PhillyDeals: PhillyDeals: Fed needs clearer exit strategy, Plosser says

The Federal Reserve, after shooting more than $1 trillion into the nation's financial companies last year, isn't out of ammo yet.

But it's running low on weapons, and it needs a clearer "exit strategy," warns

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia.

Government interest rates are falling toward zero. The Fed can't cut any more. So it's ramping up the volume of its investments to try to stimulate spending and keep banks from blowing up.

Plosser told a crowd at the University of Delaware yesterday that the Fed's "financial-stabilization" programs risk jamming the central bank with junk loans and bonds. The Fed's assets more than doubled last year as it invested in banks to boost their reserves as loan-loss rates rose. "Some of these assets will not go away so quickly," Plosser warned.

"For example, we are in the process of purchasing $500 billion of mortgage-backed securities." The Fed ought to unload those as soon as buyers resurface, Plosser said. But he's worried that "interest groups" will force the Fed to hoard unattractive investments, maybe in hopes of keeping home prices high and loan and bond prices artificially low, encouraging bad investments.

"We must develop a well-articulated exit strategy," Plosser said, "if we are to maintain control of monetary policy and encourage the revival of strong and disciplined credit markets."

David Malpass, ex-chief economist for defunct investment bank Bear Stearns Cos. Inc., discounted Plosser's fears of a bloated, impotent Fed.

While "the monetary base has shot up," most of the government's cash injection has come as "dead" capital and reserves that banks are hoarding, Malpass told the university crowd. He wants the government to buy more bonds and predicted the economy would improve late this year.

Michael K. Farr

, president at

Farr, Miller & Washington L.L.C.

, investment managers based in Washington, was less hopeful about the near-term power of intervention.

Farr said we're living the hangover of the dot.com stock bubble and the subprime-fed home-price bubble, suffering pain that was deferred, but also worsened, by former Fed Chairman Alan Greenspan's cheap-money policies.

"This seems to be a generation that believes, 'I won't have to bear the consequences of my stupid mistakes,' " Farr said. But pain, he said, makes us careful; cheap assets will attract new buyers.

"I don't think it's going to turn around in the second half of this year," Farr concluded. Though President-elect Barack Obama, with massive federal spending, "is going to try."

Stephen D. Steinour left Citizens Bank of Pennsylvania last year to work in a growth industry - distressed loans.

Now, the former Philadelphia Chamber of Commerce chairman is moving his family to Columbus, Ohio, to take the top job running

Huntington Bancshares Inc.

, whose stock this year has dropped the most among large U.S. banks, due partly to losses from a subprime-lender client.

Steinour said he hoped in time to expand the bank by acquisitions, maybe as far east as Philadelphia, where he praised Beneficial Savings Bank and Penn Liberty Bank, among local lenders.

Money-losing, government-subsidized

Citigroup Inc.

is getting out of many of the businesses cobbled together by founder Sandy Weill. That includes its Smith Barney brokerage, founded by Civil War bond supersalesman Jay Cooke, which "traces its origins back to Philadelphia," recalls Charles Godwin, former manager of Smith Barney's Washington branch, now senior vice president at Farr, Miller & Washington's Wayne office.

"It has a great name and history," Godwin said, "until they put it on steroids."

Smith Barney, founded as two Philadelphia firms that later combined on Wall Street, prospered in the Reagan-era stock market revival, with actor John Houseman as its spokesman. Then it was bought by Weill, "who kept the name as he made multiple acquisitions" and used Smith Barney to expand Citigroup into a sometimes-reckless giant too complex to manage.

For now, the old Philly names will survive as part of "Morgan Stanley Smith Barney."