NASHVILLE, Tenn, April 18 (Reuters) - Political furor over lavish bonuses paid to executives at institutions bailed out with U.S. taxpayer funds is making investors wary of emergency programs and will hamper consumers' ability to borrow at reasonable rates, a top Federal Reserve policy-maker said on Saturday.
The effectiveness of some of the U.S. central bank's emergency lending programs has been 'undercut by stigma or worries about what other strings are or might be attached' to their use, William Dudley, president of the Federal Reserve Bank of New York, said in remarks prepared for a conference at Vanderbilt University in Nashville.
The U.S. central bank's most ambitious lending program to date, the Term Asset-Backed Securities Loan Facility, which aims to spur consumer and small business lending, has been suffering from such concerns, he said.
The program kicked off in March, shortly after a furor erupted over bonuses paid to executives of American International Group, the insurer that has received billions in government bailout funds, and investors have worried they could become the focus of the political anger.
'I think it is worth emphasizing actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates,' Dudley said.
In the first two rounds of TALF, investors requested less than $7 billion in loans, a program that the Fed has said could grow to $1 trillion.
'One reason why the TALF has gotten off to a relatively slow start is the reluctance of investors to participate,' Dudley said, noting that some investors worry they could become subject to scrutiny on their pay similar to that on banks receiving bailout money through the Troubled Asset Relief Program.
'My own view is that these fears are misplaced. The TARP funds in the TALF program only come in on the back end of the program when loans are put back to the Fed,' said Dudley, who prior to becoming the New York Fed's president ran the bank's markets group.
But, even with the tepid start, the TALF has helped restart securitization markets, Dudley said.
In general, the Fed's unprecedented array of liquidity programs have 'worked quite well. In those areas where the facilities have been active, we generally have seen an improvement in market conditions,' Dudley said.
But, he warned, they are not a panacea as they can't address the shortage of capital in the banking system, which he called the 'fundamental problem'.
NOT WORRIED ABOUT INFLATION
The Fed's balance sheet has more than tripled to over $2 trillion since the financial crisis took hold, as the central bank set up the emergency facilities to combat a punishing recession. For a factbox of these programs, please see
The goals of the Fed's balance sheet expansion 'are to slow down the pace of deleveraging to reduce the risk of catastrophic failure, improve market function, and ease financial market conditions,' said Dudley, who is a voter on the Fed's policy-setting committee.
The Fed's ballooning balance sheet is unlikely to lead to runaway inflation down the road as the U.S. central bank will be able to shrink it once financial conditions and the economy improve, he said.
'I am not worried at all that the Federal Reserve's balance sheet expansion will generate an inflation problem,' Dudley said, noting that many of the programs will automatically wind down as soon as markets normalize and better prices can be found elsewhere.
The Fed's ability, since last September, to pay interest on excess reserves will also make it easier for the central bank to tighten monetary policy and private sector interest rates when the time comes, Dudley said. He said the central bank has many options to make it worth banks' while to hold reserves at the Fed.
(Reporting by Kristina Cooke; Editing by Leslie Adler) Keywords: USA FED/DUDLEY (kristina.cooke@reuters.com; 646 223 6154) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
The effectiveness of some of the U.S. central bank's emergency lending programs has been 'undercut by stigma or worries about what other strings are or might be attached' to their use, William Dudley, president of the Federal Reserve Bank of New York, said in remarks prepared for a conference at Vanderbilt University in Nashville.
The U.S. central bank's most ambitious lending program to date, the Term Asset-Backed Securities Loan Facility, which aims to spur consumer and small business lending, has been suffering from such concerns, he said.
The program kicked off in March, shortly after a furor erupted over bonuses paid to executives of American International Group, the insurer that has received billions in government bailout funds, and investors have worried they could become the focus of the political anger.
'I think it is worth emphasizing actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates,' Dudley said.
In the first two rounds of TALF, investors requested less than $7 billion in loans, a program that the Fed has said could grow to $1 trillion.
'One reason why the TALF has gotten off to a relatively slow start is the reluctance of investors to participate,' Dudley said, noting that some investors worry they could become subject to scrutiny on their pay similar to that on banks receiving bailout money through the Troubled Asset Relief Program.
'My own view is that these fears are misplaced. The TARP funds in the TALF program only come in on the back end of the program when loans are put back to the Fed,' said Dudley, who prior to becoming the New York Fed's president ran the bank's markets group.
But, even with the tepid start, the TALF has helped restart securitization markets, Dudley said.
In general, the Fed's unprecedented array of liquidity programs have 'worked quite well. In those areas where the facilities have been active, we generally have seen an improvement in market conditions,' Dudley said.
But, he warned, they are not a panacea as they can't address the shortage of capital in the banking system, which he called the 'fundamental problem'.
NOT WORRIED ABOUT INFLATION
The Fed's balance sheet has more than tripled to over $2 trillion since the financial crisis took hold, as the central bank set up the emergency facilities to combat a punishing recession. For a factbox of these programs, please see
The goals of the Fed's balance sheet expansion 'are to slow down the pace of deleveraging to reduce the risk of catastrophic failure, improve market function, and ease financial market conditions,' said Dudley, who is a voter on the Fed's policy-setting committee.
The Fed's ballooning balance sheet is unlikely to lead to runaway inflation down the road as the U.S. central bank will be able to shrink it once financial conditions and the economy improve, he said.
'I am not worried at all that the Federal Reserve's balance sheet expansion will generate an inflation problem,' Dudley said, noting that many of the programs will automatically wind down as soon as markets normalize and better prices can be found elsewhere.
The Fed's ability, since last September, to pay interest on excess reserves will also make it easier for the central bank to tighten monetary policy and private sector interest rates when the time comes, Dudley said. He said the central bank has many options to make it worth banks' while to hold reserves at the Fed.
(Reporting by Kristina Cooke; Editing by Leslie Adler) Keywords: USA FED/DUDLEY (kristina.cooke@reuters.com; 646 223 6154) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.