On Big Ben getting bigger

A deal has been reached between the Treasury and Democrat Barney Frank on how to go about regulating banks. Reading up on some of the planned regulations, they don’t sound/look good:

A proposal circulated Tuesday by House Financial Services Committee Chairman Barney Frank (D., Mass.) would give the government multiple tools to crack down on companies that could pose a threat to the broader economy, part of an effort by the administration to prevent financial firms from becoming too big to fail.

I mean, sure this isn’t something really new. We’ve already heard and been made aware of the upcoming regulations.  But here, emphasis mine:

The proposal would require financial firms with more than $10 billion of assets to pay for the unwinding of a collapsed competitor. The measure would also give the Federal Reserve the power to direct any large financial holding company to sell or transfer assets or stop certain activities if the central bank determined there could be a “threat to the safety and soundness of such company or to the financial stability of the United States.” This suggests the Fed would win new authority to order companies to shrink.

A few thoughts.

I can see the intention of why the highlighted part is being done.  Banks would have to look out after one another to ensure they don’t end up funding the collapse of another.  That sounds good, but how could that possibly be done? Apart from that, this is only feasible if it’s some sort of mild calamity that only 1 bank is at stake.  If we get a repeat of or anything close to what happened the past year, I don’t see how it is sensible to make the “big” banks catch the others when they fall.

Then, the Fed’s bigger role.  The central bank has already been blamed for missing the crisis.  To think they’re only handling monetary policies of the US.  Given a bigger responsibility, we’re not really becoming more efficient by giving the task to an existing and probably ineffective regulator.  What they’re doing is simply building another reason for people to blame the central bank if and when the system faces a collapse yet again. By then, the Fed would no longer just be overseeing monetary policies; they’d also be looking after banks and any failure that causes systemic panic would have the fingers pointed at them. I trust Ben and his gang to fix the current system the right way.  But not so much that they would be effective in preventing another one from happening.  They may have stopped the demise of the global economy but that doesn’t give them authority and expertise in deterring what is rather a cycle.

Source: WSJ

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