Proposals to lift the U.S. housing market from its doldrums invite "further disaster" for the economy if they include an expanded role for the government-sponsored enterprises Fannie Mae and Freddie Mac, the president of the St. Louis Federal Reserve Bank said Friday.

The still-struggling housing sector helped drive the U.S. into recession in 2008, and its weakened status more than three years later has slowed the broader economic recovery.

Many observers have pinned the blame on the two government-sponsored firms for enabling less-than-credit-worthy home buyers to obtain mortgages.

"I'd be wary of expanding the role of GSE's in housing markets," said St. Louis Federal Reserve Bank President James Bullard.

"They've already done tremendous damage," and further involvement "invites further disaster for the economy," he said.

The Fed official's remarks came while meeting with reporters after he spoke to partners of the St. Louis-based brokerage firm Edward Jones.

Also, it is Bullard's belief that a recession confronting debt-ravaged Europe won't seriously derail the U.S. economic recovery.

"The direct trade effects" with Europe aren't large enough to have an extensive influence on the U.S., he said.

Europe's debt load was of primary concern Friday as investors prepared for Standard & Poor's to issue credit downgrades for several European governments.

Bullard said he is less fearful compared to other observers about the potential of a financial market meltdown in Europe similar to what happened when Lehman Brothers Holdings Inc. collapsed in 2008.

During a time of crisis, it is Europe's tradition to "nationalize" or take over troubled banks or financial entities, he said.

However, the risk of a big financial shock is "not zero," he added.

Bullard used his Edward Jones appearance to unveil a paper called "Death of a Theory." In it, he argued that the Federal Reserve can handle shocks to the economy through stimulus even though its federal-funds rate is near zero.

Fiscal policy, enacted by the Congress, is better able to deal with medium- and long-term tax and spending issues, he said.

In prepared remarks, Bullard said the central bank has acted appropriately to stimulate the U.S. economy since the Lehman collapse. Still, he warned that borrowing rates in the U.S. will rise quickly in a crisis, given the nation's high debt levels.

The U.S. government enjoys very low financing costs, but as European nations have found out, "there is such a thing as too much debt," Bullard said.

The St. Louis Fed chief is a nonvoting member this year of the monetary policy-setting Federal Open Market Committee.

At its next scheduled meeting on Jan. 24-25, the committee will publish for the first time explicit forecasts for the short-term funds rate, based on its projections for economic growth, unemployment and inflation.

Stating that he is an advocate for Fed transparency, Bullard said the new information is going to be "a little bit helpful," but "not a panacea."

The FOMC's funds rate expectations are "not going to be perfect" because the economy will encounter shocks and other changes over time, he said.

Bullard would like to see the Fed release quarterly inflation outlooks, similar to what policy makers do in England.

The St. Louis Fed president reiterated his view that the U.S. central bank should hold off on enacting a third round of quantitative easing, meaning that it would buy more U.S. Treasurys or mortgage-backed securities to provide further assistance to the economy.

Asset purchases would tighten supplies of debt, and presumably lead to lower rates.

However, Bullard noted that recent reports show some improvement in the economy.

"There's a good case to stand pat for now," he said.

-By Howard Packowitz, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com

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