“Failsafe” and “Too Big to Fail” — #1

On May 9th, a Bloomberg News headline read: “Obama Administration Said to Favor Fed as Systemic Risk Agency.”

The article says that one candidate for Systemic Risk Agency (or SRA) is the Federal Reserve Bank. Others in the Administration favor a council of regulators. That would be an SRC, or Systemic Risk Council. This will take awhile to sort out.

And the article goes on to quote Senator Dodd (D, CT): “Senate Banking Committee Chairman Christopher Dodd said in a May 6 hearing that ‘It is my preference that authority not lie in any one body; we cannot afford to replace Citi-sized financial institutions with Citi-sized regulators,’ referring to Citigroup Inc., one of the largest U.S. financial firms.”

Barney Frank talked about systemic risk regulators several months ago. A Systemic Risk Regulator would be designed to assure that all those financial entities that are “too big to fail” wouldn’t even get CLOSE to failing, ever again.

MY problem is that any reasonable person would want to get rid of the systemic risk to the financial system, not regulate or oversee it. That reasonable person would want to break up any entity that was “too big to fail.” Is that rocket surgery?

Another Bloomberg article purports to report back from 2088 about our financial crisis and its aftermath. Deeply suspicious of government action, the article lists several unintended consequences, and starts with this truism: “The U.S. Congress, which excels at preventing the last crisis from recurring, enacted new rules and regulations before the last bank had extricated itself from the government’s grip.” [Emphasis added]

We shouldn’t settle for a good faith effort to try to create ways to restrain firms that are Too Big To Fail. We don’t just want to avoid repeating this financial meltdown. We need to avoid such failures no matter what. We need a financial system that’s fail-safe. “Fail-Safe” is not a new idea.
And has America ever before faced this issue of keeping corporate entities from becoming too large and too powerful? Why, yes. We called the issue “monopoly” and the laws “antitrust laws.” The Wikipedia entry for the Sherman Antitrust Act tells you more than you want to know.

The (several) antitrust laws were designed to keep large businesses from harming consumers by monopolizing trade and thereby becoming able to set prices without competition. Before it atrophied, there used to be an Antitrust Division within the Justice Department, believe it or not!

And if America decided a century ago to set limits to corporate power in order to protect consumers, why can’t we do so today to protect the entire financial system?

Why can’t we aim for a financial system that’s fail-safe? Shouldn’t that be our design goal?

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