Kevin Warsh, member of the Board of Directors of the Federal Reserve, takes to the pages of the Wall Street Journal to report on the FOMC meeting last week. Essentially, the Fed is treading water to give the people’s elected representatives time to change the country’s fiscal, trade, and regulatory policies to ones that are better tailored for fostering economic growth:
The deleveraging by our households and businesses 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 have 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.
Monetary policy also has an important role to play. However, the Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies. Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility—and monetary policy can lose its considerable sway—if its policies overpromise or under deliver.
To his list I would add immigration policy and aspects of foreign policy. Tempus is fugiting. We are barely keeping our heads above water as it is and the capacity of the economy to grow with all of the drag that’s being placed on it is limited.
We might do well to heed Denis Healey’s First Law of Holes: when you’re in one, stop digging! This hole already goes all the way to China.