Fed’s Lacker: Put 'Credible’ Limits on All Aid to Firms

Far from being a market failure, the financial crisis stemmed in good part from the federal financial “safety net” and the incentives for excess risk-taking it created, and the best way to avoid future crises is to put “credible limits” on that safety net, Richmond Federal Reserve Bank president Jeffrey Lacker said yesterday.

The only alternative is to impose onerous regulations on financial institutions, which would prove “costly,” said Lacker, a voting member of the Fed’s policymaking Federal Open Market Committee this year.

Although he did not explicitly say so, in the past Lacker has argued for a more clear delineation of the circumstances in which the Fed would use its Section 13(3) authority — a power it has deployed in an ad hoc way over the past two years to greatly expand its assistance to troubled financial giants, such as Bear, Stearns & Co. and American International Group Inc.

In a note of irony, Lacker observed that, in responding to the crisis, the Fed, the U.S. Treasury, and other government agencies have further extended a safety net, which he maintained was a major contributor to the crisis to begin with.

Rather than expanding the safety net, it needs to be curbed, Lacker argued in remarks prepared for the Asian Banker Summit in Beijing.

By “safety net,” Lacker made clear he was referring not only to explicit government protections, such as federal deposit insurance and access to the Fed’s discount window and payments system, but also to “implicit” guarantees.

— Market News International

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