Loading ...Fed’s Fisher Says Bank Rescue Plan Would Worsen Fiscal `Chasm’
By Vivien Lou Chen
Sept. 25 (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.”
Fisher made the comments as the central bank expands its role in the biggest government intrusion into markets since the New Deal, with Bernanke trying to persuade Congress to approve Paulson’s bailout plan.
Bernanke has already cut the benchmark interest rate at the most aggressive pace in two decades, invoked emergency powers to loan to securities firms and pumped billions of dollars into banks to try to restore liquidity. Also, the central bank loaned $85 billion this month to American International Group Inc.
The Fed left its main interest rate unchanged on Sept. 16 after a bankruptcy filing by Lehman Brothers Holdings Inc. encouraged investors to expect a reduction. It was the first unanimous decision by policy makers in a year.
“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.
Bank Rescue
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.”
Growth Risks
Bernanke has moved closer to cutting interest rates after indicating that risks to U.S. growth are greater than central bank policy makers saw them last week.
The central bank chief in testimony yesterday before the Joint Economic Committee signaled that restrictive credit has slowed the economy from its 3.3 percent annualized pace in the second quarter to a pace “appreciably below its potential rate.”
Bernanke and Paulson warned lawmakers that failure to pass the bailout plan would threaten markets and lead to a recession.
The final cost to taxpayers would equal $700 billion minus “the return earned” on the purchased securities, Fisher said in his speech.
“Economic activity appears to have decelerated broadly” and the financial system faces “grave threats,” Bernanke testified yesterday. “Stabilization of our financial system is an essential precondition for economic recovery.”
