Federal Reserve Bank President offers solutions at Richmond

The President of the Federal Reserve Bank of Richmond spoke at the University of Richmond Tuesday and offered a financial solution to one of the United States' largest economic problems.

Jeffrey Lacker, president since 2004, suggested that resolution planning is the best possible solution for financial markets to end the problem and phenomenon known as "Too Big to Fail."

He offered the solution in a speech at a Global Society of Fellows conference titled "When Public Investment is No Longer an Oxymoron: Fiscal Policy in Liquidity Trap Conditions," held in the Alice Haynes Room in the Tyler Haynes Commons. The conference was held in partnership with the University of Richmond and the Global Interdependence Center.

"It's essential that we be prepared to handle such failures," Lacker said. "It will require a lot of hard work and detail-oriented resolutions, but I see no other way to achieve a solution where investors are convinced that unassisted bankruptcy is the norm."

Lacker was alluding to financial firms in past years who have relied on government bailouts to remain operational.

Lacker's presentation started with a brief definition of "Too Big to Fail." There are two mutually reinforcing problems, Lacker said, which are that creditors at financial institutions feel protected by implicit government support and that policy makers feel compelled to provide that support.

In 2008, government support helped to bail out certain financial firms such as Lehman Brothers and AIG.

Premeditated resolution planning, Lacker said, would be a measure for financial institutions to be ready for any type of drastic failure, as was the case in the 2008 economic crisis.

"[Resolution planning] is the hard work of mapping out in detail of just what problems the unassisted bankruptcy of a large financial firm as it's currently structured might encounter," Lacker said.

It would provide an objective basis for firms and correlating policy makers to have confidence in a plan without the subjection to government bailouts, he said.

Lacker spoke for almost an hour in front of around 40 people. Michael Bosserman, former Richmond student, said that Lacker's remarks were quite interesting.

"If you don't force banks or financial holding companies to act, they're not going to. That's the essence of capitalism," Bosserman said. "Making them think about what they would have to do in these situations is a big step."

Tom Kranz, a local businessman, said that Lacker's resolution planning idea would be a fairly reasonable business approach.

"It's forcing financial institutions to dig deeper than they normally would," Kranz said. "That type of introspection makes sense to a certain degree, and it will be interesting to see how it's implemented."

Sophomore Garrett Lanigan said he became an economics major at Richmond because of the 2008 economic crisis and the impending "Too Big to Fail" phenomenon, so he was glad to hear Lacker's take.

"It really is interesting to see how much more there is to learn and figure out with this topic," Lanigan said.

Contact reporter Scott Himelein at scott.himelein@richmond.edu