Dallas Fed's Fisher: Three Ways to Curb Too-Big-to-Fail Banks … Despite honest efforts by the government since the financial crisis, too-big-to-fail banks haven't been reined in, says Dallas Federal Reserve Bank President Richard Fisher. Just 12 huge banks hold almost 70 percent of the assets in the U.S. banking industry, he and Dallas Fed research director Harvey Rosenblum write in The Wall Street Journal. The current system is "patently unfair," they say. "It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, and it places the financial system and the economy in constant jeopardy." – Newsmax
Dominant Social Theme: We have to get these pesky "big 'uns" under control.
Free-Market Analysis: Top Federal Reserve "big brain" Richard Fisher is back with his prescription for fixing what has gone wrong with the US's financial economy. He has a three-part solution.
First, the federal government ought to provide deposit insurance and access to the Fed's discount window only to traditional commercial banks. That means that non-bank affiliates of bank holding companies or the parent companies themselves need not apply.
Second, non-bank affiliates and the parent holding companies would make it clear via a signed disclosure statement that the federal government did not guarantee client investment.
Third, the largest financial holding companies should be restructured so that they facilitate a bankruptcy process and are easy to break up.
The Newsmax article [excerpted above] provides us with an alternative viewpoint to the above prescription. It quotes "star banking analyst Dick Bove" of Rafferty Capital Markets as suggesting that bank shares are set for a 14-year rally.
Banks have overcome a world of woe, he told Moneynews last month. "Capital requirements have gone up, liquidity requirements have gone up, the industry has written off close to $800 billion worth of bad loans, there's been increases in operating costs due to regulations.."
"And yet this industry is sitting here earning the most money it's ever earned in its history." In 2012, the industry probably earned $145 billion net after tax, he says. "That's very close to the highest amount it's ever earned."
Bove expects the profit stream to continue and perhaps he is correct. The Fed has monetized US banks and financial firms around the world with tens of trillions of dollars. All this money flows into bank coffers and some of it is invested – driving up markets and providing a further liquidity cushion.
Surely Richard Fisher – a Fed president – understands exactly how the current financial system works. The US Fed prints enough money to monetize ever larger and more clumsy financial entities.
It doesn't make any difference whether or not they make mistakes because inevitably they receive yet MORE money to monetize the mistakes they have already made.
So here is the big question. Why doesn't Mr. Fisher point out the real problem, which is Federal Reserve money printing? If the Fed didn't re-liquify the same offenders after crack-up, the banks in question would soon sink without a trace.
Federal Reserve officials often complain – or warn – about price inflation but by printing torrents of money, central banks turn themselves into inflation machines. Isn't it hypocritical to warn about price inflation when the mechanism you run is responsible for the inflation in the first place?
And isn't it perhaps a teensy bit hypocritical to write articles in the Wall Street Journal explaining how too-big-to-fail banks might be cut down to size when the money mechanism YOU supervise is responsible for keeping these banks afloat?
To quote Alanis Morissette, "Isn't it [at least] ironic …"