Kevin Warsh, a member of the Board of Governors of the Federal Reserve System, gave a speech titled “The Promise and Peril of the New Financial Architecture”.  The entire speech is available here.

He has offered a concise summary of the current financial market turmoil and summarized the response of both the financial sector and the official sector, as well as a glimmer of hope in his concluding remarks.

A couple of highlight quotes to ponder –

I would advance the following: We are witnessing a fundamental reassessment of the value of virtually every asset everywhere in the world.

I am reminded of a certain Omaha-based investor who says that his investment style is to be greedy when other investors are fearful, and be fearful when others are greedy.11 I would modify the advice somewhat to make it applicable to policymakers: We should be steady when financial market participants are fearful, and fearful when markets appear steady.

This call for steadiness is not some nostrum, implying that the government should be passive during times of significant economic turmoil. Quite the contrary. But comprehensive policy prescriptions are most effective when they establish new rules of engagement that are clear in intent, consistent in application, and reasonably predictable in effect. This policy formulation should allow financial firms to regain their footing and market participants, more broadly, to take new, constructive actions to facilitate the availability of credit. Perhaps in this way, policymakers and market participants alike can best contribute to the development of a reformed and robust financial architecture.

I see more promise than peril over the horizon. The speed of these changes in the financial architecture understandably brings fear to some market participants, but it may equally sow the seeds of recovery. Policymakers are keenly observing the pulse of private financial institutions and other market participants to gauge their ability to take up the cause of reform and renewal. If financial institutions readily and steadily approach new ways of intermediating credit, the real economy might recover sooner and with more vigor than expected. If not, if private market participants prove unable or unwilling to establish new business models, then the effects of the current financial market turmoil may be a significant drag on economic growth long after stability is ostensibly achieved. Getting the architecture right is essential to address the central challenge facing our economy.

This piece is worth your time to read through…..

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