Richard W. Fisher and Harvey Rosenblum, President and CEO and Executive Vice President and Director of Research, respectively, of the Federal Reserve Bank of Dallas, wrote in Wednesday’s WSJ op-ed pages,
The phrase “too big to fail” is misleading. It really means too complex to manage. Not just for top bank executives, but too complex as well for creditors and shareholders to exert market discipline. And too big and complex for bank supervisors to exert regulatory discipline when internal management discipline and market discipline are lacking.
This is a cynically Alinsky-esque change of subject. “Too big to fail” and “too complex to manage” are entirely separate concepts. While there is some overlap—size does contribute to complexity—”too big to fail” is a purely political concept created to justify increased government interference in the private management of private enterprises. “Too complex to manage” is at once a management and an economic concept. It’s the managers who cannot keep up with the complexities of their enterprise (or, in fact they can; government has nothing legitimate to say here), and it is a free market economy that will demonstrate and react to the overcomplexification in a wholly appropriate manner: the truly too complex, and so poorly managed, enterprises will fail.
The proof of the political purpose of “too big to fail” is in that phrase “too big and complex for bank supervisors to exert regulatory discipline.” But they add to that proof:
TBTF is a misnomer in another way. The phrase creates the impression that these banks cannot fail. … Suffice it to say, institutions holding one-third of U.S. banking system assets did essentially fail in 2008-09…. They were quasi-nationalized—bailed out….
…TBTF banks…contributed to reducing the impact of the Federal Reserve’s accommodative monetary policy.
The typical Progressive meme: it’s not my fault; it’s that other guy’s fault. Never mind that the Fed’s “accommodative monetary policy” not only was, and is, not necessary, the inflation threat the Fed is creating with this policy is enormously and increasingly dangerous.
They also write, dismissively, that while principles (e.g., of “market capitalism”) count, economic performance also counts. They use that superpositioning to justify government pressure to break up enterprises that the Fed (not the free market) considers too big. In doing so, they ignore the fact that it is free market principles that maximize the capacity for performance. They ignore the fact that while concentration can cause severe dislocation when the concentrated entities fail, the bankruptcy system of our particular free market system works very well. That bankruptcy system has a habit of breaking up too complex, and/or “too big” enterprises that have failed—Merrill Lynch comes to mind, which was reduced in size and acquired by another enterprise; as does Lehman Brothers, which was allowed to disappear altogether and its assets sold to a multiplicity of other enterprises; and AIG, which is undergoing breakup and shrinkage today. And the bankruptcy produces results far faster than can the government—just look at how many of our nationalized banks, and car companies, still have significant government ownership positions.
Government has to run things. The free market system has to be centrally managed. Our existing bankruptcy system has to be bypassed. All this because government Knows Better. A free market can’t be allowed to make its own decisions; that’s too messy for our antiseptic Progressive patróns. And too far beyond their control.