RICHMOND--Some economic recovery should start in the United States by the end of 2009, Federal Reserve Bank of Richmond President Jeffrey Lacker said yesterday.
Lacker said the Federal Reserve's action to pump money into the banking system should stimulate the economy. He said the system won't return to full health until private investors are confident there won't be more government infusions that hurt shareholder value.
Lacker said it will take years to pinpoint what caused the economic meltdown. But he thinks the leading contender is a belief on the part of unregulated financial institutions that they were too big to fail and could thus take on too much risk. He called for a redesign of the system.
Lacker made his comments during an economic forum at the University of Richmond's Jepson School of Leadership Studies. Lacker and 15 economists, including two Nobel Prize winners, gathered to discuss the country's economic predicament.
They met in private for most of the day but in the afternoon held a question-and-answer session with students, faculty, invited guests and reporters. Video of the session is expected to be posted next week on the Jepson Web site, jepson .richmond.edu.
The Fed has doubled the U.S. monetary base since August, noted William Niskanen. He applauded the unprecedented action but thinks it will require a sharp reversal, once the economy recovers, to prevent inflation.
Niskanen and other panelists weren't as complimentary about the Treasury Department's handling of the $700 billion TARP plan, Congress' proposed $800 billion-plus economic stimulus plan or the actions that have led to the current crisis.
James Buchanan called it a "massive constitutional failure" of the financial system, which has been relying on rules pieced together over time. He called for a new set of rules and commented that people now have a better appreciation of the challenges faced during the Great Depression.
Niskanen said politicians feel compelled to show they're doing something about the problem. He said the proposed stimulus package, which the House of Representatives passed last week, is mostly a way for Democrats to wrap together all the things they've wanted for years into one bill.
"It has no particular use as a fiscal stimulus," he argued, noting that the TARP and stimulus will cost more than the Iraq and Afghanistan military operations have to date. Dean Croushore argued that this is a good time to fund infrastructure improvements, as there is currently limited private investment.
Sidney Winter said the crisis in the financial sector is being dealt with and will pass. Yet he sees a long-term problem with demand, as household wealth has fallen sharply and people have learned to scale down spending.
Vernon Smith agreed that people have been on a "huge consumption binge for years," fueled in part by a housing bubble exacerbated by federal laws skewed toward homeowners. He compared the laws to "putting gasoline on a smoking cigarette" and said some good is likely to come from the decline in consumption.
Bill Freehling: 540/374-5405
Email: bfreehling@freelancestar.com