Fed’s Fisher: Credit Markets Have “STD”

In surprisingly blunt remarks delivered to a group of NYU students Thursday, Federal Reserve Bank of Dallas president Richard Fisher explained his recent less-hawkish stance on monetary policy, which saw him vote in line with Fed chief Ben Bernanke and other FOMC members in the most recent decision on rates. Prior to that, Fisher had been vocal in calling for hikes to the federal funds target rate. Fisher bemusedly noted some media coverage suggesting he was Bernanke’s “little doggie” for falling in line with monetary policy decision making, saying that he “places the health of the economy and the proper conduct of monetary policy above any personal interests or intrigue.” And Fisher is clearly worried about the health of the U.S. economy. He explained his rationale for pushing for a rate increase thusly: “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.” Read his full remarks. TARP only part of the solution Fisher signaled at least tepid support for the Treasury’s so called TARP, of “troubled asset recovery program,” saying that “by removing diseased mortgages and curing the credit market patient, creditors can begin getting back to the business of funding commerce and economic growth.” But not long after, he cautioned that “we need to bear in mind that the TARP places one more straw on the back of the frightfully encumbered camel that is the federal government ledger.” Fisher also suggested that buying up troubled assets alone will not be enough. “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,” he said. And that’s a process that Fisher said he sees a particularly problematic, given that vast amount of debt that the federal government already has, and seems likely to add to. He pointed to $13 trillion in unfunded Social Security benefits and Medicare obligations, and telling attendees that “we are deeply submerged in a vast financial chasm.” Getting out will require Congress to show a level of fiscal discipline it has not shown in roughly a decade, Fisher argued. “[Members of Congress] can use this crisis as a call to arms for coming to grips with our fiscal predicament, or they can punt by asking our children and their children to do what they cannot bring themselves to do,” he argued. “Or, just as awful, they can turn to the Fed to print their way out of their dilemma and encumber future generations of Americans with the debilitating burden of debased money.” Legislators on Friday were still frantically attempting to work out details on the proposed TARP proposal; House Republicans’ proposal to see the government insure — but not purchase — illiquid mortgage-related securities had thrown an earlier bi-partisan agreement into doubt. Read full coverage.