Open dissent at the Fed continues. I first talked about this a week ago in Infighting At The Fed. Today Lacker Says Fed Loans to Wall Street Risk More Crises.



Richmond Federal Reserve Bank President Jeffrey Lacker said the lending to securities firms that the central bank introduced in March may lay the seeds of further financial crises.



"The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking," Lacker said in a speech to the European Economics and Financial Centre in London. That "in turn could give rise to more frequent crises," he said.



Lacker urged that the central bank now "clearly" set boundaries for its help to financial markets. In an interview yesterday on the themes of his speech, Lacker said even those new boundaries may not be believed by investors unless a financial firm fails "in a costly way."



The remarks are the strongest warning by an official about the consequences of the Fed's aid to securities dealers, the first lending to nonbanks since the Great Depression. While other regulators have focused on tightening investment-bank oversight in exchange for the lending, Lacker said there's a case for "scaling back" the new programs.



Philadelphia Fed President Charles Plosser urged in a separate speech today that officials specify the conditions "under which the central bank will lend" to firms. He told reporters in New York afterwards that "we run the risk of sowing the seeds of the next crisis."



Thomas Hoenig of Kansas City said last month the Fed's actions were "likely to weaken market discipline," while Minneapolis's Gary Stern in April worried about "adequate incentives to contain" an expansion in the Fed's safety net.



The central bank has introduced three programs since December to help counter the credit crisis. Along with the Primary Dealer Credit Facility, the Fed lends Treasuries to dealers in exchange for mortgage and asset-backed debt through the Term Securities Lending Facility. The Term Auction Facility offers cash loans to banks.



Lacker indicated skepticism about the value of the programs.

"It isn't clear what kind of market failure is being addressed" with the TAF, he said. Central bankers should be wary "that they can substitute their own judgment about the fundamental value of financial instruments," he said.

Bernanke Loses Support

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