Fed's Warsh: Panic Fueled Economy's Weakness

Panic created a domino effect that magnified the economic weakness leading to the U.S. recession, Federal Reserve Board governor Kevin Warsh said yesterday.

He said the term “recession” is “insufficient in some important respects,” according to prepared text of his remarks at the Council of Institutional Investors spring meeting, which were released by the Fed.

“In my view, this period should equally be considered a panic, one that preceded, if not made more pronounced, the official recession,” he said. “Hence, the Panic of 2008, which preceded the calendar year, is a more revealing description of the recent economic and financial travails. As I will describe, panics involve generalized fears — often related to financial firms — that magnify economic weakness. The encouraging news, I should note, is that panics end. And this panic is showing meaningful signs of abating.”

However, he noted the current downturn is already “longer … deeper and broader than most.”

“Panics involve losses of confidence in the financial system, when even sound firms find it difficult to borrow,” Warsh said. “Panics are threatening to economic well-being. Panics take even less kindly to, and often result from, uncertainty. And panics place a greater burden on the deftness of policy responses than recessions alone.”

The current fiscal stress, he said, “is marked by indicia of both recession and panic conditions.” Warsh said he believes the unemployment will rise steadily the rest of the year.

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