr.stanford.edu/

-- and video of it is expected to be posted there shortly.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Home Truths

By Kevin M. Warsh

Distinguished Visiting Fellow
Hoover Institution, Stanford University

Lecturer, Graduate School of Business, Stanford University

Excerpts from Remarks as Prepared For Delivery
to Stanford Institute for Economic Policy Research

Thursday, January 26, 2012

EMBARGOED Until 5 p.m. ET
Remarks Delivered at 8 p.m. ET

Regarding the state of the global economy:

-- Excessive spending and the assumption of new liabilities endanger the creditworthiness of key nations and undermine prospects for the global economy. The famed "paradox of thrift" -- used to justify still more aggressive policy -- is confronting the cold, dark comfort of a sovereign debt crisis.

-- Economies falter and markets flail when risk-free rates turn out to be not so risk-free.

-- Global economic conditions are weak, leaving the global economy far from a durable recovery. In spite of this, and substantial errors in the conduct of policy, the private sector in the U.S. is outperforming.

Seven "home truths" regarding the conduct of U.S. economic policy:

1. Policy has favored stability over growth and achieved preciously little of each.

2. Good economic policy takes time to bear fruit. Bad policy does harm in a hurry.

3. Exceptionally accommodative monetary policy can provide important transitional support for an economy. But recent policy activism -- measures that go beyond a central bank's capacity or traditional remit -- threatens to forestall recovery and harms long-term growth.

4. Central bank transparency is good, but transparency that delineates future policy breeds market complacency. It threatens to undermine the wisdom of crowds and the essential interchange with financial markets.

5. The primary responsibility of financial market regulation is to markets, not to firms.

6. The government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive.

7. In charting a better path for the economy, policymakers should remind themselves of two essential and oft-forgotten virtues: greater humility in the conduct of policy and stronger faith in the underlying resiliency of the U.S economy.