"Bad bank" good way to tackle crisis: Fed's Lacker

RICHMOND (Reuters) - A top Federal Reserve official on Friday said lifting bad assets from troubled banks would be a "compelling" way to recapitalize the financial system, hours after the Fed backed major aid for Bank of America.

"As long as you have some material risk that remains on the bank's books, any new equity investor is going to be subsidizing existing debt holders," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech.

"That is going to pose an impediment to raising new equity and recapitalizing the banking system from the private sector, which is what, ultimately, we want to do," he said.

Critics worry that the U.S. government is putting taxpayer money at risk while officials, including those from the Federal Reserve, argue there is no other option to restore growth.

Lacker has consistently voiced misgivings about Fed support for financial firms since the collapse of the country's housing market, which destroyed some of the oldest names in banking and has tipped the country into a year-long recession.

During the savings and loans crisis of the 1980s and 1990s, the creation of a "bad bank" to house nonperforming loans allowed U.S. authorities to cleanse financial intuitions of troubled assets that otherwise would have crippled the system.

The Fed on Friday joined the U.S. Treasury in providing a massive financial backstop to Bank of America to buffer it from losses, including a $20 billion capital injection.

Lacker said the Fed should not be used to finance "bad bank" arrangements because this could hinder monetary policy.

"I think financing via monetary liability would be a mistake, and unnecessary, and could potentially constrain us going forward ... for us to take it on our balance sheet; I don't think there is any need for that," he said.

He also played down the risks that slowing growth could tip the country into a Japan-style period of deflation, where prolonged price declines inflicted a decade of stagnation in the 1990s.

Government data on Friday showed U.S. headline consumer prices fell 0.7 percent in December and grew just 0.1 percent over the previous 12 months, the weakest gains since 1954.

Lacker said this reflected nose-diving energy prices and noted that wages continue to grow.

"This looks like a temporary dip in the price level over the last half year or so, and when energy prices bottom out or stabilize, ultimately, those inflation numbers will pick up," he said.

(Editing by Leslie Adler)