When Republicans invite a Democrat to testify at a congressional hearing and Democrats invite a Republican, we should pay attention. It was certainly the case recently, when the House Financial Services Committee held a hearing on how to end “too big to fail.”
Specifically, the topic of the June 26 session was “Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts” – whether the procedures put in place since 2010 to handle the failure of very large financial institutions would work, and whether we should expect the extraordinary official support provided to those institutions to fade away. The conclusion: The problem of too-big-to-fail banks is alive and well, and looms over our financial future.
In the more optimistic camp was Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. His assessment was that the Dodd-Frank financial-reform legislation created sufficient legal powers to tackle the threat of large, complex, cross-border financial institutions. In particular, he said that regulators would be able to determine when financial companies are too big or otherwise too difficult to resolve through bankruptcy – and could use Title I powers under the legislation to make banks (and others) small enough and simple enough to fail. This looks like wishful thinking.
Most people at top levels of the Fed seem to have a broadly positive view of the financial sector today: Everything is moving in the right direction and anyone who thinks otherwise is being too negative or even undermining the home team.
Richard Fisher, president of the Dallas Fed, is a welcome exception among central bank officials. He has extensive experience in the private sector and understands how highly leveraged situations can unwind in brutal fashion.
Fisher and his colleagues at the Dallas Fed find that large financial institutions receive big, implicit subsidies.