Bernanke and "Too big to fail"

Baseline Scenario: 

Mr. Bernanke, with all due respect: there is simply no evidence to support the assertion that, “our technologically sophisticated and globalized economy will still need large, complex, and internationally active financial firms to meet the needs of multinational firms, to facilitate international flows of goods and capital, and to take advantage of economies of scale and scope,” at least if this implies – as it appeared to on Saturday – we need banks at or close to their current size.

We can settle this in a simple and professional manner.  Ask your staff to contact me with the evidence – or, if you prefer, simply have a Fed governor provide the compelling facts in a speech and/or have a staff member put out the technical details in a working paper.

There is no compelling case for today’s massive banks, yet the downside to having institutions with their current incentives and beliefs is clear and awful.  Think hard: what has so far changed for the better in the system that brought us to the brink of global collapse in September 2008?  In this context, Mr. Bernanke’s three part proposal for dealing with these huge banks should leave us all quite queasy:

1. He wants tighter regulation.  Fine, but what happens next time there is “let it all go free” president again – a Reagan or a Bush?  Regulation cannot be the answer; there must be legislation.
2. Improving the clearing and settlement of derivatives is also fine.  But why not also make the banks involved smaller – given that a bankruptcy of a future megabank could easily involve millions of open derivative positions?  This would also make complete sense as a complementary measure – unless you think society would lose greatly from the absence of megabanks.  Again, show us the evidence.
3. A resolution authority is not a bad idea.  But everyone involved in rescuing the big banks with unconditional guarantees in spring 2009 insists on one point – if they had run any kind of FDIC-type resolution process, this would have been prohibitively expensive to the taxpayer.  You simply cannot have this both ways – either resolution/bankruptcy was a real option in early 2009 (as we argued) or it was not (as Mr. Geithner argues), but in that case the resolution authority (and also living wills, by the way) would change precisely nothing. 

Mr. Bernanke needs to face some unpleasant realities.  Because of the various actions – some unavoidable and some not – it took in saving Too Big To Fail financial institutions during 2008-09, the Federal Reserve is now looked up with grave suspicion by a growing number of people on Capitol Hill. 

Posted via email from Jim Nichols for GA State House