On March 3rd, Richard Fisher – President of the Federal Reserve Bank of Dallas – told the Council on Foreign Relations:
A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability—the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009.
The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, they are sprawling and complex—so vast that their own management teams may not fully understand their own risk exposures. If that is so, it would be futile to expect that their regulators and creditors could untangle all the threads, especially under rapidly changing market conditions. Second, big banks may believe they can act recklessly without fear of paying the ultimate penalty. They and many of their creditors assume the Fed and other government agencies will cushion the fall and assume the damages, even if their troubles stem from negligence or trickery. They have only to look to recent experience to confirm that assumption.
Some argue that bigness is not bad, per se. Many ask how the U.S. can keep its competitive edge on the global stage if we cede LFI territory to other nations—an argument I consider hollow given the experience of the Japanese and others who came to regret seeking the distinction of having the world’s biggest financial institutions. I know this much: Big banks interact with the economy and financial markets in a multitude of ways, creating connections that transcend the limits of industry and geography. Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter, leading to a downward spiral of bad loans and contracting credit that destroys many jobs and many businesses.
The dangers posed by TBTF banks are too great. To be sure, having a clearly articulated “resolution regime” would represent steps forward, though I fear they might provide false comfort in that a special resolution treatment for large firms might be viewed favorably by creditors, continuing the government-sponsored advantage bestowed upon them. Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size—more manageable for both the executives of these institutions and their regulatory supervisors. I align myself closer to Paul Volcker in this argument and would say that if we have to do this unilaterally, we should. I know that will hardly endear me to an audience in New York, but that’s how I see it. Winston Churchill said that “in finance, everything that is agreeable is unsound and everything that is sound is disagreeable.” I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders. And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis.
Fisher joints many other top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion, including:
- Nobel prize-winning economist, Joseph Stiglitz
- Nobel prize-winning economist, Ed Prescott
- Former chairman of the Federal Reserve, Alan Greenspan
- Former chairman of the Federal Reserve, Paul Volcker
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
- Simon Johnson (and see this)
- President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
- Deputy Treasury Secretary, Neal S. Wolin
- The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
- The Congressional panel overseeing the bailout (and see this)
- The head of the FDIC, Sheila Bair
- The head of the Bank of England, Mervyn King
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Economics professor, Nouriel Roubini
- Economist, Marc Faber
- Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- Economics professor, Thomas F. Cooley
- Former investment banker, Philip Augar
- Chairman of the Commons Treasury, John McFall
Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
Senators Ted Kaufman, Maria Cantwell, John McCain and others are also demanding that the too big to fails be broken up.
But Senator Dodd is trying to push through a financial “reform” which bill won’t do anything to break up the too big to fails, or do much of anything at all. It’s got a reassuring name and a nice, sugary taste … but there’s no real medicine in it.
For example, Dodd’s bill:
- Won’t break up or reduce the size of too big to fail banks
- Won’t remove the massive government guarantees to the giant banks
- And won’t even increase liquidity requirements to prevent future meltdowns
As Senator Ted Kaufman points out:
What walls will this bill erect? None.
Just this week, a Moody’s report stated: “…the proposed regulatory framework doesn’t appear to be significantly different from what exists today.”
In sum, little in these reforms is really new and nothing in these reforms will change the size of these mega-banks.
Our economy is really sick, and the cure is well-known. But Dodd is offering nothing but a placebo.
Placebos do often work – more often when the ailment psycho-neurological in nature. However I do not believe that this problem is ‘all in our heads’.
I am not sure why being a Nobel prize laureate is always mentioned as if it were some kind of qualification.
Carrying that title will not make the statements of its holder right or wrong.
Those guys are usually as right or wrong as the other guy, and some of them are even contrary indicators.
What’s really scary is that the Republicans are already gearing up for an all out fight against the Dodd bill. As seen from the leaked memo, they are going to paint it as something that will make US banks less competitive internationally and cause banks to have to increase fees for their customers to survive while simultaneously institutionalizing TBTF (nevermind the inherent contradiction). What this means is that if anything passes, in its final form it will be likely to be even more watered down than the Dodd bill.
The Republicans may even be correct on this.
It may be that there is a strategy behind it and let the Democrats fail, just to prove that ‘socialism does not work’, after that the dog-eat-dog economy the corporatists want, will be firmly established.
The “corporatists” do not want a dog eat dog economy. Only a small number of lunatic Randroids and Libertopians want that. The corporatists do want a system where profits are privatized and losses socialized.
Oh yes they do.
Corporatism and dog-eat-dog are contradictory concepts.
Corporatism actually means dog-eat-people where the corporations are the dogs and we are the people.
I have advocated breaking up the TBTFs for years. I welcome the Nobel laureates to my position.
Yeah, well, the Big Policy Call is precisely that there be no haircuts in the bond market, to keep the dominos from falling, with the next major dominos being health and life insurance sectors (uh-oh, BatmanObama! The health insurance industry just went into cardiac arrest losing everyone’s premium money on toxic waste bond issues! Buh-bye health care reform, elections, etc).
The necessary correllary to the Big Policy Call is no forced asset writedowns, and hand in glove with that is no nationalizations or bankruptcies, no Ma Bell breakups, no nothing, nada, it’s Sumo-sized Japan zombie time.
So stop whining about too big to fail. The powers that be have already decided that the pension/life/health complex can’t take the haircut so we are stuck like bugs in goo for the next twenty years or so. Yes, this policy also helps the ultra-rich and furriners but that is just a “happy accident”.
The relevant questions now are, what measures can be taken for small business and job creation that are commensurately radical and what should public pension managers, corporations and individual investors do if, per the Japanese policy, we experience essentially zero real returns on stocks and bonds (best case) for twenty years? Implications for savings, consumption, investment, governmental budgets, taxes and wages pls. What do we DO???
Not rehashing structural reform doodles that Ain’t Gonna Happen.
Or as Steve Martin put it on behalf of the financial sector: “Excuuuuuuuuuuse….MEEEEEE!”
In a similar jest I read the bank tax in Germany is going to collect 1.2 Billion euros as insurance for another crisis. 1.2 Billion is a ridicolously small sum for the size of the German banking systems and thus it well take decades if ever for any sort of meaningful systematic insurance fund to be built up. Yet everyone is pating themselves on the back that we really taught the banksters a lesson this time around.
Senator Dodd suckles at Wall Street’s teat, and with this proposed legislation is angling for the huge corner office at Goldman Sacks, massive financial consulting contracts, and then even more money lobbying Congress, either officially or unofficially. Don’t cry for ex-Senator Dodd, he is an oily, venal “public servant,” and knows where to find HIS milk.
vat can I say? A+
Keep on posting exactly the same post all over the web
Mark me down with Fisher. The nation cannot be so stupid as to not move in this direction. It is high time for citizens to pipe up and make their feelings heard in no uncertain terms. Now is the time for substantive financial reform.
Einstein has some chosen words about human stupidity.
“Quite frankly, they (the banks) owned the place!”
— Senator Dick Durbin
There are so many things that are totally wrong with the “answers” from the polity to this crisis, it is enough to despair.
WTF are they thinking in DC? Are they THAT clueless and stoopid? Or just terminally deluded?
Or, on a more sinister note, is this the program, ie. make the big banks so big that they’ll convert this country into a pure banana republic with the help of the politicians? A new PRI a la Mexico, perhaps?
Just consider how fast we are sliding backward as a country and ask yourself if, this time, we should attribute to malice what incompetence cannot explain.