Dallas Fed President Calls for the End of Too Big to Fail

 by Jerry O’Driscoll  

Thursday at the Cato Monetary Conference, Dallas Fed President Richard Fisher called for the end of of the too-big-to-fail doctirine.  He identiifed the largest financial institutions as the source of excessive risk taking.  He also repeated his claim that these institutions interefere with the conduct of monetary policy. 

Fisher offered a middle ground between two strategies discussed on ThinkMarkets: steeper capital requirements or beaking them up.  He advocated forcing the largest banks to give up some of their riskiest operations.   In effect, that is forcible downsizing. 

This is a noteworthy call coming from within the Fed itself.

5 thoughts on “Dallas Fed President Calls for the End of Too Big to Fail

  1. Progressive capital requirements would give an incentive to banks to figure out what activities to divest themselves of. By contrast, forcible downsizing means the government will decide what should be divested. So the key question is, why do you think politicians and government bureaucrats know better?

  2. Chidem,

    No argument from me. If firms decide for themselves how to downsize, might that lead to a market-driven move back to a kind of Glass-Steagall separation of pwers. Why does Goldman need to take deposits? And would a retail-oriented bank like BA be led to shed its investment banking operations?

  3. It’s kind of funny that the US Treasury pushes BofA to acquire the investment bank Merrill Lynch, then there is a demand that the US get BofA out of investment banking. The notions about this seem to be changing awfully fast.

  4. It’s blowback, the unintended consequences of public policy.

    The problem is that while Geithner, et al. profess to have got religion, they don’t know what to do. They aren’t capable of thinking oustide their own conceptual framework.

  5. I think John Cochrane put it well: “If you want to run a hedge fund, you do not get to have deposit insurance”

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