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Fed Really, Really Wants to End Too Big to Fail

Barry Ritholtz at Bloomberg notices consensus at the Fed on at least one policy issue:

Perhaps most notable is Dallas Federal Reserve Bank President Richard W. Fisher’s remarks, Ending ‘Too Big to Fail,’ earlier this year. A conservative who dislikes government intervention in markets and despises bailouts, Fisher is concerned that TBTF will eventually require more of both. His full proposal was aptly titled Ending ‘Too Big to Fail’: A Proposal for Reform Before It’s Too Late (With Reference to Patrick Henry, Complexity and Reality).

You don’t need to be an expert in pattern recognition to see that the Fed has a deep institutional interest in ending Too Big to Fail. When things collapse catastrophically, the Fed is the institution of last resort that is charged with cleaning up the mess.

This spring, I discussed how an unlikely pair of senators — Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican — had introduced a non-binding resolution calling for the end of the implicit subsidies that “too big to fail” (TBTF) banks enjoy. The Senate voted 99-0 in support of the measure. (Can two senators end ‘too big to fail’?)

I know smashing the Fed is all the rage these days, but give them some credit.  One of the worst aspects – among many – of Dodd-Frank is the further enshrinement of TBTF.  TBTF is a favorite of politicians because it allows them to reward their friends; but the Fed has long enjoyed some of the greatest political independence of any of the major central banks, so it’s not surprising they’d feel the ability as well as the need to speak out.

And central bankers have been warning politicians for a long time that their powers have limits.

Posted in Economics.