^*Jeffrey M. Lacker is the President of the Fifth District Federal Reserve Bank, at Richmond, having taken office on August 1, 2004. He is currently serving as a full term that began March 1, 2006. In 2009, he serves as a voting member of the Federal Open Market Committee. He received his bachelor's degree in economics from Franklin and Marshall College in 1977. Following graduation, Dr. Lacker joined Wharton Econometrics in Philadelphia. He went on to earn a Ph.D. in economics from the University of Wisconsin in 1984. Dr. Lacker was an assistant professor of economics at the Krannert School of Management at Purdue University from 1984 to 1989. He joined the Bank in 1989 as an economist in the banking area of the Research Department. He was named research officer in 1994, Vice President in 1996, and senior Vice President and Director of the Research Department in May 1999. He taught at the College of William and Mary in 1992 and 1993, and in 1997, he was a visiting scholar at the Swiss National Bank. Dr. Lacker is the author of numerous articles in professional journals on monetary, financial, and payment economics, and has presented his work at several universities and central banks, and also presented at the National Association for Business Economics 2009 Washington Economic Policy Conference, Alexandria, Virginia, March 2, 2009.

Abstract

The financial dimension of the current contraction has brought a historic expansion in government lending to financial market participants, mostly through an expanding array of Federal Reserve (Fed) initiatives. This contrasts with the Fed's typical response to recent recessions that has been limited to adjustments of the target Fed funds rate. Restrictions on credit supply and declines of creditworthiness have both contributed to the contraction in lending, although the latter cause has probably been underestimated relative to the former. Fed and other government lending programs have targeted particular sectors, altering the allocation of credit across markets. Also, targeted credit programs contribute to the moral hazard problem inherent in the provision of government-funded credit or guarantees. An alternative approach to monetary policy where the Fed funds target is essentially zero is purchasing Treasuries, which is likely to have little effect on the relative credit spreads on different financial instruments. However, given that targeted lending has taken place, it is critical that regulatory mechanisms be installed so that government regulation matches the scope of government support. Also, targeted lending by the Fed is in effect fiscal policy. Is this a legitimate role for a central bank, or should such lending be subject to legislative approval, with the Fed's role limited to monetary stability?