Still Too Big to Fail


Harvey Rosenblum, Director of Research for the Dallas Fed, has written an interesting if flawed report on the status of “Too Big to Fail” and the early results of the Dodd-Frank reforms. Some highlights include:

  1. Since the 1970’s the share of assets of the five largest banks has grown from 17% to 52%. As Rosenblum notes, with size comes complexity, and with complexity the opportunities for obfuscation, malfeasance, and creative greed.
  2. Smaller banks generally weathered the crisis better, and are generally in better shape now. Most TBTF banks still have toxic assets which still infect the whole economy.
  3. Dodd-Frank remains a work in progress, as its broad prescriptions are turned into rules by the required agencies, and this process has introduced more uncertainty into the system. But it is fighting size and complexity with size and complexity, leaving the larger banks, with its squadrons of lawyers, lobbyists and accountants, in an advantageous position, and the smaller banks, who have no choice but to comply with the costly demands, in a tenuous one. The smaller banks face the burdens of these regulations even if they didn’t do anything wrong the first time around.
  4. So long as the Fed maintains its remarkably low interest rates it will be encouraging debtors and effectively penalizing savers.
  5. He recommends breaking up the larger banks into smaller ones as “the ultimate solution” for TBTF – one that seems almost self-evident.

One might quibble with his overall endorsement and understanding of capitalism, but I think it is pretty clear that Congress hasn’t done some of the things that need to be done in order to restore some sanity to the system, including reviewing the role of the Fed itself. Clearly one of the main problems in the collapse of ’08 was the behavior of the ratings agencies, and Dodd-Frank doesn’t address them at all. These are an obvious problem in the system, especially when one considers how the ratings work and how the agencies are incentivized or not by that which they are rating.

Then too, there is the problem of implementing such regulations. The NYSE does around $15 trillion in sales annually with hundreds of thousands of exchanges daily and has, if I’m not mistaken, five full time regulators overseeing it.

One reads reports such as this with a deepening sense that this is far, far from over.

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