The Weekly Quill — Too Small to Not Fail
“It is worth noting that 'too big to fail' is not simply about size. A big institution is 'too big' when there is an expectation that government will do whatever it takes to rescue that institution from failure, thus bestowing an effective risk premium subsidy. Reforms to end 'too big to fail' must address the causes of this expectation.”
Jerome Powell, March 4, 2013
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There was a time when there was honor among central bankers. That ended in August 2007, a century after J.P. Morgan envisioned a central bank of the United States that could staunch the bleed in times of financial crises. In an empty conference room at the Federal Reserve’s annual Jackson Hole Symposium, Ben Bernanke secretly met with a coterie of his closest confidantes to blueprint the response to a breakdown in the financial system. That day, in what few dare reference as the ‘Bernanke Doctrine,’ the precondition of taking interest rates to the zero bound before launching large scale asset purchases was decided.
Not present were Thomas Hoenig, Charles Plosser and Richard Fisher, members of the Federal Open Market Committee who would have, no doubt, vociferously objected to the presumption of zero interest rate policy, or ‘ZIRP,’ as it’s known. Such reckless policy would surely encourage speculation and malinvestment of the worst kind. What’s worse, it would be exceedingly difficult for the bank to extricate itself from the policy. These arguments were never considered. Those who would have defended the nation’s long-term prosperity were never invited.
When the inevitable catastrophe did erupt, winners and losers were chosen. Bear Stearns and Lehman Brothers were targeted to fail. By the virtue of the Troubled Asset Relief Program, which soaked up the same bad assets that sank the Chosen Two, Citigroup was saved from suffering the same fate. The big bank was deemed, “Too Big to Fail.”
Brokered bank acquisitions in the heat of the crisis made the biggest banks bigger. And the Fed’s Large Scale Asset Purchase program, what we refer to as Quantitative Easing, further enriched these mammoths. The passage of the Dodd-Frank law, designed to eradicate Too Big to Fail (TBTF), instead indemnified it. On July 15, 2015, the five-year anniversary of the Obama’s signing the bill into law, then Texas Congressman Jeb Hensarling, wrote an op-ed in?The?Wall Street Journal: “The statute itself?declared?that it would ‘end too big to fail’ and ‘promote financial stability.’ None of that has come to pass. Too-big-to-fail institutions have not disappeared. Big banks are bigger, small banks are fewer, and the financial system is less stable.”
When I was at the Dallas Fed, I had the good fortune to visit and discuss TBTF. I had attended a board meeting at the 12thDistrict’s San Antonio branch and was saddened to hear of community banks’ struggles with overbearing costs of complying with Dodd-Frank, which required banks with $10 billion or more in assets be stress-tested annually. The onboarding of staff to comply was pure overhead. To the alarm of the regulators in attendance that day, to defray the added costs, some of the banks were making commercial real estate loans at ridiculous rates. Other banks were simply closing their doors. As Hensarling wrote, “Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street hard. Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community?bank?or?credit union? a day.”
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Danielle DiMartino Booth is founder and Chief Strategist at?Quill Intelligence
Senior Analyst | Business Intelligence, Analytics, Data Analysis, Business Planning
3 个月I was impressed with your comments in the June 7, 2024 video subtitled "Gaslighting" where you provided some examples of how this is happening in our economic media and government reports. I'd like to suggest a book titled, "Live Not By Lies," by Rod Dreher. It takes conversations with and research on people who survived totalitarian regimes and provides methods to help you stand against the lies that are repeated over and over, year after year. While some may not like the focus on Christians who survived with families intact, it has applications for anyone. Thanks for the wisdom you share for everyone's benefit.
Operations at Westbrook Trucking
1 年Ron Wolf- First time to hear you, on Jim Rickards recent Jeckel Island broadcast. You had an excellent presentation. as Detective Friday use to say: Just the Facts, Just the Facts.
Client Relationship Manager at SoFi
1 年How about, "TOO SMALL TO CARE"?
Vice President at XYZ
1 年Danielle, thank you for stating the obvious. I have been saying this for a long time.
There's a saying that "whose back is on the floor is never afraid of falling "