A Central Banker who speaks plain English; “Break them up.”


Deus Ex Macchiato provide a link to one of the finest summaries of the financial crisis I have read ; “Choosing the Road to Prosperity”  by Federal Reserve Bank of Dallas Director of Research  Harvey Rosenblum.

Preceding it is a letter from the Dallas Fed President, Richard Fisher, quoted as being “one of the more hawkish and conservative Fed Presidents”. Even this description begins to show how the old political pigeon holes really have such little meaning now.

Some of the choicest quotes:-

As a nation, we face a distinct choice. We can perpetuate too big to fail, with its inequities and dangers, or we can end it. Eliminating TBTF won’t be easy, but the vitality of our capitalist system and the long-term prosperity it produces hang in the balance.

In 2010, Congress enacted a sweeping, new regulatory framework that attempts to address TBTF. While commendable in some ways, the new law may not prevent the biggest financial institutions from taking excessive risk or growing ever bigger.

When competition declines, incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.

The financial crisis arose from failures of the banking, regulatory and political systems. However, focusing on faceless institutions glosses over the fundamental fact that human beings, with all their flaws, frailties and foibles, were behind the tumultuous events that few saw coming and that quickly spiraled out of control.

Greed led innovative legal minds to push the boundaries of financial integrity with off-balance-sheet entities and other accounting expedients. Practices that weren’t necessarily illegal were certainly misleading—at least that’s the conclusion of many post-crisis investigations.

With size came complexity. Many big banks stretched their operations to include proprietary trading and hedge fund invest- ments. They spread their reach into dozens of countries as financial markets globalized. Complexity magnifies the opportunities
for obfuscation. Top management may not have known all of what was going on—particularly the exposure to risk. Regulators didn’t have the time, manpower and other resources to oversee the biggest banks’ vast operations and ferret out the problems that might be buried in financial footnotes or legal boilerplate.

These large, complex financial institutions aggressively pursued profits in the overheated markets for subprime mortgages and related securities. They pushed the limits of regulatory ambiguity and lax enforcement. They carried greater risk and overestimated their ability to manage it.
In some cases, top management groped around in the dark because accounting and monitoring systems didn’t keep pace with the expanding enterprises.

Complicity extended to the public sector. The Fed kept interest rates too low for too long, contributing to the speculative binge in housing and pushing investors toward higher yields in riskier markets.

Hindsight leaves us wondering what financial gurus and policymakers could have been thinking. But complicity presupposes a willful blindness—we see what we want to see or what life’s experiences condition us to see. Why spoil the party when the economy is growing and more people are employed? Imagine the political storms and public ridicule that would sweep over anyone who tried!

Easy money leads to a giddy self- delusion—it’s human nature. A contagious divorce from reality lies behind many of history’s great speculative episodes, such as the Dutch tulip mania of 1637 and the South Sea bubble of 1720.

In the financial crisis, the human traits of complacency, greed, complicity and exuberance were intertwined with concentration, the result of businesses’ natural desire to grow into a bigger, more important and dominant force in their industries. Concentration amplified the speed and breadth of the subsequent damage to the banking sector and the economy as a whole.

It concludes

The road to prosperity requires re- capitalizing the financial system as quickly as possible. The safer the individual banks, the safer the financial system. The ultimate destination—an economy relatively free from financial crises—won’t be reached until we have the fortitude to break up the giant banks.

If only other regulators and central bankers had the guts and balls to write so clearly, unequivocally and honestly without fear of their legal officers or political masters, the recovery process could have truly begun in earnest.

Here’s the link to the article in case you haven’t already got there.

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