TOO BIG TO FAIL

The proposed expansion of Federal Reserve authority over American finance is based on the idea that some firms are too big to be allowed to fail. Bear Stearns was such a
firm.

The big boys hope that they will not preside over bankrupt firms. To make sure of this, they are willing to let the FED impose new rules. These rules will be imposed on their competitors, too. That is suitable in their eyes. If left to themselves, they will continue to make bad decisions in order to earn a little more money.

This is the effect of moral hazard. The FED has promoted moral hazard. Now it wants to regulate the operations of a financial system that has grown up under Greenspan’s administration to believe that some firms are too big to fail. The implicit guarantee led to explicitly bad policies. Bear Stearns is a good example.

The FED is the genie who is out of the bottle, Congress relies on this genie to keep the inflation-created boom going. Congress is frightened of a full-scale recession in which the biggest firms fail. After all, who would fill up their Political Action Committees’ coffers if big firms were allowed to fail? That is why the big firms fill the coffers.

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CONCLUSION

We are living in an era of government controls. These controls have created a hierarchy of winners (guaranteed) and losers (guaranteed). The option ARM is a manifestation of both.

The new proposals will centralize power over finance in the hands of an agency that is officially run by the government (www.federalreserve.gov) but in fact is run by agents of the largest fractional reserve banks. All of the regional FEDs are .org agencies, not .gov. The regional banks are a majority on the Federal Open Market Committee, which sets monetary policy. The FOMC’s policy is implemented by the New York FED (www.ny.frb.org).

We can expect more of the same. The idiocy that the banks have shown in making bad loans will spread to the entire financial sector. Regulation by tenured staff economists will not make the system less fragile. It will make it more top-heavy and less flexible.

The bigger they are, the harder they fall. They will fall all at once. That is the curse of centralization and government regulation. As Tom Lehrer sang in 1959, in a different context: “We’ll all go together when we go. Every Tom, Dick, and Harry, and every Joe.”

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