Richard Fisher, President of the Federal Reserve Bank of Dallas, tells DW why he still believes in a unified Europe and why a temporary fix of the fiscal cliff problem in the US isn’t good enough.
DW: Your remark that so called Too-big-to-Fail banks should be broken up isn't very popular in financial circles. Do you really believe that this can be put into practice?
Richard Fisher: I do. And I am referencing in particular the financial situation in the United States. We have five institutions that have become even more concentrated in their power than they were before the crisis. And the intention of the legislation we passed, called the Dodd-Frank Act (law on Wall Street reform -the ed.), was to end "too big to fail". Instead the consequence has ensued: the largest banks have become even bigger - "too bigger to fail."
We have as you have in Europe over 6,000 banks, but we have excessive concentration in the hands of a few. It's the least worst outcome to say break up the banks. We provide a taxpayer guarantee on deposits. But starting with a very clever man named Sandy Weill at Citicorp, who took that franchise and was able to expand it through the acquisition of Travelers Insurance and so on, basically transformed it into what banks have become now which is an income-oriented and not a balance sheet oriented institution. That means how do I make as much as possible, taking advantage of the cheap money that was made available subsidized by the American taxpayer deposits.
But what I argue is: The only guarantees that exist are those of deposits. Any other activity beyond what we used to consider the commercial banking functions - safeguarding deposits by the American taxpayers that are at risk - will not be assisted by the government. I think by just making that clear alone we'll assist the process.
Now what's happened in the marketplace, if you look at three or four of the five that have the most diverse, widespread and large - and I would argue difficult to manage situations because of their scale and scope - is that the market has assigned them a discount from book. And what that tells you is the market is saying the pieces are worth more than the whole. So we have not given prescriptions of how to do it. I wanted to see how the market place of ideas would come forward and lo and behold even Sandy Weill has come forward now and said this is a good idea along with a former managing partner of Morgan Stanley. So I think there may be something there. That's something that's supported by both sides of the aisle, so Democrats and Republicans see some virtue in this, the left-wing as well as the Tea Party types. So we'll see what ensues.
My general view is this. We created a new bureaucracy to think of new capital standards and so on. My guess is that we are empowering a new bureaucracy rather than solving the problem. Now we at the Federal Reserve under the leadership of Dan Turillo are doing the best we can do comply with the law. The question is the law itself. And I don't think it will be effective ending "too big too fail."
The Liikanen Group (independent commission set up to review EU banking reform -the ed.) last month issued its report on banking reform in the EU. What do you make of it since it also addresses the question of what to do with big banks?
We are going to have to deal with this not only in a domestic context, say within Europe or the United States, but in an international context with regard to Basel (international regulatory framework for banks - the ed.) and the way people operate and the capital standards that are as reinforcing internationally as they would be domestically. I am very reluctant to comment on recommendations made from Europeans about the European system. But I think some good ideas came out of that report and it should be studied.
One of the recommendations made in that report is the separation of lending and trading which is reminiscent of the old Glass Steagall Act of the US. Should the US consider that again?
This is what Mr. Volcker and the Volcker Rule intended to be. He's the man by the way who is one of my mentors and we were trained by the same individual. We did have the Volcker Rule. I know Paul Volcker well. He will tell you the Dodd Frank Act made it so complicated even he cannot understand it. But the basic recommendation that you just mentioned echoes the separation of traditional banking activities from more speculative activity.
I think it's important to understand: The old commercial banker was driven by having a sound balance sheet and the commitment was to return to the depositors their money with a rate of interest. The investment banking rule, which I spent a part of my lifetime in, was how much can I make in a year. I think it would be healthiest for the system in terms of the basic utility of banking to have a balance-sheet orientation to protect those that we subsidize, savers. And if you are going to be income statement oriented then you are at risk and there will be no support and no bailouts.
But we have in the United States created this structure of identifying for example systemically important institutions, or SIFIS. All that does is say that they are too big to fail and that gives them a funding advantage. But there is a discrepancy here too. The too big to fail or the SIFIS have a funding advantage. It's unfair. That doesn't mean we can't have banks that provide for international clearing… But there needs to be a way to have a banking system were you have a level playing field and you also don't place the taxpayer of the United States or in Europe at risk. And that's what we are seeking to achieve.
In the US the so-called fiscal cliff looms at the end of the year. How hopeful are you that Congress can strike a sensible deal instead of kicking the can down the road?
I am hopeful mainly because we at the central bank of the United States have been carrying the load and there's a limit to what we can do. We haven't defined that limit in terms of our pronouncements and we are still struggling with how far we can as well as should go. But there is no question that the central bank of the United States, the Federal Reserve, which I am part of, has been doing the work that must be done by others.
And moreover, accommodative monetary policy - meaning low interest rates and the abundant liquidity that we put into the system - will not be put to work effectively in creating jobs unless those that create jobs, which in our country are private sector companies, particularly the job creators in small companies and the Mittelstand, but also the big companies, understand what the rules of the road will be. Right now they are sailing in a channel that has no markers. Those markers are defined by our government.
Our government is composed of the Congress of the United States and the executive branch. And the Congress writes the rules of tax collection and spending and regulation. So we have made capital, money, abundantly cheap at the central bank. It is necessary, but not sufficient to get the economy moving again, particularly putting our people back to work - the American people that are under- and unemployed.
A temporary fix, which is what is being discussed now, may postpone falling off the cliff from an aggregate standpoint of GDP calculation. What it does not do is give businesses who hire people and put people back to work clarity. It postpones clarity. And I don't know a single businesswoman or businessman that if there is a temporary fix, will say a-ha I will now go out and employ new people and expand my plant. They won't do it until they know what the long-term rules are going to be because they won't invest on an overnight or one-year basis. So am I hopeful? I would say I am prayerful. But I may be hoping against hope.
For the third week in a row, the finance ministers of the eurozone met this week to reach a deal on Greece. Germany in particular is unwilling to provide an additional bailout package or accept a so-called haircut of Greek debt. What's your take on Greece's future and can it ever pay back its debt without a haircut?
As far as the German treatment of Greece is concerned, you have an immensely capable chancellor and also a very capable and effective Finance Minister Schäuble. So I am hesitant as an American to give them advice. It's clear that there are different standards that apply and different productivity that come out of the workforces of say on the one end Germany and on the other end Greece.
I think it's important to remember that the vision we have of a unified Europe sprang from the heads of Germans and French leaders such as Helmut Kohl and Francois Mitterand. And this is a dream that beats the alternative. And now we have to make it work. And there will be misses and missteps along the way.
One of my colleagues the other day in a wisecrack said every time we Europeans deliver a beautiful wrapped package kind of like at Christmas, you unwrap it and it says assembly required and batteries not included. As a father that used to frustrate me at Christmas when I was buying toys for my children. So it will take time. And I would not ever offer to give advice to a foreign government as to how they should treat this problem.
But the one benefit you have with one currency is it forces the politicians to make uncomfortable decisions. And whether they are Spanish or Greek or politicians of any member of the 17 countries under the euro, it's not easy anymore. They can't coast along anymore by giving things away. So I wouldn't point my fingers at the Greeks per se. It's much tougher to be a member of the legislature be it the Bundestag or a parliament in another country than it ever was before.
And I would hope that over time in all 17 countries and even broader in the 27 countries of Europe, that the people who assume these offices will not be the old-fashioned types, but instead realize they can only address their job with dead serious concentration and economic probity. The old days of just giving things away or satisfying a single constituency are over. And the single currency forces discipline. So I am all for it.
Richard Fisher has been President and CEO of the Federal Reserve Bank of Dallas, Texas since 2005. Earlier he served as an assistant to the Secretary of the Treasury in the Carter administration from 1978 to 1979. From 1997 to 2001, Fisher was deputy US trade representative with the rank of ambassador where he oversaw the implementation of NAFTA and a senior member of the team that negotiated the bilateral accords for China's and Taiwan's accession to the World Trade Organization.