Dallas Fedhead Fisher on the Necessity of Excitement and TBTF
It doesn't matter how you feel about the Fed (I'm at an End the Fed rally as we speak), you have to admit that Dallas Fed President Richard Fisher - skeeze though he may be - is one hell of a speaker. *fapfapfap* yeah whatever, he has a career in this shit when the Fed implodes and he's out of a job, someone remember that.
Anyway. "Paradise Lost" huh? (To the Cato Institute’s 27th Annual Monetary Conference, Washington DC November 19):
Sometimes it helps to contemplate economic predicaments by seeking wisdom from definitively noneconomic sources. Consider this passage from Book III of Milton’s Paradise Lost, where God answers the question of why He created men and angels who could rebel against Him. Of man, He responds:
“… I made him just and right,
Sufficient to have stood, though free to fall.
Such I created all th’ ethereal Powers
And Spirits, both them who stood and them who failed;
Freely they stood who stood, and fell who fell. …”
As is clear from this most celebrated work of literature, the issue of whether entities—be they mortal or divine—should be allowed to fail is one of the oldest philosophical quandaries. It has been debated for eons on a much higher plane than economics or finance. And yet Milton is germane to the subject of this conference: “Restoring Global Financial Stability.” There is no way we can reasonably expect to restore global financial stability without addressing the vexing issue of institutions considered “too big to fail.”
It's pompous poetry to call TBTF "vexing" but whatever, we'll let that one go, he's a Texan.
Only a short while ago, we were teetering on the brink of global financial collapse. Essentially, what occurred was a crisis of unintended consequences: Misperceptions of risk and misplaced incentives led to misguided actions. The crisis metastasized in large financial institutions and spread through the entire body of the financial system. Both on and off balance sheets, banks levered up to cancerous levels and funneled funds into assets of questionable quality.
These bad bets were made worse by their scale and the rapidity with which they spread. It was not enough that one or two large institutions erroneously thought that real estate prices would rise forever—nearly all of the biggest banks did. It was not enough that one or two large institutions thought they could contract with third parties they presumed would immunize them against failure—nearly all did. And it was not enough that one or two regulators turned a blind eye to the systemic risk posed by this behavior—nearly all did, including the Federal Reserve.
This is not something new. Readers of history might recall Charles Mackay’s 1841 Memoirs of Extraordinary Popular Delusions, in which he wrote:
“Every age has its peculiar folly—some scheme ... or phantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”
To which he caustically added: “Men … think in herds; it will be seen that they go mad in herds ...”
He's mentioned that book before, maybe I'll pick it up for the next time I'm switching planes at DFW and bored with playing Nintendo DS.
All in all, while an entertaining read, there is not much of substance in here. I get the sense that Fisher is being defensive of the Fed's role as regulator more in the preening sense than anything else, as if to say his agency's pair is larger than TBTF's. Whatever. It's not a sword fight, it's our financial system. If you ask me, everyone failed and no one did so in any extraordinary way that was any more diabolical than others. Who judges that?