Tuesday, March 3, 2009

Battle at the Fed, Bernanke versus Lacker

There's an interesting battle going on at the Fed. It's two inflationists fighting, but one is having problems with some of Bernanke's new "tools".

Richmond Fed President Jeffrey Lacker cast the lone dissent at the Jan. 27-28 Federal Open Market Committee meeting, his fifth straight dating back to his previous term as a voting FOMC member three years ago, according to WSJ.

Lacker’s first four dissents, in late 2006, were all in favor of higher official interest rates. At the January FOMC meeting, however, his dissent was even more interesting. It wasn’t against the decision to hold the fed funds rate near zero, but rather the composition of the Fed’s balance sheet. Lacker doesn’t think the Fed should be expanding its balance sheet through credit programs, but rather via purchases of Treasury securities.

According to the minutes of that meeting, Lacker “preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs” including the Term Asset-Backed Securities Loan Facility, or TALF.

Since, in many cases, it is not exactly clear what the Fed is buying or, who they are buying from, Lacker may smell a rat.

In a speech last week, Lacker said government programs targeting specific sectors of the credit markets may distort the allocation of capital in the private sector. 

“Consequently, while some market segments benefit from reduced funding costs, others may actually see their costs rise as credit is diverted to those markets that have been targeted for support,” Lacker said.

Warren Buffett said pretty much the same thing in his annual letter to shareholders:

This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Lacker added during his speech that, “an alternative approach to expanding the monetary base is to do it in a way that is more neutral across market segments” (That is buy Treasury securities, like in the old days.)

Lacker has no chance of winning this fight but, kudos to him for raising the issue.

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