After reading this essay in the Wall Street Journal, I’m going to have to move up Jeffrey Lacker as my favorite Federal Reserve participant, trailing only old friend Paul Volcker [Apr 9: Paul Volcker Speaks] as someone who actually realized the unprecedented actions of this Federal Reserve [Mar 22: A Historic 9 Days for the Federal Reserve] are just setting up for more risky activity in the future by unchecked banks. (heads we win, tails we still win) The fact he is stating this while actively involved in the system deserves even more brownie points.

• In a striking insider’s critique, a Federal Reserve policy maker said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior and could endanger the Fed’s independence.
• …show that concerns that outsiders, including former Fed Chairman Paul Volcker, have raised about the Fed’s actions — in particular its rescue of the investment bank Bear Stearns Cos. — are shared by some inside the Fed. Those people — including presidents of some of the 12 regional Fed banks — remain a minority. Nonetheless, their views will matter in the months ahead as the Fed, the Bush administration and Congress grapple with the implications of the Fed’s unprecedented actions.
• “The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking,” a phenomenon called moral hazard, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending,” Mr. Lacker said, according to a text of his remarks.
• In an interview, Mr. Lacker said that “before this recent episode, there [were] well-understood and well-articulated boundaries around when we would lend” — to manage short-term interest rates, to help banks deal with temporary shortages of cash, or to facilitate the closure of a bank taken over by regulators.
• “The innovative credit programs and other things we’ve done have gone beyond previously accepted boundaries. We’ll be wrestling with the consequences.” The new program could put the Fed’s independence at risk, he said. “It crosses a line into what is essentially fiscal policy to direct credit to particular sectors, creating expectations of similar treatment.”
• Mr. Lacker said the Fed has already “gotten questions from firms saying, ‘I’d like to take over this other firm. Can you help like you helped with Bear?’ (pathetic – CORPORATE WELFARE – this is what you BREED – ENTITLEMENT by CORPORATIONS for handouts!)

[May 4: Moral Hazard now run Amuck]

Last 5 posts by Trader Mark

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