The New Malaise

This is riveting reading–a speech by Fed Governor Kevin Warsh at the Securities Industry and Financial Markets Association in NYC. It’s a must read.

I check the Fed site regularly and I’m always up-to-date on the speeches–because I like reading them, not because it’s a function of my job. This is one of the best speeches I’ve ever read. Read the whole thing using the link above, but here are my favorite passages.

The New Malaise

After a cyclical boost early this year, the current state of the U.S. economy is unimpressive: modest growth in output, high levels of unemployment, stagnant wages, low levels of consumer and business sentiment, and volatile financial markets. Extrapolating from recent data, many in your business and mine predict only a middling recovery in the next several years. They call it “the new normal.” I call it the new malaise.

The prevailing theory has it that U.S. policymakers should not deny our foregone fate. We should accept smaller improvements in output and employment and productivity over the horizon. We should not stand before you and feign optimism or profess misplaced hubris. Instead, we should resign ourselves to the new normal now upon us, and conduct policy accordingly. In particular, central bankers in advanced economies–against a backdrop of disinflation–should be comfortably permissive in the conduct of monetary policy, still more encouraging of still more accommodative central bank policies for still longer periods. That is the last best hope, they argue, to preserve the remaining vestiges of a golden age that is no more.

I reject this view. I consider this emerging ethos to be dangerous and defeatist and debunked by America’s own exceptional economic history. The dour economic tale being told is not inevitable. Our citizens are not unwitting victims of some unavoidable fate. The current period of subpar growth and high unemployment is real, but it need not persist. We should not lower our expectations. We should improve our policies.

So, how far does the economy find itself from our aspirations? If policies could be moved in the right direction, we could close the gap between the new malaise and the new promise. Policy need not be perfect, but it cannot be so growth-defeating. The U.S. economy is capable of much more than it is delivering.

Hence, the deleveraging by our household and business sectors is not a pattern to be arrested, but good prudence to be celebrated. Larger, more liquid corporate balance sheets and higher personal saving rates are the reasonable and right responses to massive government dissaving and unpredictable government policies. The steep correction in housing markets, while painful, lays the foundation for recovery–far better than the countless programs that sought to subsidize and temporize the inevitable repricing. It is these transitions in our market economy–and the adoption of pro-growth fiscal, regulatory, and trade policies–that lay the essential groundwork for greater, more sustainable prosperity.