One phrase that became a household word as a result of the last financial meltdown is "too big to fail". Many have insisted that we need to break up all such banks while others have argued that the real issue is not one of size but one of interdependence i.e. a bank becomes more crucial to the economy when its failure will bring about a systemic failure and not only because it is large. The following article is a summary of the views of the president of the Dallas Federal reserve Bank who is a strong supporter of the view that the US does not have to put up with banks that are too big to fail. Read and comment.
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The largest U.S. banks are "practitioners of crony capitalism," need to be broken up to ensure they are no longer considered too big to fail, and continue to threaten financial stability, a top Federal Reserve official said on Saturday.
Richard Fisher, president of the Dallas Fed, has been a critic of Wall Street's disproportionate influence since the financial crisis. But he was now taking his message to an unusual audience for a central banker: a high-profile Republican political action committee.
Fisher said the existence of banks that are seen as likely to receive government bailouts if they fail gives them an unfair advantage, hurting economic competitiveness.
"These institutions operate under a privileged status that exacts an unfair tax upon the American people," he said on the last day of the annual Conservative Political Action Conference (CPAC).
"They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great," said Fisher, who has also been a vocal opponent of the Fed's unconventional monetary stimulus policies.
Fisher's vision pits him directly against Fed Chairman Ben Bernanke, who recently argued during congressional testimony that regulators had made significant progress in addressing the problem of too big to fail. Bernanke asserted that market expectations that large financial institutions would be rescued is wrong.
But Fisher said mega banks still have a significant funding advantage over its competitors, as well as other advantages. To address this problem, he called for a rolling back of deposit insurance so that it would extend only to deposits of commercial banks, not the investment arms of bank holding companies.
"At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries - investment firms, securities lenders, finance companies - to grow larger and riskier," he said.
Fisher argued Dodd-Frank financial reforms were overly complex and therefore counterproductive.
"Regulators cannot enforce rules that are not easily understood," he said.
9 comments:
The idea of a bank being "too big to fail" is a frightening idea that should be inspiring the American tax payers to do something about it. It's genuinely worrisome that were we to fall into another economic crisis, the big players would again be bailed out while I (and every other average American) is left to deal with the debt and the raise in prices. Even if they never receive another bailout, the fact that they could is affecting the overall economy and the competitiveness of the market. It bothers me personally that the stance Fisher took was that "Regulators cannot enforce rules that are not easily understood." Basically what he is saying is that because the reforms are complex, they won't work. I believe that some kind of reform is necessary if we want to take part in a successful economy.
I believe that larger banks that are in danger of being bailed out by the government should be broken up so they don't threaten the stability of our economy. The idea that some banks are considered "too big to fail" seems threatening to the average american that ends up paying for their corruption and risk taking. Bigger banks also have an unfair advantage against their competition because they are given that backbone of protection in case they would ever face bankruptcy. Overall, I think our government shouldn't give these bigger banks the opportunity to reach the point where they are "too big to fail."
Since the large sizes of the banks represent a threat, the banks should be either reduced in size or should recieve no help when they crash. the fact that the government bailed out the banks was a bad idea. some banks would have survived and new banks would have been able to make an appearence.this would make it more competitive throughout the banking sysyem. it would also make the banking system less riskier. if they are too big and actually fail, the economy can decrease substantily but if more banks get involved it will decrease the risks taken by the bigger banks
I remember in class the explanation of how the United States has countless banks that we are entitled to use. The largest of these banks have been bailed out by the government to protect a systemic failure. Although some banks are "too big to fail" I remember that the smaller banks actually contribute to the large ones when loans are needed. They help one another strive in the " competition". The President of Dallas Federal reserve bank supports that the US should not put up with these " too big to fail" banks. If we already have countless options for banks to choose from why add more? If the government must step in to give a helping hand so that a bank or other company for that matter does not go bankrupt than so be it. We are not economically stable enough to survive on our own. Most of our markets are free markets unless something bad happens and the government steps in, why not utilize this in every aspect.
I believe that the mega banks should be split up into smaller banks. This would allow for more competetion, which would benefit the public as a whole. As for bailouts, our government tried that once to no avail, and I think it would be irresponsible to repeat such an action. If the mega banks are not split up, there should be a strict no bailout policy implemented.
I think that banks take advantage of that fact that they are "too big to fail". They know that in order for the economy to function, they must stay alive. They can give out more mortgages and take more risks, etc. because if it does well then that's good for them; however if their investments tank, they will just be bailed out anyways. This gives them an unfair advantage because they are still doing well, while we pay for it. It would definitely help if the bigger banks were split up to encourage competition.
The idea of “too big to fail “ is frightening, it’s like saying no matter how good everyone thinks something is on the outside there is behind the scenes work that could be crumbling. I think the larger banks should in fact be split up into smaller entities, it would make them more stable and flexible when the economy changes but also it would allow for more jobs in the economy thus generating income for persons without employment. Splitting these banks up would also take a lot of stress of the government because bailouts for these banks would in turn be substantially smaller and in fact they could refuse to do so at all. The government could refuse to bail out banks because if a couple of the smaller banks go out of business it is less of a shock to the economy. If the government were to refuse to would encourage the banks to be more careful with the money that they lend, making the bank more stable therefore they wouldn’t be in the same mess they were in a couple years and some of them still today.
I think that the bigger banks need to be split up for more competition. The big banks have the most people which means the most money which also means if the investments fall through the government will be there to pick them up because of the amount of people it will affect. The smaller banks can’t compare to the rates of the big banks and know that the government won’t help them out as much if their investments flop.
If it comes to “too big to fail” banks I think our elected officials are the only ones to blame for being too easy on them during 2008 financial crisis. By passing Dot Frank/bail out they accepted risky behavior of investment banks that are “too big to fail” and affirmed them that if we will come across the same crisis or worse ever again they will be bailed out and none of the government agencies will let them go under the water. I think if we would let too big to fail companies go bankrupt during financial crisis in 2008 that would set some kind of boundaries for them in terms of taking on risky investments etc. Make no mistake if that would happen financial meltdown would be far worse than it was back in 2008. Sometimes its better to suffer great pain and recover from it then just cure the disease and be sick one more time from the same thing in the short amount of time. Next crisis is on the way and we the people will pay the price!
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