Politico's Ben White on July 15 interviewed Federal Reserve Governor Dan Tarullo, the Fed's point man on capital regulation, such as it is, between his testimony before the Senate Banking Committee and Fed Chairman Ben Bernanke's scheduled appearance before both congressional banking committees this week.
Tarullo's rambling answers can be parsed to gain insight into the muddled thinking that continues to produce halting measures to deal with the ongoing financial crisis, five years after the 2008 episode and three years after the enactment of Dodd-Frank.
It would be oppressive to quote everything Tarullo said, but it is instructive to look at his response to the first question from White as to whether there are still "too big to fail" banks that would be bailed in a crisis in spite of all of the efforts being implemented by the Fed and other regulators:
I think the way to begin assessing this is to realize that too big to fail is not a binary status. I don't think you have an institution that either in some absolute sense is or in some absolute sense isn't. Think about what happened during the crisis when the Reserve Primary Fund, a pretty small money market fund, became insolvent. It set off a crisis in the rest of the money market funds that required intervention by the Treasury and the Fed to keep that industry supported.
One would never before the crisis have thought of the Reserve Primary Fund as a systemically important institution. So there's an important lesson there, which is that to some degree, too big to fail is a contingent status; it depends on what is going on in the greater environment of the financial system. Having said that, it's obvious that risks posed by any particular institution can be substantially greater, and the imminent failure of some institutions can pose a much more obvious threat to the financial system than others.
So for that reason, we do conventionally identify some institutions which we may not characterize as too big to fail, but at least systemically important, and I guess I would say that with respect to the largest, most complex institutions in the United States, that while a good bit has been done and ... is still about to be done under sets of regulations and agreements that will be implemented, my own view is that we still need to do more to get to the point at which the risks posed by some of these institutions are confined to what we think of as manageable proportions.
So he didn't say no. Moreover, the fact that the financial markets don't crash after statements like this is further evidence that they are satisfied that the famous "Bernanke put" is still in force.
Tarullo went on to say that the big area that needs action now is short-term wholesale funding.
Asked when something will be done about vulnerable wholesale funding, Tarullo gave another rambling answer, concluding with a reference to a speech he made a couple of months ago when he "floated the idea of tying short-term wholesale funding to an independent metric of some sort and then possibly tying it to higher capital levels as well."
But he still didn't answer the question as to when the regulators will do something about what is acknowledged by both Tarullo and the Financial Stability Oversight Council to be a serious vulnerability of the financial system.
So White asked the question another way, why the regulators have issued their highly touted leverage rule as a proposal with a 60-day comment period that will give the too big to fails plenty of time to lobby against it. He asked specifically why they didn't instead issue an interim final rule, "something that would be more immediately impactful on these banks and make the system safer faster."
Tarullo again rambled saying that the banks are already on an upward regulatory trajectory that includes a proposal forthcoming in the fall to impose a capital surcharge on the systemically important financial institutions/too big to fails, but all of the requirements will take years to phase in.
Then, with no apparent appreciation of the irony, he concluded that an International Financing Review would only be appropriate for "exigent circumstances," then he zagged to a conclusion that "there's a very strong sense in the agencies that the 3 percent ratio was just inadequate, and that's why we've made a proposal for something more." (Something that could take many months at least to adopt and then years to phase in.)
White himself then zagged by asking whether the too big to fails might be justified in complaining that the proposed capital and liquidity rules might impair the ability of the largest banks to get access to credit and thus damage the economy.
In response, Tarullo repeated that there will be a transition period, but he missed the chance, perhaps because he doesn't believe it, to point out that the economy suffered enormous damage as a result of the activities of the too big to fails that led to the 2008 episode of the ongoing financial crisis.
Finally, White asked whether Tarullo would support a bill introduced last week by a small group of senators to reinstate Glass-Steagall restrictions on investment banking activities of too big to fail banks.
Tarullo answered with an even more circuitous discourse that, while somewhat informative, prompted White to rejoin, "Is that a long way of saying no, you wouldn't support it?" Tarullo concluded that the problem, "again, was of short-term runnable funding more than it was what kind of firm they were affiliated with."
For me, the overall impression, continuously over at least the past four decades is that the financial regulators are conflicted as to whether they want to do anything to contain the ongoing financial crisis and prevent it from completing the destruction of the U.S. and even the global economy.
Clearly they don't want to do this if it would upset the banking lobby. Most of all, while Tarullo explained how the evolution of financial markets led to a squeeze on industry profits, he managed to do this without realizing that even requiring more capital will not save a banking system that tends to consume capital, rather than to accumulate it, over the course of a business cycle, with the result that the authorities repeatedly rescue the too big to fail banks, on a bigger scale with each episode. It is this destructive cycle that has caused long-term damage to the standard of living of Americans other than executives of too big to fail banks.
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