Fed Official Says Rescues May Create More Risks

Washington Post (06/06/08) P. D1; Irwin, Neil
Richmond Fed President Jeffrey Lacker has joined with other notable figures in expressing concern about the sweeping rescue of Bear Stearns by the U.S. Federal Reserve in March, including the possibility that the rescue could open the markets to further risks. Lacker told the European Economics and Financial Centre in London, "The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk taking, which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending." The Federal Reserve may have fundamentally recast its role with the Bear Stearns rescue, but without the lengthy, deliberative process that normally would precede such a move. Philadelphia Fed President Charles Plosser says that the Fed must define in what situations the Fed will intervene in the markets. He's concerned that the Bear Stearns rescue without clarification will incite others to take on more risks in the hope they could receive a similar bailout. A number of other insiders in the central banking system have expressed similar concerns. Meanwhile, Fed Chair Ben Bernanke says, "We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy."