By Bill Wilson — An excellent piece by syndicated columnist George Will on Oct. 12 urges Mitt Romney, should he defeat Barack Obama at the ballot on Nov. 6, to tap Dallas Federal Reserve Chairman Richard Fisher for Treasury Secretary. Why? Fisher is calling for an end to “too big to fail” financial institutions.
Particularly, Fisher thinks it’s time to break up the nation’s largest banks, saying that “too-big-to-fail banks are too-dangerous-to-permit.” He notes that half of all the nation’s commercial bank assets — consisting of loans, securities, etc. — are concentrated in just five financial institutions, comprising more than 58 percent of the entire Gross Domestic Product (GDP) of the U.S.
In his paper Fisher writes, “sustaining too-big-to-fail-ism and maintaining the cocoon of protection of [systemically important financial institutions] SIFIs is counterproductive, expensive and socially questionable.”
The solution? “[A]n international accord that would break up these institutions into more manageable size” should be adopted. Not a bad idea. Once financial institutions boast balance sheets comparable in size to the entire economy, that might be an indication they are getting too big.
But the issue may even be wider than that. With the nation’s financial system as a whole issuing credit nationwide totaling $54 trillion — representing 353 percent of the $15.5 trillion economy — it is quite clear there is even more debt being issued than there is money to repay it all.
All of which is made possible by the simple fact that banks are allowed by law to issue far more in debt than they ever hold in capital. The result? If defaults on those loans exceed what has been invested by shareholders, the bank is broke.
Fisher addresses the issue of capital requirements, noting that they have been used in some form in the U.S. going all the way back National Bank Act of 1864.
He might have added that they have never really proven adequate when financial crises have hit. They have helped facilitate economic booms and then when the bust happens, the public often bears the consequences.
So while Fisher supports higher capital requirements, he is also okay with letting banks go bust. The problem for him is the bailouts that follow the bust for too-big-to-fail institutions. If their size was limited by law, and the consequence was always shareholders lose their money if the bank folds, in principle banks would be more careful with whom they lend to.
But this would have to be coupled with the lifting of federal lending mandates that contributed to ill-conceived mortgage loans to individuals who could not afford to repay in the 1990s and 2000s. Banks would have to be allowed to set their own credit standards and to make their own risk assessments — and then bear the consequences of failure.
The law of the jungle would prevent or at least lessen financial crises. And when they did hit, bad actors in the system would be removed. In short, no more bailouts.
Hard to argue with that. What is significant is an established conservative pundit like George Will taking up Fisher’s mantle to break up the banks. Could this be indicative of where Mitt Romney is on this issue?
It may be too early to tell, but there may yet be hope for the Republican Party that tarnished its reputation with the American people by supporting bailouts of banks in 2008.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.