Wednesday, February 3, 2010

Fed's Warsh Wants to Have It Both Ways

The ex-Morgan Stanley banker and ex-PPT member Kevin Warsh, a Fed Governor, wants a system that lets insolvent firm fail, but at the same time wants more control for the Federal Reserve to regulate the global financial markets.

Fed's Warsh says restoring market discipline key
(2/3/2010 Reuters via Yahoo Finance)

"NEW YORK (Reuters) - Federal Reserve Governor Kevin Warsh said on Wednesday that regulatory improvements alone would not prevent future financial crises and the government must be willing to let firms fail.

""Regulation is too important to be left to regulators alone. We need a system in which insolvent firms fail," Warsh told the New York Association of Business Economics." [The article continues.]

Well, Mr. Warsh, that system is called "free-market system". It is almost dead at this point, thanks at least partially to the heavy intervention by none other than the Federal Reserve in both domestic and international financial markets.

Mr. Warsh continues:

"In response to an audience question, Warsh said it was "essential" that the United States coordinate regulatory reform with other members of the Group of 20 rich and emerging countries."

Oh really? Are the members of G20 that homogeneous to allow a common regulatory platform? The government debt to GDP ratio of (so-called) advanced countries including G7 is above 100% and going higher, while the ratio for emerging countries will remain less than 40% and declining. Among BRIC, India has the highest ratio at 60%, Brazil is next at 46%, China at 18%, Russia is the lowest at 7%. The U.S.'s ratio is 40%, much lower than its G7 peers who are pushing toward 100%. Italy and Greece are already over 100%, and Belgium is 99%. (Source: CIA The World Fact Book country comparison of public debt)

In the eyes of BRIC, particularly R and C, a coordinated global regulatory reform would look like a wealth transfer from them to G7, not the other way around.

"Given the global nature of financial markets, the overall "policy prescription has to be global," even as countries make different choices about specific reforms, he said."

Uh huh. Speaking like a true globalist. So Greece made its own choices about its financials, but now Germany may get to bail them out under the umbrella of regional monetary system (Euro). Some raw deal for Germans.

My take on what Mr. Warsh really wants is this: he does want a stronger, global regulatory reform which the Federal Reserve will guide, and the like-minded globalists will pick and choose which firms or countries to let fail, to give a sop to "free market". More like a perception control.

As for his "global" focus, take a look at these charts. They are posted in an article by Bill Gross of PIMCO. Judge for yourself if any "global" regulation is even possible over such a diverse set of fiscal situations.


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