Too Big to Fail – Again

by Jerry O’Driscoll  

The issue of banks viewed as too big to fail has been taken up several times on this site. In its Annual Report, the Federal Reserve Bank of Dallas has weighed in on the topic with an essay on “Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now.”

 It is authored by Harvey Rosenblum, the bank’s Director of Research. Since Richard Fisher, the bank’s president, signed off on the annual report, one presumes he endorses the substance of the essay.

It is a very hard-hitting piece, arguing that “the vitality of our capitalist system and the long-run prosperity it produces hang in the balance.” It explains why TBTF is “a perversion of capitalism,” which undermines faith in markets. Rosenblum quotes Allan Meltzer on point: “Capitalism without failure is like religion without sin.”

The essay spares no sacred cows and, among other things, charges that the “the Fed kept interest rates too low for too long” in the 2000s. That directly contradicts the stated position of Fed Chairman Ben Bernanke. I assume there is much grinding of teeth over the essay in Washington, D.C. The essay details how government support is the source of the gigantism in banking today, and debunks the idea that efficiencies and financial innovation are the reason why, since the early 1970s, the share of banking assets belonging to the five largest banks has grown from 17 percent to 52 percent of the total. These financial institutions expand in size to capture the government support available only to the largest banks.

The essay notes that “commercial banks holding roughly one-third of the assets in the banking system did essentially fail, surviving only with extraordinary government assistance.” As noted elsewhere, “a bailout is a failure, just with a different label.” Amazingly, the report even identifies two of the failed institutions – Citigroup and Bank of America (albeit in a footnote).

It’s a lengthy essay and I recommend it to everyone interested in the issue.