Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Governor Warsh, I’m going to put you on the spot. You and many others have talked about the liquidity in the market, and I want to understand better what that means. First, liquidity can refer to the availability of buyers and sellers; clearly, that has increased over the past years as we’ve had hedge funds and other actors increasing their activity. That simply makes markets more efficient and lowers the costs of trading. I don’t think that’s a bad thing, if that’s what we’re talking about. The second possibility refers to monetary aggregates, and we know that hasn’t been a serious concern. Money growth has generally been pretty slow. A third possibility, which is the one that I subscribe to, is that the big demand for assets reflects the global saving glut, which means that there’s an awful lot of money out there looking for returns that is coming from abroad and from high rates of saving relative to investment in other parts of the world. But if the saving glut is, in fact, a source of liquidity, then actually, as President Lacker I believe mentioned, the equilibrium rate should be lower, not higher, to be consistent with the real rate that clears the saving and investment market. So I was just wondering, what is your view about the meaning of this liquidity issue?

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