Richard Fisher on Financial Regulatory Uncertainty

Krugman is right, this is depressing:

So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately, and given what I read that’s saying a lot.

Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk. Like others, I’ve tried to point out that there is no evidence for this claim: business investment is no lower than you’d expect given the state of the economy, while surveys say that weak sales, not fear of regulation, are holding back business expansion. Oh, and just to make it perfect, Fisher cites Mort Zuckerman to bolster his case.

What freaks me out about the speech is that he’s blaming the financial reform bill, of all things, as one of the major sources of uncertainty (my bold):

The Dodd–Frank Wall Street Reform and Consumer Protection Act offers a number of compelling examples of how regulatory uncertainty could hinder economic growth….

Title I states that “The Board of Governors shall establish, by regulation, the requirements for determining if a company is predominantly engaged in financial activities..It goes on to prescribe a vexing combination of “shall” and “may”…And “The Board of Governors may establish additional prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies…

This leaves those affected by the legislation hanging on the cliff of uncertainty until we at the Fed and other regulators issue clear directives. And the uncertainty does not stop there. How will the landscape be sculpted by the new Bureau of Consumer Financial Protection, and how will potential conflicts between this bureau and other financial regulatory agencies be managed? What will come of the Treasury’s study, as mandated by the act, of Fannie Mae and Freddie Mac? What capital requirements and eventual exemptions in over-the-counter derivatives transactions will be established?…

Regardless of how you feel about the recent reform efforts’ broad goals, I hope you see my point: This is not the best time for added uncertainty, especially when the banking industry appears to be on a very slow mend. Yet uncertainty reigns.

Here is Fisher, two months ago, as reported by Shahien Nasiripour:

This leaves us with only one way to get serious about TBTF–the “shrink ’em” camp. Banks that are TBTF are simply TB–“too big.” We must cap their size or break them up–in one way or another shrink them relative to the size of the industry….Some counter that even if all banks were made small or mid-size (or at least not TBTF), systemic threats–and thus the incentive for regulators to step in and save financial institutions–would not disappear…I consider this argument hollow for a few reasons….The point is this: The arguments against shrinking the largest financial institutions are found wanting.

I can’t believe that Fisher went around aggressively promoting financial size caps, saying we need to break up the largest 5 banks into the largest 15 banks (or whatever he imagined the solution being practically), but is now complaining about uncertainty coming from the fact that the capital to be held against liquidity risks wasn’t explicitly written into the bill and the existence of the CFPB. The bill looks pretty close to the Obama White Paper, which has been in existence for well over a year now.   All the major banks have already finished their comments on Basel III and the strongest Basel you could imagine is likely already common knowledge, and it’s just a matter of where the final effort lands.

I remain convinced by arguments for decreasing the concentration of the financial sector but I also understand that if the SAFE Banking Amendment had passed there would have been a period of “added uncertainty” in the financial markets. To say the very least. I think the idea of an overall leverage cap as a floor is crucial, but I always thought additional measures would be necessary and that they shouldn’t be written explicitly into the bill. Did he? Or is he just grasping at straws here to argue against further stimulus?

Also note that he is already blaming the CFPB for a slowdown in growth and a lack of investment. Really? This is why you want a strong outsider as the person to create and build it – there’s already a presumption among the inside that this bureau can only get in the way and is functionally impossible for it to do anyone any good.