Richmond Fed President Jeffrey Lacker said the Fed should limit its lending in order to reestablish its boundaries.
Speaking at the Cato Institute on Wednesday, Lacker said that he favors a narrower support of the financial system. "Sometimes it is essential to for central banks to forgo loans," Lacker said.
He added that it is a critical policy challenge to resolve lending limits, adding he is concerned that the dramatic rise in Fed lending has pushed it past its supervisory reach.
"But finding a way of establishing credible boundaries is essential if we wish to maintain a financial system that includes both institutions that are protected and regulated by the public sector and institutions that are regulated primarily through market discipline," he added.
Lacker said that it is essential that the central bank disappoint expectations at times by refusing to lend money.
He noted that it important to limit the scope of public safety net in order to avoid stifling innovation. He cautioned that using regulation to prevent swing in credit and asset prices may impede technological progress.
"I believe this mix is important to achieving a balance between the safety that comes from government involvement and the innovation that, despite the associated volatility, has added much to the effectiveness of our financial system and to overall economic growth," Lacker said.
By Steve Stecyk and edited by Nancy Girgis
©CEP News Ltd. 2008