Tuesday, April 3, 2012

Dallas Federal Reserve: Break Up the Big Banks and Review Dodd-Frank

In its 2011 Annual Report, the Federal Reserve Bank of Dallas puts forward a basically conservative case for ending the era of Too Big to Fail and suggests that Dodd-Frank may empower, not weaken, large banking institutions.

The author of the lead essay for this report, Harvey Rosenblum, offers an intriguing narrative for the near-collapse of 2008.  Rosenblum notes that the top five banks went from having 17% of the total banking industry assets in 1970 to having over 52% of these assets in 2010.  When a few players controlling a large portion of the economy fall into similar trends (such as the subprime bubble), disastrous outcomes can occur, Rosenblum warns.  Rosenblum lambastes the "quasi-nationalization" of Too Big to Fail banks, which he calls "antithetical to a capitalist system."

He lays out three ways that Too Big to Fail perverts capitalism:
Capitalism requires the freedom to succeed and the freedom to fail.
Capitalism requires government to enforce the rule of law (thereby providing a level playing field).
Capitalism requires businesses and individuals to be held accountable for the consequences of their actions.
Federal policy approaches to Too Big to Fail institutions  often run afoul of these three principles.

However, this report also suggests that President Obama's signature financial reform package, Dodd-Frank, may not successfully deal with these challenges.  What Dallas Fed President Richard W. Fisher terms Dodd-Frank's "complexity and opaqueness" may add further uncertainty to the banking sector, an uncertainty that benefits those banks with the biggest lobbying power and biggest teams for reviewing regulatory structures.

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