Dallas Fed: Why We Must End TBTF Now!
by Tyler Durden
“We’re on the road to economic stagnation” is how the Dallas fed describes the status quo as Too-Big-To-Fail (TBTF) is forcing the US economy to suffer from the perpetuation of perverse incentives. We want to get back on the path to prosperity and they note that there are some things monetary policy can’t fix (well we know that already) but in this case they demand an end to the TBTF paradigm now. In an excellent presentation of the costs and benefits of ending TBTF (defined rather tongue-in-cheekily: The unwillingness of a government entity to abruptly close an insolvent company and force its creditors to sustain sizable losses due to the company’s size, complexity, interconnectedness and general significance within the financial system), the ignorance of the process of creative destruction is critical as they note that a sick (or failed) bank cannot lend: “Undercapitalized banks gum up the working of the interdependent moving parts of the monetary policy engine”. Dismissing the Dodd-Frank Act as a distraction that doesn’t buttress market discipline, they summarize their guiding principles as: End banking oligopoly power; punish failure quickly; and change the do-or-die (M.A.D.) decision-making paradigm; ending with the threat promise suggestion that Restructuring isn’t so radical, firms do it all the time.
How the Dallas Fed sees the world with TBTF…