In a statement in front of the House Banking and Financial Services Committe, Paul Volcker e takes aim at several issues at the crux of the regulatory debate, one of which is the “too big to fail” concept.
This is an important, but misunderstood concept, and Volcker’s refreshing view is that it’s a meaningless phrase.
Think of the practical difficulties of such designation. Can we really anticipate which institutions will be systemically significant amid the uncertainties in future crises and the complex inter-relationships of
markets? Was Long Term Capital Management, a hedge fund, systemically significant in 1998? Was Bear Stearns, but not Lehman? How about General Electric’s huge financial affiliate, or the large affiliates of other substantial commercial firms? What about foreign institutions operating in the United States?
Volcker also throws all his support behind the Fed, an institution that should not become “an academic seminar debating in its marble palace various approaches toward monetary policy without the leavening experience of direct contact with, and responsibility for, the world of finance and the institutions through which monetary policy is effected.”
So don’t let the Fed become merely a monetary policy-setting institution
Quite simply, it is the Federal Reserve that has (surely should have) the independence from political pressures, the prestige and the essential qualifications of experience to serve as overseer of the financial system. In sum, I believe the needed oversight and coordinating role should be in the hands of the Federal Reserve rather than the Treasury.