kevin warsh : it ’ s greek to me – economic events of the last three years speech by mr kevin warsh, member of the board of governors of the federal reserve system, at the rotary club of atlanta meeting, atlanta, georgia, 28 june 2010. * * * the views expressed here are my own and not necessarily those of my colleagues on the board of governors or the federal open market committee. nellie liang, daniel covitz, william english, and brian madigan of the board ’ s staff contributed to these remarks. it is tempting to view the economic events of the last three years as a series of unrelated, unpredictable, unfortunate financial shocks. and it is easy – too easy, really – to bemoan the latest flare - up of crisis conditions, and chalk it up to the global economy ’ s continued string of bad luck. if what ails us is nothing more than a case of bad fortune, then the mixed metaphor of the moment has it about right : the black swans are caught up in the perfect storm. and if what is needed to induce a durable global economic expansion amounts to more doses of the nowfamiliar spending packages and weekend shock therapies, then we would know that our luck was indeed changing. if only it were so. in my view, a strong, sustainable u. s. economic expansion is not in the hands of the fates. it rests in our hands – the hands of fiscal, regulatory, trade, and monetary policymakers. equally, it rests with business leaders like you here at the atlanta rotary club. we will soon give notice to the third anniversary since the onset of the global financial crisis. as we mark this occasion – and continue to witness shocks arising intermittently and unevenly – it might be worth debunking some popular views that have become part of the crisis narrative. in their stead, i will begin with what i believe are some truths, perhaps hiding in plain sight all along. subprime mortgages were not at the core of the global crisis ; they were only indicative of the dramatic mispricing of virtually every asset everywhere in the world. the crisis was not made in the usa, but first manifested itself here. the volatility in financial markets is not the source of the problem, but a critical signpost. too - big - to - fail exacerbated the global financial crisis, and remains its troubling legacy. excessive growth in government spending is not the

– a prudent way forward. the most recent round of turmoil in financial markets caused many fiscal authorities around the world to reconsider whether they can spend their way to prosperity. some are concluding that fiscal consolidation may be the better path to economic expansion. that spending cuts are key to establishing a credible path of fiscal sustainability. that channeling government funds from higher - yielding private - sector activities to lower - yielding public - sector activities undermines economic potential. that fine - tuning aggregate demand requires a precision that is difficult for governments to execute effectively. and, that market forces are often more certain than promised fiscal spending multipliers. fiscal policymakers must wrestle with difficult questions of timing, external conditions, economic potential, and policy credibility. ultimately, in my view, fiscal consolidation happens either when policymakers choose the path, or it gets chosen for them. the former is preferred. the events in europe remind us that the latter is likely if policymakers do not act in a timely way. charles l. schultze ( 1989 ), “ of wolves, termites, and pussycats : or, why we should worry about the budget deficit ”, brookings review, vol. 7 ( summer ), pp. 26 – 33. what about the conduct of monetary policy? the challenges for monetary policy are not dissimilar from those confronting the fiscal authorities. the allure of short - term gains must be balanced dispassionately against longerterm and potentially larger consequences. last week, the fomc announced that it would maintain the target range for the federal funds rate at 0 to 1 / 4 percent, and it continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. the fed announced no changes in the size or composition of its balance sheet. however, the published minutes of recent fomc meetings make clear that the committee has been carefully considering critical aspects of its balance sheet policy. in my view, the fed should pursue a deliberate, well - communicated strategy that clearly differentiates the path of the fed ’ s policy rate from the size and composition of its balance sheet. the fed ’ s policy tools should not be conflated or confused. one of the surviving features of the fed ’ s extraordinary actions is the breadth of tools at our disposal. they comprise a handy set, and should remind us that every problem is not a nail. and that we have more than the hammer in our tool