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

Federal Reserve by Shutterstock.com

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.

    Tweet This

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

    Tweet This

  • 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.

    Tweet This


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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Holder will regret his refusal to obey the Constitution
image 'Flood Wall Street' climate protesters take aim at their corporate allies
image 3 opportunities for better US-India defense ties
image Is Nicolás Maduro Latin America's new man at the United Nations?
AEI on Facebook
Events Calendar
  • 29
    MON
  • 30
    TUE
  • 01
    WED
  • 02
    THU
  • 03
    FRI
Thursday, October 02, 2014 | 9:00 a.m. – 10:30 a.m.
Campbell Brown talks teacher tenure

We welcome you to join us as Brown shares her perspective on the role of the courts in seeking educational justice and advocating for continued reform.

Event Registration is Closed
Friday, October 03, 2014 | 12:00 p.m. – 1:00 p.m.
Harnessing the power of markets to tackle global poverty: A conversation with Jacqueline Novogratz

AEI welcomes you to this Philanthropic Freedom Project event, in which Novogratz will describe her work investing in early-stage enterprises, what she has learned at the helm of Acumen, and the role entrepreneurship can play in the fight against global poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.