Former Federal Reserve governor Kevin Warsh in this CNBC interview elucidates of the potential risks from Bernanke’s Open Ended QE
Here are some key points:
Ben Bernanke is a “modest man” with “an immodest move”
Yesterdays move was an “aggressive move”…which means that “They are really worried with the state of the economy”….part of it could be that “They must be dealing with some of the Tail Risk Europe is in an early innings of a recession” while Asia has been “weakening too”
For Mr. Warsh “Exit is a four letter world” where “exiting from a monetary policy is technically difficult”. He sees the benefits from QE as “incontestably small and that the risks are unknown”…He further notes that “This is an unproven experiment so risks of exit have to be higher”
So the FED’s hands are essentially tied and risks are magnified rather than suppressed.
Mr. Warsh also talks about the moral hazard risks by open ended QE on Washington where
Mr. Warsh adds that in reality the US state of the economy has been struggling “We’re not in a panic we are in a lousy recovery”
Short term oriented “informercial” policies have also been amplifying risks, yet this has been the framework guiding Fed and Washington policies
Here are some key points:
Ben Bernanke is a “modest man” with “an immodest move”
Yesterdays move was an “aggressive move”…which means that “They are really worried with the state of the economy”….part of it could be that “They must be dealing with some of the Tail Risk Europe is in an early innings of a recession” while Asia has been “weakening too”
For Mr. Warsh “Exit is a four letter world” where “exiting from a monetary policy is technically difficult”. He sees the benefits from QE as “incontestably small and that the risks are unknown”…He further notes that “This is an unproven experiment so risks of exit have to be higher”
So the FED’s hands are essentially tied and risks are magnified rather than suppressed.
Mr. Warsh also talks about the moral hazard risks by open ended QE on Washington where
“The risk in Washington is real too. I don’t mean political risks. What I mean is if the Federal Reserve is now in a business of private pullout, “rabbit out of hat” everytime the economy loses control, then the rest of Washington can say there is not much we can do or need to do because Bernanke has got my back. I do not think that is his intent”.The implied incentive provided by QE to Washington is to rely on more inflationism.
Mr. Warsh adds that in reality the US state of the economy has been struggling “We’re not in a panic we are in a lousy recovery”
Short term oriented “informercial” policies have also been amplifying risks, yet this has been the framework guiding Fed and Washington policies
“For 4-5 years…Washington has been in the business of solving the next quarter, solving for the next election $5 trillion trying to turbocharge the economy we’ve been running stimulus program after stimulus program and GDP can look a little better next quarter but we’ve been running this program like it’s an infomercial…this time of short term policy has not served as well. I don’t they served the politicians well. We need to fundamentally change what our time horizon is”Real recovery must come through improving competitiveness
“The private sector has much better at asset allocation than the government”And that central planning has been hobbled by the knowledge problem
“There is lots of talent there, but they do not know which direction capital should go”Mr. Warsh delineates what central banks can and cannot do
“Central banks are in the business of buying time…until the economy gets into the groove. But what we heard yesterday was that we will be buying time for a very long time”He also notes that
“Policy makers should be humble”Most importantly Mr. Warsh sees the market as I see it
“If you continue to look at the markets right now, where asset prices continue to melt up where asset prices are driven less by fundamentals in particular companies and more by speeches and policies come out of Washington you are taking this risks. Risk are highest in the economy when measures of risk ARE lowest, when I look at the VIX at this level and you compare that to the headlines you guys read every morning they certainly do not seem in sync that’s when shocks happen”Shocks happen because inflationism has obscured the market price signals.
No comments:
Post a Comment