Last week, in anticipation of a positive outlook resulting from the Treasury's Stress Test on the country's largest financial institutions, and the surprise employment figures that indicated a slowing in number of people losing their jobs, the markets soared with the Dow Jones ending up over 4.4% for the week. Although these may be market moving events, it was our own Jeffrey Lacker, Fifth District Federal Reserve President who caught my attention.
President Lacker is a voting member of the Federal Open Market Committee, which guarantees that his views will count in the monetary policy actions of the nation for the rest of the year. So paying attention to his views is important to all Americans during this time of crisis. I have to admit, I admire individuals that can see the big picture and are willing to voice a dissenting opinion instead of simply going along with the top dog, in this case, Chairman of the Federal Reserve Ben Bernanke.
We have seen him dissent on more than one occasion, but he gave us a little understanding of his ideas in January when he dissented to the Term Asset-Backed Securities Loan Facility and the blanket statement "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability". His statement stated he "preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs".
This statement was pretty brief and my conclusion was that he simply believes that "targeted credit programs" can create more problems than they solve and open the door for greater Federal Reserve and or Federal Government involvement into the next crisis. That was a vote on principal and took courage to do so as the sole dissenting vote.
From a speech he gave this past weekend (The speech is available at the Federal Reserve Bank of Richmond's web site www.richmondfed.org) we have learned more about President Lacker's belief and I hope that others will listen, especially to this statement; "I believe that a strong case can be made that the financial safety net, especially those parts that were more implicit and perceived that explicit and written into the laws, played a significant role in the accumulations of risk that ultimately led to the turmoil we are still experiencing. While deployment of the financial safety net is often viewed as an essential response to the financial crisis, I believe we need to give serious thought to the extent to which the safety net was actually a significant cause of the crisis".
The safety net he is talking about is the government guarantees of private debt - whether it is explicit and written into law as is the FDIC or the implicit guarantee of "too big to fail". We have seen the results of implicit guarantees before with the demise of the Savings and Loan industry and the ultimate cost to the taxpayers. When you can be rewarded for taking on risk without the possibility of personal loss, then why not take the risk? This is in effect what a "too big to fail" policy is saying to the nations large financial institutions. I hope, as does President Lacker, that the new rules and regulations that are currently being created will minimize this "implicit guarantee".
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