By Jim Bullard's logic, it's time to break up the Fed

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Article Highlights

  • According to Jim Bullard, a bank should be broken up if it is "too big," too leveraged, has too much short-term funding of longer assets, and creates too much systemic risk.

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  • From Jim Bullard's logic, it follows pretty clearly that we should break up the Fed.

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  • In 1913, the legislative fathers of the the Fed thought they were creating a "federal" structure of 12 regional "reserve banks," not a monolithic central bank.

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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:

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

Then it should be broken up.

Let us consider the Federal Reserve itself.  The central bank is:

  1. Too big, with over $3.3 trillion in assets and growing.
  2. Too leveraged, at 60 to 1, with a risible 1.7% capital ratio.
  3. Extremely short-funded, with a massive interest rate risk from $2.9 trillion of very long, completely un-hedged assets.
  4. 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.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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