In remarks to a full house in Franklin & Marshall's Barshinger Center for Musical Arts Feb. 12, F&M alumnus and Federal Reserve Bank of Richmond President Jeffrey Lacker '77 provided an insider's view of the U.S. housing and financial markets crisis of 2007-08 -- and shared how he believes the Fed could have acted differently.
"It seems quite plausible to me that the signal sent by the Fed's lending actions in August 2007 dampened the willingness of troubled institutions, such as Bear Stearns and Lehman Brothers, to seek safer solutions to the strains they were facing," said Lacker, who earned a bachelor's degree in economics from F&M. The perceived likelihood of government support, he later said, "is bound to have influenced [large investment banks'] choice to continue that dependence."
"I believe a more measured response by the Fed in August 2007 could have resulted in significantly less instability in 2008, although I recognize that I say this with the benefit of hindsight," Lacker said.
F&M's Department of Economics organized Lacker's visit to campus with support from the Wayne K. Van Dyck Fund, which was established in 1972 by a gift from Wayne K. Van Dyck '65 to bring speakers to the College on topics of interest in the field of economics. More than 100 F&M students joined members of the faculty and professional staff, Lancaster residents and members of the national news media to hear from Lacker, who played a key role in the government's considerations for determining how to control inflation and stabilize the American economy during the financial crisis.
Lacker took the audience on a tour of the theoretical machinery behind the U.S. financial system, outlining the complexities surrounding financial markets, policies and institutions. He also provided the backstory to the recent U.S. financial crisis, including the increasing size and frequency of bank failures in the 1970s and the first public articulation by a senior federal bank regulator in 1984 that some banks are "too big to fail."
"This history created a situation at the beginning of this century in which it was widely acknowledged that a large fraction of our financial system was believed to be backed by explicit or implicit government guarantees," said Lacker, who became president of the Federal Reserve Bank of Richmond in 2004.
Lacker opened his remarks with reflections on his time at F&M, where he first studied economics. He recalled his experience in a government seminar led by Robert Gray, The Honorable and Mrs. John C. Kunkel Professor of Government.
"One broad insight I took away from the course was that a critical influence on the choices made by policymakers was the theory they brought to the table -- their conceptual understanding of the fundamental forces at work in the world they are dealing with," Lacker said.
F&M student James Wolf '13, an economics and chemistry double major from Ambler, Pa., appreciated the opportunity to hear from a top Federal Reserve official.
"It was interesting to hear that the problems in our financial system started a lot earlier than people thought," Wolf said.
Dee Yusef '13, an economics major from Richmond Hill, N.Y., also appreciated the opportunity.
"I found it surprising that he was so honest about what they could have done differently. He was very impressive," Yusef said.
F&M juniors Avery Koep '14 and Carly Friedlander '14, both economics majors, were glad they took advantage of the chance to learn more about the financial crisis from someone on the inside. Both students waited after the lecture to greet Lacker.
"It was interesting to hear about the pressure they felt in setting a precedent by backing the banks," Koep said. "It was also a bit scary to learn how rapid inflation could be in a couple of years."
"I really enjoyed listening to his insight, and learning about his personal feelings on the decisions being made by the Fed," Friedlander said.