Richmond Fed’s Lacker: End Too Big to Fail Banks by Ending Bailouts

Friday, 08 Feb 2013 10:50 AM

By Michael Kling

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Richmond Federal Reserve Bank President Jeff Lacker is advocating a different way to end bailouts than other central bank officials are: let them fail.

If “too big to fail” institutions are allowed to fail, financial companies would get the message that they won’t be rescued and would return to market discipline, he told American Banker.

“Government support is not the answer to financial problems,” Lacker said.

Editor's Note: The Final Turning Predicted for America. See Proof.

He is at odds with many legislators and most other regulators who favor stronger regulations to help prevent and deal with future financial crisis. Lacker believes the Dodd-Frank Act that overhauled financial regulations gives too much power to regulators.

“I worry about people taking away from the crisis the lesson that what’s key is to respond with maximal force and to provide regulators with maximal discretion across the widest possible terrain,” Lacker told American Banker. “Enhancing the scope for intervention and enhancing the tools just spreads the poison that boxes us in, in a crisis.”

To prevent future bailouts, Lacker wants to make sure regulators have no funds to finance any more market interventions.

“Credibility is going to require us to take actions that will be painful to some, painful to financial markets,” he explained.

When the Fed prevented Bear Stearns’ from going under by arranging its sale to JPMorgan Chase in 2008, it led financial markets to believe that large institutions would not be allowed to fail. With that perception, other firms had no incentive to raise capital and prepare to weather the coming storm.

Lacker dismisses the prospect of an entire financial collapse, saying a credit freeze is really only an inability to agree on price.

“As a government official, I think we ought to be really shy about coming to the judgment that some market isn’t doing what it ought to do, that we know better than market participants what a piece of financial paper ought to be worth.”

Lacker is not pressing for breaking up the big banks.

“I’m an agnostic on that,” he told American Banker. “If you want to break up the banks, fine. But how do you know how far and when to stop?”

He also doesn’t support reinstating the Glass-Steagall Act, as it fails to “limit the safety net without achieving a measure of commitment not to rescue creditors of large firms whether they are on one side of the Glass-Steagall wall or the other.”

“It treats a symptom but it doesn't really address the fundamental problem, which is that commitment, the inability or unwillingness to commit to limiting rescues.”

Others argue that breaking up the too big to fail banks is imperative.

“The [too big to fail] institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism,” stated Federal Reserve Bank of Dallas President Richard Fisher. “It is imperative that we end [too big to fail].”

Editor's Note:
The Final Turning Predicted for America. See Proof.

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