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A Voice of Sanity at the Fed

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June 05, 2008 – Comments (6)

At least someone there realizes that there are more important things than bailing out failures like Bear Stearns. For instance, not creating an situaion where the solution for everyone is "become to big, or too entangled, to fail."

Jeffrey Lacker knows that Inkjet Bennie has stepped over the line. Amazing that Inkjet Ben hasn't had the guts or the foresight to come out and say "By the way, there won't be any more bailouts."

Good on Lacker for realizing that the Fed's knee-jerk bailout solutions might become terrible long-term problems.

"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. (Read the full speech.)

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."

6 Comments – Post Your Own

#1) On June 05, 2008 at 9:42 PM, TMFBent (99.80) wrote:

And by the way, this is what I mean by Inkjet Bennie creating a situation where the logical choice is to fail huge.

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?' " He declined to name or describe the firms, adding, "We've turned them down" because helping them "wasn't appropriate."

Wasn't appropriate. In other words, the targeted takeover firms weren't yet entangled enough or big enough to earn a bailout. I can't wait to see what desperate bankers can cook up in order to get messy enough to warrant Inkjet Ben's next dose of taxpayer-funded largesse.

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#2) On June 05, 2008 at 10:20 PM, abitare (35.49) wrote:

Fed Governors Openly Question Bernanke's Competence

Helicopter Ben will not last:

I think the FED should be abolished:

 

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#3) On June 05, 2008 at 11:32 PM, Tastylunch (29.34) wrote:

Where's the "Inkjet Bennie" pejorative derived from? His tendency to print money?

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#4) On June 06, 2008 at 12:31 AM, DemonDoug (34.90) wrote:

There is something that doesn't smell right about Lacker's comments.  I remember William Poole being hawkish, then turning the dove with Bernanke and the rest of the banksters.  Why is Lacker saying this stuff now, where was he last fall?  Where was he when the Bear deal went down?  I wonder if this is some kind of diversion or a pretend ploy by the bankers to give PR to those of us out here who see how awful the Fed has been in the past few years.

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#5) On June 06, 2008 at 11:50 AM, TMFBent (99.80) wrote:

Lacker wasn't one of the guys setting rates or doing the Bear deal.

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#6) On June 06, 2008 at 1:39 PM, dth20k (93.47) wrote:

Does anyone NOT think BAC is playing chicken with Inkjet Ben on the CFC deal?  BAC to Fed:  "Yeah, we'll go through with this 'compelling' deal if you give us the same $29 billion guarantee you gave our competitors at JPM.  Or would you like to see the 'consequences' that scared you so much in March?"

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