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The causes of the turmoil are broader and more fundamental than the problems in the mortgage markets, Federal Reserve Governor Kevin Warsh said calling for a new financial architecture. “There is no going back to the old arrangements, nor should there be”, he said underlining that policy actions to foster financial stability should be temporary, providing a bridge to a new, more effective financial architecture.
“The speed and success of a new financial architecture is likely to be more consequential to economic growth than the design and implementation of well-intended housing policies alone”, the Governor said.
This new architecture will also need new business models. “If private market participants prove unable or unwilling to establish new business models, then the effects of the current financial market turmoil may be a significant drag on economic growth long after stability is ostensibly achieved”, Warsh warned. “Getting the architecture right is essential to address the central challenge facing our economy.”