Ex-member of Federal Reserve Board shares concerns

Ex-member of Federal Reserve Board shares concerns

CHAMPAIGN — Institutions that are "too big to fail" may pose more of a problem today than they did at the height of the 2008 financial crisis, a former member of the Federal Reserve's Board of Governors said.

Kevin Warsh, who served on the board from 2006 to 2011, said he's worried that little has been done to solve the problem of institutions that pose risks to the broader financial system if they go under.

Speaking on the University of Illinois campus Monday, Warsh said he's also concerned that regulatory policy today is focused too much on stability and not enough on growth.

He said a slow economic recovery is "showing genuine momentum" and policymakers are "far too fatalistic" in resigning themselves to five to 10 years of slow growth.

Financial markets have moved past the point where stability should be the top concern, he said.

The U.S. economy has problems and challenges, he said, but for the most part they're not as big as those of most other countries.

He said the U.S. has better demographics, an entrepreneurial class and a culture of innovation, so regulatory policy shouldn't be "destructive of growth."

Warsh's speech was billed as "Tough Calls: An Insider's Account of The Financial Crisis."

But he didn't detail the decision-making drama that went on behind closed doors as financial markets collapsed in the fall of 2008.

Instead, he discussed in very general terms the underlying causes of the crisis.

Warsh said the "prevailing narrative" is that the subprime mortgage mess and the insolvency of Lehman Brothers were the principal reasons for the collapse.

But while both contributed to the crisis, Warsh said, the main problem was much broader — specifically, "every asset, everywhere, came to be mispriced in the boom that preceded the bust."

He said the federal government's takeover of mortgage giants Fannie Mae and Freddie Mac in September 2008 showed investors "there may not be such a thing as a risk-free asset."

Plus, the preceding 25 years of economic stability — the so-called Great Moderation — "lulled everyone around the world into a sense of complacency," he said.

"It looks like interest rates were too low for too long," he added.

Warsh credited Federal Reserve Chairman Ben Bernanke for acting quickly to avert financial panic.

Without Bernanke's actions, "this thing could have run away from us," he said.

Warsh also touched on the nation's massive debt and deficit, saying that "if we continue down this path, it will do great harm to our economy."

He urged policymakers to come up with an answer before financial markets begin to question the nation's soundness.

Warsh criticized the federal government for not being more "transparent" about its financial obligations.

Its obligations to Fannie Mae and Freddie Mac "show up nowhere on the government's comprehensive financial statements," he said, adding that accounting is used to "obfuscate realities on the government's books."

Warsh was appointed to the Federal Reserve Board by President George W. Bush and served as the board's chief liaison to Wall Street. Today Warsh is a visiting fellow at the Hoover Institution and a lecturer at Stanford University.

Monday's event, held at the UI's Business Instructional Facility, was sponsored by the UI's Center for Business and Public Policy and by Busey Wealth Management.

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