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“Too Big To Fail” Must End: Volker, Bair

By: Steve Johnson

10/5/2009 - 27 Comments

FDIC Chief said on Sunday that she wanted to end the "too big to fail" doctrine and shrink the shadow banking system that operates outside the reach of regulators.

And just a few days before, Former Federal Reserve Chairman Paul Volcker and Obama's economic advisor said the Obama administration's proposed overhaul of financial rules preserve the policy of "too big to fail". He said,

“... by designating some companies as critical to the broader financial system, the proposals create an expectation that those firms enjoy government backing in tough times. He says that implies those financial companies "will be sheltered by access to a federal safety net."

Government Intervention Must End

As I have said before, more government intervention in the economy will only make the problems greater.  Now, Obama's own chief economic advisor Paul Volker and the FDIC chief Bair are suggesting the same thing.

Support for more government intervention is fading quickly as Ron Paul’s bill to audit the Fed has more than 295 co-sponsors. 

Obama's proposed overhaul of the financial regulations and his proposal to give more power to the Federal Reserve to oversee large financial institutions, clearly revile that he has little understanding of how destructive the current policies of government intervention have already been to the economy.

FDIC chief Bair said,

“We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said she believed that bank holding companies with subsidiaries that are shut down by regulators also should be made to pay the price of failure by being subject to the same wind-down process.

"I believe that the new regime should apply to all bank holding companies that are more than just shells and their affiliates regardless or not whether they are considered to be systemic risks," she said, adding that including only systemically important firms in the shut-down regime could reinforce the 'too big to fail' doctrine.”

Financial firms subject to systemic risk shutdown authority should likely also be required to publish "living wills" -- details on how an orderly wind-down would play out -- on their websites to provide more clarity to shareholders and customers.

"If you tighten regulation of the banks even more without dealing with the shadow sector you could make the problem even worse," she said.

Bair added that reducing the shadow banking system and regulatory arbitrage is her top priority for the U.S. Congress as it works on legislation to revamp U.S. financial oversight this fall.”

Obama's push to expand the government regulatory system and blame capitalism and deregulation for the economic crisis have been severely undermined. 

The U.S. financial system is already the most regulated system in the world and capitalism does not create moral hazards that encourage banks to take high risks with other peoples money, like government intervention does. 

The free market has the only true solution to these problems, which Volker and Bair have testified to.

Will Obama Listen?

The question is will Obama listen or will he turn to Fed Chief Ben Bernanke and other leaders of the ant-capitalism movement and continue to choke out the free market?

So far the government has only let one large company fail, Leman Brothers, while bailing out hundreds of others.  Sooner or later, the government needs to let the market solve these problems that they are inadequately capable of solving – in deciding which businesses should survive. 

The damage of saving banks and large companies with government money is far greater than the damage of letting them fail.

I don’t see how Volker can stay as the chief economic advisor to Obama while his opinions remain so fundamentally different.  Something is going to have to change.  Either Volker will be replaced or Obama will begin to change his policies. 

As I have said many times before, the policies of Socialism and Inflation will eventually fail and political leaders will once again be forced to turn to the free market for solutions. I'm just glad they are finally started to make the turn before things get any worse.

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