Fed's Warsh: An Ode to Independence
Someone forgot to read the sign...
It amazes me that Fed governor Kevin Warsh was able to get through most of this speech with a straight face. Then again, I've only read the text so who knows, he might have been giggling uncontrollably to the Shadow Open Market Committee in NY this morning through the entire spiel.
We can't have a Fed speech without the opening "Hallelujah, the economy is saved!" statement, now can we?
The overall profitability and balance sheet strength of large U.S. enterprises is impressive at this stage of recovery. Equity prices and credit terms in liquid markets corroborate these improved fundamentals. And for these firms, financial market conditions appear quite supportive of economic growth.
The "profitability" of US firms is, generally speaking, a farce. If Warsh believes our financial statements have any level of integrity, I invite him to give me a call as I'd be happy to explain why financial reporting in this country is absolute bullshit. I got 5 minutes, Warshy, hit me up, Sugar Pop.
Anyway. The Board of Governors' resident poet laureate gave central bank independence one hell of a eulogy - though he obviously doesn't realize it has long since been compromised. Still operating under the delusion that the Fed is independent (has he not been reading the news?), he had this to say:
The Fed's greatest asset is its institutional credibility. This institutional credibility is rooted in its inflation-fighting credibility, but it is broader still.2 It is tied up in the full range of Fed actions and balance sheet commitments. This credibility is essential. It increases the heft of our communications. It gives weight to our economic assessments. It amplifies the effect of announced changes in the short-term policy rate on longer-term rates. It is, in some sense, the real money multiplier in the conduct of policy.
Given its immense value, we should not forget that the Federal Reserve's hard-earned credibility is no birthright. It is as much nurture as nature. It was earned by our predecessors in the conduct of their duties, making considered judgments consistent with the statutory mandate of price stability and maximum employment. Fortunately, for the asset to be burnished and bestowed upon the current crop of central bankers, it did not demand perfect clairvoyance or infallible judgments. But it did require fierce independence from the whims of Washington and the wants of Wall Street, and from a pernicious short-termism that can undermine the proper conduct of policy. This fierce independence is needed, perhaps now more than ever.
Central bank independence is precious. It can be taken for granted in benign times, but it is tested when times get tough. And we still have tough times ahead of us. My colleagues and I must demonstrate that Fed independence has not been relegated, and the Fed's long-term objectives not compromised. Ensuring Fed independence--as the cornerstone of institutional credibility--is our charge to keep. It is central to what the Federal Reserve represents, and to how policy is conducted.
Beautiful on paper, useless in reality. Warsh waxes poetic about Fed credibility at a time when the Fed is under more scrutiny than it has ever experienced in its near 100 year history, where does he get this view from? Someone's passing Kool-aid around the Board...
The Fed has been all but villainized; in the media, in Washington, and let's not get into how this all looks from the outside (are the Europeans laughing at us yet?). Unless Warsh is speaking of some other Federal Reserve that I am not familiar with, I have to argue that he's confused. Or maybe just entirely full of shit and tooting that same Save the Fed's Ass horn they've all been blowing for months now.
Just my $0.02, for whatever it's worth. By my calculations, it will be worth $0.000002 by the end of business today.