Fed Independence Strikes Again: Lacker to Chamber of Comm in SC

Fed Noir: Lacker at Univ of Richmond
January 2009


It has been said before but never has the phrase "[a]s always, the views I express will be my own, and may not coincide precisely with the views of all of my Federal Reserve System colleagues" come from someone who may actually mean it as it did today from Richmond Fedhead Jeffrey Lacker this afternoon as he spoke in South Carolina. At least not since I've been paying attention. If anyone who has been watching the Fed longer than I have (pfft) has a better example, please feel free to school me.

William Poole, St. Louis Fed President in July of 2007.

Mary C. Daly, vice president and director of the Center for the Study of Innovation and Productivity at the Federal Reserve Bank of San Francisco on March 12th of this year.

"Profitwise," a publication of the Chicago Fed, explicitly states on its website: The material in Profitwise News and Views is not necessarily endorsed by, and does not necessarily represent views of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Chicago. But Chicago Fed is providing the information on their site.

The Fed Discount Window has its own site and you probably don't even want to mess with it. These guys are serious. But even the Discount Window reserves the right to its own views independent of that of the Federal Reserve System as whole. WTF? That's not even an agency. It's the Fed lending window. Well thank God the Discount Window is independent, I was worried for a minute that it was somehow biased.

And why do the individual Fed banks across the country have .org web addresses and .org e-mail addresses (take Philadelphia Fed for example) but Bernanke's Fed has a .gov?

In the Federal Reserve System, there is Bernanke and his mess and then there is the FOMC. It's easy to get lost in the noise, watching Helicopter Ben bitchslap the dollar (gold? wtf is going on here?) and Geithner strangle the markets to death with his ineptitude. But don't discount the .orgs just yet.

I digress.

Richmond Fedhead JL spoke today before the Charleston Metro Chamber of Commerce in South Carolina. The topic? Financial Conditions and the Economic Outlook. I love you, Jeffrey Lacker, but seriously? Did we need a speech on this? I appreciate the effort but I think America would like to see a little more out of the Fed at this point. The days of Fed obscurity are coming to an end and vague predictions just won't do.

Besides being the bad boy of the FOMC, Lacker appeals to me for quips like "[t]his contraction is more severe than we have seen for some time -- in fact, you have not lived through an economic contraction this severe as an adult unless you came of age before disco."

I've made you into an LOLcat, JL, safe to say I've never seen anything like this in my lifetime. Strangely, I've quizzed some who happened to be around before disco and most report that they haven't seen it this bad in their lifetimes either.

Lacker points out the obvious with the "blame the mortgage market" spiel (expected) but drops further insight in saying: "I have emphasized the possibility that risk-taking incentives, in financial markets, have been distorted by actual and perceived government financial safety net protection. I also have emphasized that much future research will be required before economists can confidently gauge the relative contributions of various causal factors."

The economists got us in this mess so I don't know if I want to put too much faith in their analysis, however I agree completely with Lacker's view on distortion. Is it too ideological to still believe in the market's ability to heal itself when cared for correctly? How is recovery possible when everyone is scrambling to throw more funny money at the problem? Perfect example? Geithner's toxic asset scheme. Like the real estate of California, this overvalued garbage (the government always seems to overpay for things with the advantage of a printing press to fund it) is a hallucination of the Treasury. Garbage. Pure and simple. Value? $0 and/or negative. Instead of applying values to this garbage, the gerbils at the Treasury should be working overtime to calculate the writedowns. Moving on...

Saying "Speculation this year about the structure of possible government rescue programs may also be contributing to financial market uncertainty," Lacker labels it uncertainty but I call it "praying for a piece of FAILout." Recent actions by the Fed and Treasury have shown that if sufficient counterparty risk exists, it has no choice but to intervene. This is exactly where everything has gone wrong. And yet it continues, despite overwhelming evidence that the situation is worsening.

Lacker himself said of the downturn's quickening pace, "[a]fter gradually weakening through most of the first three quarters of 2008, the economy has taken a dramatic turn downward in the last few months. We find ourselves in the midst of a deep recession that is stretching into its second year."

He continues:

The unprecedented response by the Fed and the government to financial market developments is by now a well-known story. The alphabet soup of new lending programs and capital injections for large banks, as well as the targeted assistance for specific institutions, have supported market segments at the heart of turmoil. They also have limited the losses born by many market participants. While equity holders in large financial institutions have seen the value of their shares erode dramatically, government and Fed actions have shielded many debt holders from loss. This is the effect of federal financial safety net protection that I believe raises the greatest concerns about moral hazard. Our response has extended well beyond what were perceived in the past to be the bounds of such protection, and this raises important questions about how markets will expect us to act in the future.

Redesigning our financial regulatory system before establishing clear boundaries around the financial safety net would be like putting the cart before the horse. I believe we should seek to scale back the boundaries of the safety net, because the cost of containing the moral hazard effects of widespread government support exceed the benefits of avoiding financial firm failures. But in any case, our choices of whom and how to regulate in the future will need to be commensurate with the status of implicit as well as explicit safety net guarantees.

Like Volcker, it seems Lacker shares the belief that enough is enough.

What rises from this crisis in terms of regulation will be critical in rewriting the banking system as we know it. Welcome to SOx for banks. I hope that Mr. Lacker realizes that by saying as much, he is putting his own institution on the line.

My thoughts? Good. If the Fed is willing to put up everything they've got in terms of independence and risk its own neck - as opposed to solely printing funny money, that doesn't show any bold or dangerous action on the part of the Fed, only dangerous for the dollar - then I'm more willing to accept that they're doing more to stop the financial bleeding than quantitative easing.

Can you buy what the Fed says? Pfft. Most likely not.

Oh well. At least it's an encouraging thought.

I hope at least in this instance, independence means exactly that and not some diluted version thereof only put there to confuse the issue further. Not like the Fed would ever do anything like that.