This post is by SmartBrief Finance Editor Sean McMahon, who attended the annual meeting for the Securities Industry and Financial Markets Association earlier this week in New York. For more coverage of the meeting, follow @SBFinance on Twitter and sign up for SIFMA SmartBrief.
Riding the wave of buzz sparked by his op-ed in The Wall Street Journal, Federal Reserve Board Governor Kevin M. Warsh used his speaking time to spell out his vision of sound fiscal policy. The speech — which Warsh called “Rejecting the Requiem” — took pointed jabs at some of the recent policy measures enacted to counter the financial downturn.
Sounding more like a politician on the stump than a regulator at a lectern, Warsh lamented an environment that stresses overnight results rather than medium- or long-term economic soundness. Consumers’ withdrawal from the markets and recent preference for saving should be “celebrated” as a prudent reaction to financial uncertainty rather than viewed as a malady in need of a policymaking remedy, Warsh argued.
Warsh also questioned the wisdom of those who prefer to call the new fiscal landscape the “New Normal,” instead calling it the “New Malaise.” Fiscal policy gimmicks such as the “Cash for Clunkers” program erred in their short-sightedness and have only served to prolong the economic stagnation, Warsh argued. “Sound fiscal policy must do more than reacquaint consumers with old, bad habits,” Warsh explained.
Warsh called for fiscal policy measures that he said would help close the gap between the New Malaise and the New Promise. “Root-canal economics does not constitute sound fiscal policy,” Warsh opined.
Such measures would include pro-growth economic policies that focus on three key areas, he said:
- Reforming the tax code to make it more simple and efficient.
- Reform in the conduct of regulatory policy so that firms are allowed to succeed or fail — eliminating the protections of the “privileged perch” that a few companies seemingly enjoy.
- Scaling back trade policies that promote protectionism.
The minutes of the most recent meeting of the Fed have not been released yet, but Warsh’s speech left little doubt that the decision by the Federal Open Market Committee to purchase $600 billion of Treasurys was a contentious one. Warsh even went so far as to point out that the Fed’s “Quantitative Easing 2” is not unconditional and that it should be subject to review. If conditions dictate, Warsh said the QE2 spigot should be turned off. “The aggressive actions that the Federal Reserve has taken put a burden on us. … To ensure that our participation in the Treasury market does more harm than good.”
Warsh finished his remarks with a call for positive action from other market participants. “We should hope that the banking industry and the securities industry and regulators don’t take 12 months off because the economy needs us to get back in the game. … Monetary policy cannot cut unemployment to 5% or 6% on its own.”