Sunday, June 15, 2008
Lacker Lashes Bernanke
"In a striking insider's critique, a [Fed] 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. ... 'The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk taking' a phenonmenon 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. [Jeffrey] Lacker said, according to a text of his remarks..... When a central bank makes loans to [investment banks] or accepts their debt as collateral, it 'distorts economic allocations by artificially supporting the prices of some assets and the liabilities of some market participants.' ... 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'," WSJ, 6 June 2008.
Lacker is naive. What did he think the Fed's job is, if not to support some economic interests at the expense of others? Lacker, when would helping a firm be "appropriate"? Ludwig von Mises wrote of the effects of monetary expansion 80 years ago. Lacker, welcome aboard. Yves Smith has a good 6 June 2008 post about this at http://www.nakedcapitalism.com/. I have little to add to her comments.