Mirabile dictu, one of the Fed governors is expressing reservations about the stalled bailout proposal. Richard Fisher’s concern is that it would push Federal debt precariously high. From Bloomberg:
Dallas Federal Reserve Bank President Richard Fisher said the proposed $700 billion rescue of financial institutions backed by Fed Chairman Ben S. Bernanke would plunge the U.S. government deeper into a fiscal abyss.
The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put “one more straw on the back of the frightfully encumbered camel that is the federal government ledger,” Fisher said today in the text of a speech in New York. “We are deeply submerged in a vast fiscal chasm.”…
“Holding the Fed funds rate steady at 2 percent was the right thing to do, while our colleagues at the New York Fed and at the Treasury turned to dealing with the risk of AIG and other choke points in the markets,” Fisher said. He had dissented in favor of tighter policy on five votes this year by the rate- setting Federal Open Market Committee. This month he voted with the majority.
Money market rates worldwide surged today on concern lawmakers may weaken the Treasury’s proposed rescue of financial institutions.
Banks have all but stopped lending to one another. One money-market indicator, the Libor-OIS spread measuring the availability of cash among banks, widened today by 32 basis points to nearly 2 percentage points, the most on record. It averaged 8 basis points in the 12 months before the credit squeeze began in August last year.
“The seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy,” Fisher said to the New York University Money Marketeers Club.
“I was, and I remain skeptical, that lowering the fed funds rate is the most effective antidote,” he said. “Rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior.”
The Bloomberg story missed some of the juiciest bits of the speech:
There is no nice way to say this, so I will be blunt: Our credit markets had contracted a hideous STD—a securitization transmitted disease—for which lowering the funds rate to negative real levels seemed to me to be not only an ineffective treatment, but a palliative and maybe even a stimulus that would only encourage further mischief.
I was and I remain skeptical that lowering the fed funds rate is the most effective antidote for such a pathology, given that, in my book, rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior. A fed funds rate of around 3 1/2 percent—that was the level at which I began to stray from “the pen”—did not appear to me to be the principal problem, particularly with commodities prices soaring and incipient inflation coming to our shores from demand-pull pressures and rising labor costs in the countries that we use to source the inputs needed to run our manufacturing base and stock the shelves of our retail stores…..
t may be useful to review the emergency initiatives taken by the Federal Reserve as the hemorrhaging patient was being rushed into the ER:
First, there was the administration of various emergency efforts to stabilize the situation. The Federal Reserve created three new facilities: the TAF, or term auction facility; the TSLF, or term securities lending facility; and the PDCF, or primary dealers credit facility. We used these improvised devices to intravenously inject liquidity in amounts and on terms that were unprecedented.
We worked with other “ERs” as we saw the infection spread and take on global dimensions. We established and expanded our swap lines with the Europeans and the British and the Swiss and the Canadians and the Japanese (and just this week with the Norwegians, Swedes, Aussies and Danes). Together, these central banks injected sizable amounts of liquidity to satisfy dollar demand in their respective home markets.
And, working with the Treasury, we cauterized certain blood vessels that seemed to burst almost spontaneously and threaten the system, like Bear Stearns and AIG and debilitated money market funds.
Meanwhile, other responders were at work—from the Federal Housing Administration, to the Federal Home Loan Banks, to the Securities and Exchange Commission, to the Treasury, to the Congress…
These various efforts were reactive responses. They were as deliberately and thoughtfully crafted and administered as they could be under the unusual and exigent circumstances. But they were necessarily ad hoc…Ben Bernanke, a careful student of the Depression of the 1930s and other crises, had long been warning the secretary of the Treasury and others that a more comprehensive solution might be required…
One could make the argument that isolating the infected assets that were the most active sources of contagion is a necessary but still insufficient condition for restoring a healthy credit system. That argument would suggest that once the TARP, or whatever comes of it, passes through the political process and debilitating toxic assets are removed from balance sheets, we must next go about buttressing the equity side of the balance sheets of the system’s key agents….
If this is a DNA issue, perhaps no financial system—no matter how enlightened its central bank or sophisticated its regulatory architecture or wise its Congress or executive—can prevent nature from running its course.