Jeffrey Lacker Says Use of Fed'l Reserve for Fiscal Actions `Fraught With Risks'

Lacker Says Fed Loan Programs ‘Fraught With Risks’ (Update1)

By Craig Torres

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7C_kxyfhRyY&refer=home

Jan. 9 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker warned that the central bank should avoid using its balance sheet to finance a fiscal stimulus plan, saying such a strategy is “fraught with risks.”

“Many historical instances of monetary instability have been the result of central banks being prevailed upon to use their balance sheets for fiscal ends,” Lacker said in written remarks presented to the Maryland Bankers Association in Baltimore. “Mixing monetary and fiscal policy is fraught with risks.”

U.S. central bankers have boosted the Fed’s total asset holdings by $1.25 trillion to $2.14 trillion over the past year by increasing loans to banks and corporations, and through direct purchases of bonds and other credits to support specific industries, firms, and markets. The Richmond Fed president said the credit interventions could have been financed by the U.S. Treasury, keeping them in the fiscal domain.

“No matter how one assessed the overall merits of such programs, it is important to recognize that these are fiscal measures,” Lacker said. He said the programs don’t conflict with monetary policy strategy for the moment. Still, “there could well come a time at which monetary stimulus needs to be withdrawn to prevent a resurgence of inflation, even though credit markets are not deemed fully healed.”

Closing Loan Programs

Containing inflationary pressures “may require closing down credit programs, or finding an alternative, non-monetary financing arrangement for them,” he said.

The Board of Governors, led by Chairman Ben S. Bernanke, and the New York Fed are intent on using the central bank’s balance sheet to push down interest rates on a variety of credits from mortgages to student loans. The Federal Open Market Committee cut the benchmark lending rate to a range of zero to 0.25 percent Dec. 16, and said it will focus on stimulating the economy and supporting financial markets by expanding its balance sheet.

Lacker is a voting member of the FOMC this year and his speech provides more details on the debate U.S. central bankers had on the appropriate use of the Fed’s balance sheet at the December meeting.

At their meeting last month, FOMC members approved $600 billion in purchases of mortgage-backed securities and agency bonds to prop up mortgage lending.

Lacker said the turmoil in financial markets may have been aggravated by “uncertainty” about how the government would respond.

Financial institutions have reported credit losses and write downs on mortgage-related assets totaling $1 trillion since the credit crisis began in 2007, exceeding the $935 billion in capital they have raised.

“Uncertainty about the form of government support --asset purchases versus dilutive capital purchases, for example -- may have hindered the provision of fresh equity capital,” he said.

-- Editors: Mark Rohner, Carlos Torres

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: January 9, 2009 12:49 EST

 

Seriously, how can I get on the Elitetrader payroll?

 

I'm sick of your whiney shit.

If you don't think it's of importance that the Richmond Federal Reserve President is essentially arguing against the actions his own entity is undertaking via the use of massive amounts of taxpayer money, then don't click on the thread, but please, please, please...


STFU