I met recently with a member of the House Banking Committee who supports financial modernization legislation. He asked me to respond to the Federal Reserve Board's contention that banks are subsidized by the federal safety net.

The Fed, of course, uses this argument to bootstrap itself into position on the "regulatory turf" issues. Because banks are subsidized, argues the Fed, they should operate their nonbanking activities in holding company subsidiaries to limit any "leakage" of the subsidy. Did I mention that the Fed regulates holding companies?

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