WASHINGTON--Richmond Fed President Jeffrey Lacker suggested on Monday that recent Federal Reserve actions to provide expanded credit by increasing money supply need further oversight.
Government lending by the Treasury or Fed, he said in a speech to the National Association of Business Economics in Washington, is "fiscal policy in the sense that it channels taxpayer funds to private sector entities."
He added: "the presumption ought to be that such lending is subject to the checks and balances of the appropriations process laid out in the Constitution" and said expanding the Fed's balance sheet "allows government lending to circumvent the Congressional approval process."
“The way we’ve structured lending programs and the extent to which we’ve used the Fed balance sheet have had the implication that they’ve avoided the necessity for explicit congressional appropriations,” he said in response to questions after his speech. “I think it would be better, in the long run, to keep lending within programs Congress has been more explicit about."
He also expressed concerns about government bailout of banks.
“Choosing a method of bank bailouts involves a lot of different constraints and considerations,” he said. “Focusing narrowly on one piece of it, it’s going to be difficult to attract private equity investment to any banking firm as long as market participants see a material probability of future government capital injections.
He refused to comment on nationalization of banks.
During his prepared remarks, Lacker warned expanded government lending programs will encourage banks to make bad loans and lead to new financial-sector destabilization.
"If systemic risks at large financial institutions are particularly protected by the safety net of government credit, then institutions will have an extra incentive to acquire precisely those risks," Lacker said. "The dramatic recent expansion in government lending has extended safety-net support beyond the set of institutions previously covered by the regime. If no corrective action is taken, the next economic expansion would likely see more excessive risk taking that could again destabilize the financial system."
He called for regulation to address the concern.
"It is critical that the scope of regulatory and supervisory oversight should match the extent of access to government credit support in order to contain moral hazard effectively."
Lacker suggested the unemployment rate would go higher -- “above 8%” -- but would not comment on the varying unemployment-rate assumptions used in the stress test for banks or the President’s budget proposal.
“They’re derived from public sources,” he said. “My macroeconomic outlook aligns pretty well with the consensus so the baseline is in the same ballpark.
On other matters, Lacker was moderately optimistic about economic prospects.
“I think that cutting discretionary spending on the part of households is going to be subject to diminishing marginal returns,” he said. “I think eventually that people will stop cutting discretionary spending. They get down to where they’ve postponed or delayed they’re going with out a lot; it doesn’t seem worthwhile to cut further as much as they needed to.”
Lacker also dismissed the impact the continuing fall in the stock market on consumer spending. “A lot of effort’s gone into measuring the wealth effect,” he said “and…it’s measured imprecisely, but we do have some approximate sense of a reasonable range for it. It’s hard to translate that into a given effect of a given change in equity prices in practice just because there’s lots of other stuff going on at the same time. At the present time it looks like uncertainty about job market prospects is likely to be a more powerful force dampening household spending in the near term than equity markets. That’s my reading but there’s some uncertainty around that estimate as well.”
Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
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