Federal Reserve Bank of Richmond President Jeffrey Lacker urged Congress to curtail the central bank’s authority to lend to brokers and insurers facing financial stress.
“To improve the credibility of a commitment to greater market discipline, we should further restrict the means available to use public funds to rescue private creditors,” Lacker said today in a speech in Charlotte, North Carolina.
Lacker commented just hours after Fed Chairman Ben S. Bernanke said financial stability is no longer a “junior partner” to monetary policy, and central banks should try to defuse threats in the future. The 2008 financial crisis highlighted the importance of anticipating threats, he told students in a lecture at George Washington University.
The Richmond Fed president told reporters after his speech he continues to expect U.S. growth of 2 percent to 2.5 percent this year. He said current policy is “appropriate,” and he opposes additional easing to try to generate faster job growth.
“The labor market is facing some serious impediments,” Lacker said. “They are real in nature and not monetary. I haven’t been convinced that more monetary stimulus would help the labor market improve materially more rapidly.”
Lacker also told reporters he isn’t currently worried about inflation. While price measures have been higher than the Fed’s target of 2 percent annually, that reflects “a temporary bulge in energy prices” that occurred last year, he said.
Inflation Rate Acceptable
“My reading of where inflation is going in the near term is closer to 2 percent,” he said. “I think we are OK on inflation right now.”
Lacker said in his speech that while Congress has restricted the Fed’s powers to lend to firms other than banks, the “restrictions do not go far enough.”
“I would favor further tightening restrictions on Federal Reserve lending by eliminating section 13(3) entirely,” he said, referring to lending to nonbanks in “unusual and exigent circumstances.”
Further strengthening of “living wills” that show how financial companies could be unwound in an orderly way without destabilizing the financial system and changes in the U.S. bankruptcy code tailored to the financial sector are needed, Lacker said to bankers, lawyers and law students from the University of North Carolina School of Law’s Center for Banking and Finance.
“We should critically re-examine bankruptcy law in light of recent events, looking for ways to improve its effectiveness for stressed financial firms and reassure policy authorities,” Lacker said. “We should take a very rigorous approach to the Dodd-Frank provisions requiring credible resolution plans for large financial firms.”
Recipients of emergency aid have included U.S. branches of overseas banks, including Switzerland’s UBS AG; corporations such as General Electric Co. and McDonald’s Corp.; and investors like Pacific Investment Management Co.
Lacker praised Fed regulators work with “stress tests” to ensure banks are prepared for future recessions, while saying they can’t replace competitive market forces.
The Fed said this month that 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a severe recession while they continue to pay dividends and buy back stock. The stress tests are now a standard part of the Fed’s oversight of financial risk.
Rescue of Firms
Fed presidents including Philadelphia’s Charles Plosser and Richard Fisher say the Dodd-Frank Act enacted in 2010 won’t necessarily end bailouts because it gives regulators discretion to provide such rescues. Plosser has also called for a bankruptcy law that would set rules for how a large financial company is to be wound down.
The Dodd-Frank law gave the Fed and other regulators powers to take over and wind down failing institutions, mandated that the central bank look for evidence of emerging risks to financial stability and required annual stress tests of the largest U.S. banks.
Lacker didn’t comment on monetary policy in his prepared speech. He has dissented twice this year from the Federal Open Market Committee’s statements that subdued inflation and economic slack will probably warrant exceptionally low rates through late 2014.
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