BlackRock's Fisher: Fed's MBS buys may be deferring pain

CHATHAM, Mass (Reuters) - It is too soon to tell whether the Federal Reserve's purchases of mortgage-related assets are a success as they may just be putting off the pain until a later date, BlackRock's fixed income co-head Peter Fisher, said on Thursday.

Fisher, in comments prepared for a panel at the Boston Fed's annual conference in Cape Cod, said there was an "absence of a credible exit" strategy from programs such as the Fed's buying of mortgage-related assets and the program to restart securitization markets.

"While they may help to stabilize house prices and mortgage asset values in the short-run, we are likely only deferring the pain and volatility to a later date," said Fisher, who before joining BlackRock served as Treasury under secretary for domestic finance and spent 15 years at the New York Fed.

"There appears to be a significant risk of awkward and unintended consequences for financial balance sheets when these price-keeping operations are ended," he said.

Fisher said another risk for exiting programs such as the agency mortgage-backed securities purchase program and the Term Asset-Backed Securities Loan Facility (TALF) is that politicians may encourage the Fed to "continue to act as a supercharged government-sponsored enterprise."

Overall, however, Fisher said the Fed has done an "extraordinarily good and creative" job of coming up with lender-of-last-resort fire-fighting tools to deal with the credit market crisis.

That said, the Fed should not be afraid to broaden the access to its emergency lending in the future, he added.

"The wrong way to design (lender of last resort) facilities for the future would be to start with the list of the extraordinary programs the Fed launched in response to the crisis and then consider which ones to keep and which to retire," Fisher said.

"Consideration should first be given to the preferred relationship between the central bank's balance sheet and the credit creation process and then to design ... facilities consistent with the contours of the banking system that we are likely to have," he said.

The effectiveness of the Fed's broad-based approach to fighting this crisis weakens the case for requiring that emergency borrowers be supervised by the Fed, he said.

"The mere fact that the central bank is a lender is not a compelling reason for the central bank's role in supervision," Fisher said.

"The threat that the central bank will not lend unless it can supervise is not an effective moral hazard counterweight," he said, adding that the threat the Fed will not lend to institutions it does not supervise "rings pretty hollow".

Fisher slammed supervision in the run-up to the crisis, calling it a "colossal failure."

Talking about the need for better systemic risk supervision "allows us to pretend that what we have witnessed is a mistake of scope rather than one of competence," Fisher said.

"Risk-based capital is a failure in that it does not produce the incentive effects in practice that are suggested by theory. Bankers and traders intuitively understand this; academics, central bankers and supervisors appear to still be in denial," he said.

(Reporting by Kristina Cooke, Editing by Chizu Nomiyama)