The Fed’s Token Voice Of Reason: Megabanks Undermine Americans’ Faith In Democracy

At the Conservative Political Action Conference, as the GOP struggled with its future, some speakers drew crowds of over 1,000 people. But Dallas Fed President Richard Fisher was  shuffled off to “an out-of-the-way ballroom” Saturday morning with barely two dozen people showing up; yet he’d talk about “the injustice of operating our economy under the thumb” of too-big-to-fail banks.

To cater to his audience, Fisher, who’d served in two democratic administrations – assistant to the Treasury Secretary in 1978–79 and deputy US trade representative in 1997-2001 – started out with a hilarious and poignant story that a “great raconteur” and Republican hero, Ronald Reagan, had told him during the 1984 Republican Convention in Dallas:

Paddy McCoy, a hardworking Irish farmer, received a visit from an inspector of the Department for Works and Pensions.

“Tell me about your staff,” he asked of Paddy.

“Well,” said Paddy, “there are the farmhands. I pay them 240 a week and they have use of a free cottage.”

“That’s good,” said the inspector.

“Then there’s the housekeeper. She gets 190 a week, along with free board and lodging.”

“That sounds fine,” said the inspector.

Paddy went on to tell of the rest of his staff, all to the pleasant reception of the inspector. And then he said, “Now, there’s also the half-wit. He bears all the risk of this business, works a 16-hour day, nets about 25 a week when all is said and done, but takes down a bottle of whiskey and, as a special treat, occasionally gets to sleep with my wife.”

“That’s disgraceful, Paddy,” said the inspector. “I need to interview the half-wit.”

“Well,” said Paddy, “you’re lookin’ at him.”

McCoy “represented the plight of the hardworking souls” trying to feed their employees and family, Fisher said. All they wanted was “a level playing field and fair treatment.” And that was all that Main Street banks wanted.

Twelve megabanks—0.2% of all banks—control 70% of the US banking assets, he said. Because they’re considered “too big to fail,” they’re “treated differently from the other 99.8% and differently from other businesses.” Government policy has exempted them from the “processes of bankruptcy and creative destruction.” Freed from fear of failure, they and their counterparties have taken outsized risks that posed a threat to the stability of the financial system, and thus to the economy.

“Practitioners of crony capitalism,” he called them. Their “privileged status” placed them “above the rule of law” and gave them a “sense of immunity from the law.” Due to the implicit government guarantees, the cost of capital for these megabanks was lower, amounting to a “significant” subsidy that encouraged these banks and their nonbank subsidiaries to get ever “larger and riskier.” It was “patently unfair,” he said. The playing field was tilted “to the advantage of Wall Street against Main Street—as the banks exacted “an unfair tax upon the American people” and undermined their “faith in the rule of law and representative democracy.”

So Fisher offered a three-step solution:

Only commercial banks would have access to deposit insurance and the Federal Reserve’s discount window; all nonbank entities would be excluded.

Customers, creditors, and counterparties of all nonbank entities, and holders of bank deposits beyond the FDIC protection limit, would sign a legally binding disclosure acknowledging that there is no government guarantee on their investment.

And megabanks would be restructured so that each entity would be “subject to a speedy bankruptcy process.” The banking entities would be small enough to feel “a credible threat of failure,” like the other 99.8%. And they’d be allowed to fail—”closed on Friday and reopened on Monday under new ownership and management,” administered by the FDIC. All banks would be under the same regulatory oversight and exposed to the full force of market discipline.

If implemented a decade ago, this setup would have stopped “the insidious behaviors that contributed to the crisis, avoiding the bailouts and their aftermath, the cost of which our nation’s citizens will bear for years to come,” he said. A fiasco that undermined the “belief in the fairness and justice of the economic system” and “perpetuated a sense that powerful banking mandarins operate above the law and prosper at the expense of the thrifty and hardworking citizenry.”

Fisher, the token voice of reason at the Fed. He’s allowed to speak out at the margins but is politely ignored at the Fed or by Congress. Even among the thousands of Republicans at CPAC, only two dozen bothered to listen to him—and those were less than enthusiastic. Because in our crazy times of endless free money for megabanks that are above the law, there is still no political will to fix the situation once and for all.

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