It’s bad enough that nobodies like me criticize the Fed, but what do you do when members of the FOMC criticize? Two hawks, Lacker and Plosser, criticize the recent efforts to alleviate difficulties in the lending markets because of the potential for moral hazard. In this case, moral hazard means to banks: “Don’t worry about bad lending as a group. If you make mistakes, the Fed will rescue you.”
Give Bernanke some credit, because unlike Greenspan, he lets the members of the FOMC speak their minds. Hopefully the disagreement will sharpen the Fed, and not lead to paralysis or confusion. For more background on the individuals who are part of the FOMC, please refer to my piece, A Social View of the FOMC.
I agree the the moral hazard is a live issue here. The real question is whether growing weakness in the lending markets can be tolerated, which might be worse than moral hazard.
