Richard Fisher, Senior Fed Official: White House Is Dead Wrong

[depakid]

Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform. As a former commercial banker, he sees quite clearly that the legislation now headed into "reconciliation" between House and Senate versions amounts to very little. He also knows that pounding away repeatedly on this theme is the best way to influence his colleagues within the Fed and across the policy community more broadly.

He is now taking his http://www.huffingtonpost.com/2010/06/04/too-big-to-fail-lives-on-richard-fisher_n_600133.html">game to a new, higher level. Couched in the diplomatic language of senior officials, his http://dallasfed.org/news/speeches/fisher/2010/fs100603.cfm">speech on June 3 to the SW Graduate School of Banking was both a carefully calibrated assault on the administration's general "softly, softly" approach to the big banks and a direct refutation of arguments put forward by Larry Summers in particular.

As the title of Mr. Fisher's speech implies, if the legislation is not real financial reform (and it is not, according to him), then our current policy trajectory amounts to facilitating further rounds of financial dementia.

As a statement of our true problems -- dismissing the red herrings and focusing on the core issues -- Mr. Fisher's speech is a succinct classic. Cutting to the chase:

"Regulators have, for the most part, tiptoed around these larger institutions . Despite the damage they did, failing big banks were allowed to lumber on, with government support. It should come as no surprise that the industry is unfortunately evolving toward larger and larger bank size with financial resources concentrated in fewer and fewer hands."

This is most definitely not a market outcome.

"Based on these considerations, coupled with studies suggesting severe limits to economies of scale in banking, it seems that mostly as a result of public policy -- and not the competitive marketplace -- ever larger banks have come to dominate the financial landscape. And, absent fundamental reform, they will continue to do so. As a result of public policy, big banks have become indestructible. And as a result of public policy, the industrial organization of banking is slanted toward bigness."

This is an unfair, nontransparent, and dangerous taxpayer subsidy at work.

"Big banks that took on high risks and generated unsustainable losses received a public benefit: TBTF <"too big to fail"> support. As a result, more conservative banks were denied the market share that would have been theirs if mismanaged big banks had been allowed to go out of business. In essence, conservative banks faced publicly backed competition."

Mr. Fisher is agreeing with arguments sometimes heard from the left of the political spectrum, but he is most definitely coming at this more from what is traditionally -- and accurately -- regarded as the right (like Gene Fama of Chicago or Tom Hoenig of the Kansas City Fed).

"It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system."

More: http://www.huffingtonpost.com/simon-johnson/richard-fisher-senior-fed_b_602386.html

[Turbineguy]

1. And then there are

the small, well run, low risk banks being gobbled up to reduce the risk profile of the bigger ones.