In a speech before the SW Graduate School of Banking, Dallas Fed’s Richard Fisher comes out swinging, blasting his boss Ben Bernanke and his policy of globalized moral hazard: “Let me make my sentiments clear: It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system. It is not difficult to see where this dynamic leads—to more pronounced financial cycles and repeated crises.” And just in case listeners missed the point, he followed up: “Just this morning, the Washington Post summarized the impasse that inevitably blocks treatment of the TBTF pathology. In an article on preparation for this weekend’s Group of 20 talks on bank reform, it was noted that “some” participants “remain hesitant to lean too hard on banks they consider vital to their national economies.” This hesitancy only perpetuates the problem: The longer authorities delay the process, the more engrained behemoth financial institutions become; the more engrained they become, the less extricable they are. And so the debilitating disease of TBTF spreads. What appears “vital” becomes “viral” and grows ever more threatening to financial stability and economic stability.”
Fischer implicitly supports Ted Kaufman’s proposal, which failed in the corrupt and Chris Dodd subservient Senate, that had proposed a very sensible size limitation on banks:
Some counter that even if all banks were made small or mid-size (or at least not TBTF), systemic threats—and thus the incentive for regulators to step in and save financial institutions—would not disappear. For instance, if a lot of small banks got into trouble simultaneously—or, as I like to say, forgot they had already been to the Ocean View Restaurant before and made the same bad bets at the same time—one might expect the central bank and regulators to protect bank creditors, extending TBTF protections once again. As the argument goes, breaking up big banks may be necessary but is possibly not sufficient—policymakers still must grapple with the possibility of many smaller banks getting into trouble at the same time, causing a “systemic” problem.
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