By Jim Bullard's Logic, It's Time to Break Up the Fed

May 14, 2013, 1:19 p.m. EDT 1 Min Read

Consumer banking

Which Depositors Should Suffer Losses When a Bank Fails?

Virtually all discussions of banking crises these days assume that depositors should always be protected, often at taxpayer expense. Let's consider whether at least some depositors should be bailed in.

February 6
Law and regulation

Fed Doesn't Live by the Rules It Sets for Banks

Anywhere in the world, if you had $55 billion in capital, and then lost $55 billion, your capital would be zero. But under the Feds own special accounting rule, if it lost $55 billion, its capital would still be $55 billion.

December 4
Law and regulation

The Goose that Laid the Federal Reserve Note

This newly discovered, expanded version of Aesop's most famous fable bears an eerie resemblance to the modern day and sheds new light on its tragic moral.

November 30

Jim Bullard, the president of the Federal Reserve Bank of St. Louis has laid out an interesting argument, as reported by American Banker ("A Simple TBTF Plan from Fed's Jim Bullard," May 9), to determine when a bank is too big and needs to be broken up. In summary, the well-informed argument goes like this:

If a bank is:

Too big, perhaps over $100 billion or $500 billion in assets, though Bullard declined to name a threshold,
Too leveraged,
Has too much short-term funding of longer assets and
Creates too much systemic risk

Then it should be broken up.
Let us consider the Federal Reserve itself. The central bank is:

Too big, with over $3.3 trillion in assets and growing.
Too leveraged, at 60 to 1, with a risible 1.7% capital ratio.
Extremely short-funded, with a massive interest rate risk from $2.9 trillion of very long, completely un-hedged assets.
A frequent creator through its interest rate and money-printing actions of gigantic systemic risk.

Therefore, it follows pretty clearly from the same logic that we should break up the Fed.

In fact, this would be consistent with what at least some of the legislative fathers of the Fed, for example, Carter Glass, thought they were doing in 1913. They thought they were creating a "federal" structure of 12 regional "reserve banks," not a monolithic central bank. Maybe it would be a good idea to re-read those old arguments, while we are busy considering what is "too big."

Alex J. Pollock is a resident fellow at the American Enterprise Institute in Washington, DC. He was President and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.