Richmond Fedhead Lacker on the Safety Net and Regulatory Misgivings

In honor of JL's kick ass performance today,
JDA hereby resurrects MS Paint valentines just for him

Alright, I'm a few hours late but now that the work day has been tucked away and we've cracked open a cold one, maybe it's time to dig into this fabulous speech by Richmond Fed's fearless leader. A wrap up of MarketWatch's take may be found at This is Why I F&#%ing Love Jeffrey Lacker: JL Takes On Obama for Regulatory "Missteps" and WSJ echoed the sentiment of the article. If you don't speak central banker, I can sum up Lacker's thoughts in one simple sentence: WTF ARE YOU THINKING?!

Curiously enough, the original MW article has since been softened up a bit with a cute little edit, leaving me to believe that the next time Lacker implies the adminstration is absolutely moronic, he'll do so in a far more subtle way (maybe homicidal maniac Alan Greenspan is available to tutor him this if he's not writing another book these days?). Classy bastard that he is, he didn't need to name names in the speech, we all know whose idiotic regulatory reforms he was referring to. Note the link leads to "Obama reforms going down wrong road" but the article itself is now entitled "bank reforms blah blah blah." Well! Good thing Jr Deputy Accountant follows Lacker like a schoolgirl with a silly crush and caught it before the edit, eh?

Assuming dear reader does not hold Lacker in as high a regard, I'll save you the speech and sum up the juicy bits as usual. Normally I need to slap on my central banker decoder ring to pull out the useful parts of any Fedhead blabber but as you should know by now, Lacker is not your average central banker.

"Participants in the recent G-20 meetings, for instance, endorsed the notion of increased capital requirements for such companies. Given the broad and deep official support the financial sector has received, stiffer capital standards are warranted in order to better align incentives and protect taxpayer interests. But I think it also is worth questioning whether we need to take the level of official support as given."

If this were your average Fedspeak, it would mean "banks need more capital so they can get away with more bullshit" but since it's not, this can be taken at face value to mean Lacker's about fed up (LOLZ) with the safety net. In years now forgotten to us, I would be referring to the appearance of a safety net. As all of us know, things have changed and the safety net has since become the business model of banks, investment firms, and strange financial hybrids alike. These beasts have since taken to lumbering along destroying everything in their paths with the Fed Fire Department putting out the flaming wreckage left in their wake. Obviously, some in the Fed have their heads screwed on tightly enough to understand that this is not what the Fed exists for, nor can this be maintained indefinitely.

Richmond loves their safety net and for good reason. Who wants to be the cheap janitorial labor mopping up the mess when everything goes awry? Perhaps Lacker is one of the few (and by few I mean only one) on Fed payroll who has actually read the Fed mandate that dictates they are put in place to help and not harm the economy at large. Does it actually say that somewhere in the Fed handbook? I certainly hope so.

"The more we rely on government guarantees of private-sector financial liabilities as our main defense against financial market disruption, the more we must regulate private risk management to offset the adverse incentive effects of that safety net. But by the same token, meaningful market discipline requires a credible government commitment to not shield private counterparties of large financial intermediaries from credit losses."

What the hell does that mean? That means BALANCE; so to the fiduciary crack addicts cranking up the Fed presses, this means sometimes they've got to be the authoritative parent and put their foot down. NO MEANS NO, and if financials can't get that point, they'll just have to sit in the corner and think about what they did until they do.

I've tried to tell you people Lacker is really a libertarian in disguise across enemy lines, when will you believe me?

"At each moment of crisis, it is hard to argue with the proposition that losses to the creditors of a large, interconnected financial firm pose significant risks to the financial system and the broader economy. But the cumulative effect of these actions has been to solidify long-held beliefs by many market participants that large, interconnected financial firms will be viewed by policymakers as "too-big-to-fail," or at least too big to fail in a way that imposes substantial losses on creditors... The result is an environment in which there is both broad agreement on the need for stronger regulatory oversight of financial markets and institutions and widespread dissatisfaction with the scale of the official financial support the crisis has seemed to require."

Is there any commentary required? I certainly hope not.

Lacker goes on to discuss the imperfect free market model, which naturally exposes its flaws, only amplified in a chaotic, "real life disaster mode" environment like the one we see today. But the free market, he argues, is no more flawed than the regulatory model, as both are subject to the same sorts of unknown and varied influences. Personally I think he gives policymakers a tad too much credit as we know the free market has far less tolerance for personal and political interference thanf the intentions of man, those same fragile intentions which are easily swayed by emotion or the undeniable draw of power. Power! Does the free market consider such things? I think not.

"I believe that the incentive effects of the financial safety net added to the vulnerability of financial institutions and contributed significantly to the housing boom and subsequent bust."

See? Don't blame the damn free market, bitches.

My favorite, ABSOLUTE favorite paragraph of all follows. Lest I be accused of rubbing Richmond's balls, what other reaction do you expect when one of the Fed's own calls the Fed's expanded and completely frightening power into question?

"Effective resolution reform should limit the discretionary use of public funds. Federal Reserve lending has played a prominent role in this crisis and has been expanded far beyond the boundaries that previously were believed to constrain it. Section 13(3) of the Federal Reserve Act allows Reserve Banks, with the permission of the Board of Governors, to lend to any individual, partnership or corporation, provided the circumstances are "unusual and exigent," and the borrower is "unable to secure adequate credit accommodations from other banking institutions."9 This provision was rarely invoked before 2008, but now that it has, we should seek to clarify how we want people to expect it to be used in the future. Successfully solidifying these expectations may require rewriting Section 13(3). I would favor revisions that specify more clearly the circumstances in which the Fed can extend such credit and forms that such credit can take. For instance, I previously have suggested limiting the Fed's emergency loans to duration of a few days, after which further funding would become the responsibility of the Treasury."


Win win win.

I've read more Lacker speeches in my day than any 20-something girl who claims to have a life ever should and can say with absolute certainty that this is one of his best ever.

I'm proud of you, Jeffrey Lacker. You not only knocked this one out of the park but you managed to kick Obama's moronic regulatory scheme in the nuts while doing so. It is no wonder that you are my favorite Fedhead, and it's because of speeches like this that even a known Fedbasher like myself can believe that there IS at least some crumb of hope in this entire mess.

Seriously, what does a girl have to do to get you to bitchslap Janet Yellen at the FOMC conference table? PLEASE!! We need you!!

I know I normally don't insist that JDA readers skim the entire thing but please, if you read one Fedhead speech in your entire life it should be this one. And if Lacker ever finds himself wanting to switch sides, I will happily loan him the End the Fed t-shirt off my back.

And just because I'm trying to be nice, I think I got through this entire post without a single F word, that's got to be a Jr Deputy Accountant first. Respect where respect is due, I suppose. Or maybe I'm saving them up for that Janet Yellen speech I haven't gotten to yet...

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


jenlacker said...

misgivings or misteps?

Well I think the appropriate word here would be "misteps" but I used that in an earlier post on Mr Lacker's thoughts :)

Um... strange coincidence that you share his last name!

I think it is appropriate to say that he has "misgivings" over the route we are taking.

At the very least.

Anonymous said...

"Who wants to be the cheap janitorial labor mopping up the mess when everything goes awry?"

Like being the mop up guy at a peep show.