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Kevin M Warsh: Financial market developments

Remarks by Mr Kevin M Warsh, Member of the Board of Governors of the US Federal Reserve System, to the State University of New York at Albany’s School of Business, Albany, New York, 21 September 2007.

The original speech, which contains various links to the documents mentioned, can be found on the US Federal Reserve System’s website.



It is good to be back in upstate New York. Thank you to the School of Business of the University of Albany for inviting me. I am particularly heartened to see old friends, new students, and prominent business leaders in attendance. I played in the New York State Public High School Tennis Championships on the other side of this campus, so this is certainly familiar terrain. However, I hope to perform better in my remarks today than I did with my racquet twenty years ago.

I have been honored to serve in Washington, D.C. for the past 5-1/2 years. My knowledge of the economy has deepened by working with my colleagues to put fiscal and monetary policy into practice. Nonetheless, with each passing day, it is more obvious that I learned much of what I need to know about the real economy in my first eighteen years here in upstate New York.

The current period of heightened financial market volatility has drawn more attention than usual to the policy actions of the Federal Reserve. Returning home at this time serves as a useful reminder that the decisions we make in Washington matter on the front lines of the real economy. Our monetary tools, for example, affect the ability of aspiring homeowners to take out a first mortgage. They also matter to retirees on fixed budgets, who are vulnerable to escalating prices, and to graduates of this and other universities looking for jobs. Our supervision and regulatory policies, to cite another example, matter to businesses, large and small, looking to borrow from banks to expand their operations.

On the Federal Open Market Committee (FOMC), my colleagues and I seek to deploy our monetary policy tools to help keep the U.S. economy on an even keel.1 We try to provide the right mix of policy prescriptions, patience, and perspective to counter possible adverse developments. In evaluating the state of the U.S. economy, its prospects, and the current stance of policy, we typically turn to such arcana from the economics textbooks as the term structure of interest rates, the shape of the Phillips curve, trends on the natural rate of unemployment, changing risk premiums, the exchange value of the dollar, and marginal propensities to consume as asset values change, to name just a few.

While these indicators and relationships are important, many of the enduring teachings needed to evaluate the financial markets and U.S. economy (particularly in times of financial tumult) are well known without the technical jargon all across the country: Trees don't grow to the sky. There is no free lunch. You shouldn't put all your eggs in one basket. There is no substitute for doing your own homework. And my favorite, that which can't go on forever usually doesn't. 2


The views expressed herein are my own and do not necessarily reflect the views of other members of the Board of Governors or of the Federal Open Market Committee. I am grateful for the assistance of Nellie Liang and Daniel Covitz of Board staff, who contributed to these remarks.


That is a slight paraphrasing of Herbert Stein's self-styled "Stein's Law" (Herbert Stein, 1998, What I Think: Essays on Economics, Politics, and Life, Washington: AEI Press, p. 32).

BIS Review 104/2007


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