UPDATE 1-Fed's Warsh says more regulation might hurt US economy

WASHINGTON Tue Feb 2, 2010 5:33pm EST

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WASHINGTON Feb 2 (Reuters) - U.S. Federal Reserve Board Governor Kevin Warsh said on Tuesday that financial reform efforts that focus narrowly on expanding regulation could stifle the economy.

His comments, published in a Financial Times newspaper opinion piece, come as President Barack Obama pushes for tighter rules that would attempt to limit risky behavior by banks.

Warsh described attempts to strengthen the system as "worthwhile," but said time would be better spent reviewing the role of government-sponsored mortgage finance agencies Fannie Mae and Freddie Mac.

Banks, he said, should not be treated like heavily-regulated utilities.

"In a global economy, big is not bad," Warsh wrote."The U.S. economy runs grave risks if we slouch toward a quasi-public utility model."

The Obama administration's efforts, led by senior White house adviser Paul Volcker, would look to reinstitute the separation between the speculative trading of investment brokers and the desposit-taking and lending that is the bread-and-butter of commercial banks.

Volcker testified before the Senate Banking Committee on Tuesday, arguing that while his proposal would not have prevented the collapse of firms like Lehman Brothers and AIG, it could help avert future crises.

"I may not live long enough to see the next crisis but my soul will come back to haunt you," the 82-year-old Volcker quipped.

Warsh, however, spoke of a return to market discipline which he maintained could only take place if government became, less, not more, engaged in the banking system.

"The specter of government support threatens to confuse price signals and create a class of institutions that operate under different rules of the game," he said.

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Comments (4)
synchronicity wrote:
Lack of regulation definitely ‘did’ hurt our economy so not enacting more regulation would be ignorant.

‘Might’ sounds like a scare tactic from people who like to be in control but have done a terrible job.

Feb 03, 2010 11:51am EST  --  Report as abuse
Tchalla wrote:
If we have learned anything over the last 18 months it is the myth of self regulated “market discipline”. We have experienced first hand the affects of governments reduced engagement with the banking system and there is absolutely nothing that suggests that this is a responsible position to take going forward.

Feb 03, 2010 11:58am EST  --  Report as abuse
grantly wrote:
From Wikipedia, which pretty much says it all. Bush appointee, young, inexperienced & filthy rich:
“President Bush nominated Warsh and Randall Kroszner to fill two Fed vacancies on January 27, 2006. Warsh’s nomination drew some criticism, based on his age and inexperience. At 35 years old, Warsh was the youngest appointment in the history of the Federal Reserve. Moreover, he was an attorney, rather than a trained economist and had no prior Fed experience. At the time, former Fed vice chairman Preston Martin said it (Warsh’s nomination) was “not a good idea” and that if he had a voice in the Senate, he would vote no. However, Warsh impressed colleagues, especially Fed Chairman Ben Bernanke…”

“In 2002, Warsh married Jane Lauder, a granddaughter and heiress of Estée Lauder making him “wealthier than all his fellow Fed[eral Reserve] governors combined.”

Feb 03, 2010 12:07pm EST  --  Report as abuse
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