It is official: the last year in financial markets isn’t the Global Financial Crisis, the credit crunch, or even the Global Recession. According to a Governor of the US Federal Reserve, it’s a “panic” — a description he made clear in a surprise speech in the US overnight.

In the speech entitled “The Great Panic of 2008”, Fed Governor Kevin Warsh described the American economy as being in a state of a state of a panic that predated the official recession and may have significant long-run implications. It was one of the clearest and most striking speeches from a Fed member since the credit crunch erupted in August 2007. He made it clear the term and the speech were his opinion, and not that of the Fed, or other members of the US central bank.

It’s more than just rhetoric: central bankers don’t go in for grandiose phrasing or dramatic descriptors, unless there is a very serious point to make. Central bankers do not use words like “recession”, “depression” and especially “panic” at will. They have precise meanings and levels of alarm — with panic being the most alarming.

In the speech, to the Council of Institutional Investors, Mr Warsh used the word “panic” more than 30 times, so we can take it he was trying to make a point. And he did.

Mr Warsh is no lightweight. He’s a senior member of the Fed, one of the five person board of the most important central bank in the world.

Unlike the recent talk of “green shoots” in the economy and spruiker analysts trying to pick an upturn, this speech isn’t optimistic. In fact it is downright pessimistic.

For instance, in the speech, he said that while the pace of economic decline was likely to abate, he was “decidedly uncomfortable forecasting a sharp and determined resumption of growth in the coming quarters.”

So, don’t fall for the strong rebound line that is starting to appear in market chatter and analyst talk — if Mr Warsh is to be believed then it will a long hard road back.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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