By Brai Odion-Esene

RICHMOND, Va (MNI) - Richmond Federal Reserve President Jeffrey Lacker Wednesday said the United States needs to wean itself off the need for housing subsidies, and 10 years from now should no longer need Fannie Mae and Freddie Mac or central bank support for the housing market.

With the focus being on financial reform coming out of the crisis, Lacker stated his belief that one important problem that needs to be faced in the government's policy towards housing in general.

"We ought to seriously consider moving towards weaning ourselves off subsidies for housing and subsidies for housing finance," he said. The goal should be, a decade from now, no longer needing government-sponsored enterprises or central bank support for the housing market.

So no Fannie Mae or Freddie Mac? "Sure," Lacker said. "It seems to me like they've outlived their usefulness." The U.S. recovery must be built on something other than housing, he said.

Lacker retained his optimistic outlook for 2010, telling reporters that, "I'm pretty confident we are going to continue seeing positive growth in the first half of 2010. The recovery is going to continue."

This means a 2.5% to 3% growth rate, he estimated, adding, "could be lower, could be higher."

Lacker was less certain on the future path of unemployment, citing the difficulty in predicting the labor force participation rate as the economy picks up steam.

"Its going to take some time to get unemployment down to a level we'd like to see in a recovery," he said. Inflation, however, seems like "its in a very good place right now," Lacker added, and should remain steady.

Responding to a question by MNI about Tuesday's reported drop in the Producer Price Index by 0.6% and potential deflation, Lacker called the link between PPI and consumer prices "a fairly loose one, especially on a month-to-month basis."

"So I still favor a forecast of inflation remaining where it now -- which is to say around 1.5% for the PCE measure," he said.

On the continuing concern posed by commercial real estate loans coming due for refinancing, Lacker said there continues to be a deterioration in commercial real estate conditions, especially on loans made by community banks.

This contributed to most bank failures seen this year, he added. However the magnitude of the deterioration is consistent with past recessions, he added, making it "a manageable problem for the banking industry."

"I don't think it threatens them as a whole," Lacker said.

Even with about $250 billion to $300 billion in commercial mortgage-backed securities loans expected to come due for refinancing in 2010, Lacker said he does not see a need for the federal government to get involved. "In my view, I don't think intervention is warranted," he said.

There is also risk to the Fed's balance sheet from the large amounts of purchased mortgage-backed securities it now holds, Lacker assured.

On criticism from some quarters that it was actually government policy and not market actions that led to the financial crisis, Lacker agreed that over the last two years, "the perceived guarantee" of the liability of large financial institutions played a central role."

A government safety net for financial institutions "is costly to administer," he argued. But this does not mean the Richmond Fed chief is in favor of breaking up this firms into smaller ones.

Economies of scale that these firms provide is important, he said. "I'd be hesitant to throw out the advantages of reaping those economies of scale for consumers and businesses that use financial services ... because we can't get policy right for those."

Instead, Lacker called for limiting the safety net, allowing a significant proportion of the financial system to operate in a way that they are regulated largely by market discipline rather than the government.

** Market News International Washington Bureau: 202-371-2121 **