Richard Fisher, a former commercial banker who is now head of the Federal Reserve Bank of Dallas, has delivered a powerful speech denouncing the financial reform bill soon to be sent to the president’s desk as toothless. He also attacks the administration’s soft touch on big banks. According to Fisher, as long as there are banks considered TBTF, the entire financial system will be in peril — and the market will be badly distorted. Why? Because big banks whose executives know the government won’t let the market discipline them have incentives to behave recklessly, while banks whose executives know that they’ll be held accountable for their decisions stand to lose business to the reckless big boys. What I find especially interesting about the Fisher speech is that he is not criticizing banking reform from the left, but from the pro-market right. He thinks our failure to seriously reform the banking system is anti-market, and puts the entire country at serious risk.

Simon Johnson favorably analyzes Fisher’s speech, and quotes from it liberally. It is astonishing that Fisher’s point of view has lost in Washington, after all that happened in the past two years. On the other hand, maybe it’s not so surprising. If you haven’t watched the PBS Frontline report on how Alan Greenspan, Robert Rubin and Larry Summers ganged up on Brooksley Born when she tried to warn them about unregulated trading in derivatives, you really should. I also recommend this 2009 piece by Glenn Greenwald on the revolving door between government and the financial industry, with particular attention paid to the case of Larry Summers.
In my post earlier today about how despite being furious at BP over the oil spill, I’m more angry at government regulators for failing to do their jobs, some commenters took that opportunity to blame George W. Bush for supposedly going easy on the oil industry — this, as opposed to what the Democratic administration before him did. Look, I have exactly zero interest in letting Bush off the hook for his failure to run a tight ship in regulating the oil industry, but I am suspicious of the idea that it’s a problem particular to the Republicans. To me, it’s about Washington and the power elites colluding with financial and industry elites against the public interest. It must not be forgotten that the deregulation of the banking and finance industry took place in the 1990s, under a Democratic administration — and that Robert Rubin and Larry Summers, both Democrats, were high-profile advocates for it (it goes without saying that the Republicans were all for it as well).
My point is simply this: to blame these failures on a single political party is to miss the essence of the problem. The danger to the country is that the ruling class — and I use that term not perjoratively, but descriptively — in Washington and in the boardrooms really do confuse their own interests with the public’s interest, and govern that way. I suppose it has always been thus, but in the past couple of years, we’ve seen how dangerous their short-sightedness and self-interestedness is for all of us. What these people are doing is destroying the American people’s confidence in our democratic institutions. It is a gross moral failure with political implications.
There won’t be any ending the Too Big To Fail threat. Not this time. NYT financial columnist Joe Nocera analyzes the House and the Senate financial reform bills that will soon go into reconciliation, and explains why when it’s all over, we will essentially be no safer from the threats that nearly brought the world financial system to ruin. The thing is, when there is a next time, there won’t be any money left to save any big institution — and when it goes down, we’ll all fall into the sinkhole it creates.