A Voice of Sanity at the Fed
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."