By Jonathan Weber
ASPEN, Colorado June 28 (Reuters) - Large financial firms that have grown even bigger since the financial crisis earn backdoor government subsidies because of a perception that they will be bailed out, a Federal Reserve official said on Thursday.
This offers these big banks lower borrowing costs and a leg up over smaller competitors, said Dallas Fed President Richard Fisher, who has repeatedly called for breaking up institutions seen as too big to fail.
“It’s an unfair subsidy,” he said during a question-and-answer session at the Aspen Ideas Festival. “They have a funding preference.”
While he did not single out specific firms, Fisher was responding to a question about JP Morgan’s massive recent trading loss, which is now estimated to range between $4 billion and $6 billion.
On the subject of monetary policy, Fisher, an anti-inflation hawk, reiterated his opposition to the Fed’s most recent effort to keep long-term borrowing costs low, known as Operation Twist.
Fisher said he is concerned that the central bank’s bloated balance sheet, which now stands at around $2.9 trillion, could complicate an eventual exit from a highly supportive monetary policy.
He said a lack of monetary stimulus was not the problem facing a “painfully slow” economic recovery. “There’s plenty of liquidity out there,” Fisher said. “Why isn’t it being put to work?”
He blamed uncertainty about the course of fiscal policy, saying: “When you have maximum uncertainty you go into a defensive crouch.”
Fisher is not a voter this year on the policy-setting Federal Open Market Committee, but he has not been shy about dissenting in the past when he did have a voting seat.
Many economists believe fresh signs of weakness in the U.S. economy, including weaker job growth, will drive the Fed to a third round of bond purchases or quantitative easing, also known as QE3. U.S. gross domestic product expanded just 1.9 percent in the first quarter, a level seen as too soft to bring down the nation’s 8.2 percent jobless rate.
In response to the severe financial crisis and recession of 2008-2009, the Fed not only slashed interest rates to effectively zero but also bought mortgage and Treasury bonds to keep long-term rates down.
Part of that effort was aimed at reviving a moribund housing market, which only now is slowly beginning to recover from a slump lasting more than five years. Still, Fisher said he was encouraged by recent figures.
“I think the housing market has bottomed out,” he said.