Richard Fisher on moral hazard of "Too Big to Fail" and creation of megabanks

Here are the facts: A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system.

Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8 percent and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.

Their exalted status also emboldens a sense of immunity from the law. As Attorney General Eric Holder frankly admitted to the Senate Judiciary Committee on March 6, when banks are considered too big to fail, it is “difficult for us to prosecute them … if you do bring a criminal charge, it will have a negative impact on the national economy.”[1]

The megabanks can raise capital more cheaply than can smaller banks. Studies, including those published by the International Monetary Fund and the Bank for International Settlements, estimate this advantage to be as much as 1 percentage point, or some $50 billion to $100 billion annually for U.S. TBTF banks, during the period surrounding the financial crisis.[2] In a popular post by editors at Bloomberg, the 10 largest U.S. banks are estimated to enjoy an aggregate longer-term subsidy of $83 billion per year.[3]

~ Richard Fisher, Ending 'Too Big to Fail', Remarks before the Conservative Political Action Conference, National Harbor, Maryland, March 16, 2013

1. For a recap of comments made during the Q&A period following Attorney General Eric Holder’s Senate testimony, see “Holder: Banks May Be Too Large to Prosecute,” Wall Street Journal, March 6, 2013.
2. For one example of the TBTF advantage observed in the spreads paid for longer-term debt, see “BIS Annual Report 2011/12,” Bank for International Settlements, June 24, 2012, pp. 75–6.
3. See “Why Should Taxpayers Give Big Banks $83 Billion a Year?” Bloomberg, Feb. 20, 2013.

Fed chief Richard Fisher on why QE1 failed to stimulate an economic recovery

The vexing question is: Why isn’t this liquidity being utilized to hire new workers and reduce unemployment? Why is it that, as pointed out in Alan Greenspan’s op-ed in the Oct. 7 edition of the Financial Times, the share of liquid cash flow allocated to long-term fixed asset investment has fallen to its lowest level in the 58 years for which data are available? If current dramatically high levels of liquidity and low interest rates are not being harnessed to add to payrolls or expand capital expenditures, would driving interest rates further down and adding more liquidity to the system through Fed purchases of Treasury securities induce U.S. businesses and consumers to get on with spending it?

The intrepid theoretical economist would argue in the affirmative, the logic being that there is a tipping point at which the market becomes convinced that money held in reserve earning negligible returns is at risk of being debased through some inflation and, thus, should be spent rather than hoarded. Hence, the appeal of the Fed’s showing a little leg of inflationary permissiveness.

There is some valid theory behind this approach. Yet, my soundings among those who actually do the work of creating sustainable jobs and making productive capital investments―private businesses, big and small―indicate that few are willing to commit to expanding U.S. payrolls or to undertaking significant commitments to expand capital expenditures in the U.S. other than in areas that enhance the productivity of the current workforce. Without exception, all the business leaders I interview cite nonmonetary issues―fiscal policy and regulatory constraints or, worse, uncertainty going forward―and better opportunities for earning a return on investment elsewhere as factors inhibiting their willingness to commit to expansion in the U.S. As the CEO of one medium-size business put it to me shortly before the last FOMC, “Part of it is uncertainty: We just don’t know what the new regulations [sic] like health care are going to cost and what the new rules will be. Part of it is certainty: We know that taxes are eventually going to have to increase to get us out of the fiscal hole Republicans and Democrats alike have dug for us, and we know that regulatory intervention will be getting more intense.” Small wonder that most business leaders I survey, including those at small businesses, remain fixated on driving productivity and lowering costs, budgeting to “get fewer people to wear more hats.” Tax and regulatory uncertainty―combined with a now well-inculcated culture of driving all resources, including labor, to their most productive use at least cost―does not bode well for a rapid diminution of unemployment and the concomitant expansion of demand.

So, it is indeed true that some economic theories would lead one to believe we can shake job creation from the trees if we were to further expand our balance sheet, and/or induce greater final demand if people and businesses with money in their pockets believe the central bank will tolerate inflation somewhat “above” levels consistent with our mandate. Yet, to paraphrase the early 20th century progressive Clarence Day―the once-ubiquitous contributor to my favorite magazine, The New Yorker―“Too many (theorists) begin with a dislike of reality.” The reality of fiscal and regulatory policy inhibiting the transmission mechanism of monetary policy is most definitely present and is vexing to monetary policy makers. It is indisputably a significant factor holding back the economic recovery.


~ Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, "Rangers, Yankees and Federal Open Market Committee: One Game at a Time", Remarks before the New York Association for Business Economics, New York, NY, October 19th, 2010

Richard Fisher on Fed policy

We reacted with very deliberate actions. That shouldn't lead markets to expectations that we will continue to react in that manner. I would discourage you from thinking that simply because of a significant action in the credit markets, that suddenly we're going to move Fed funds rates in response.

~ "US Fed Pins Economic Hope On $200 billion Liquidity Boost", Telegraph UK, March 9, 2008