Prior to the credit crisis, Dallas Fed President Richard Fisher was probably best known for his analogy comparing Fed Policy to a baseball game. On June 3, 2005 Fisher suggested the Fed’s then current rate hike cycle was fast approaching the “7th inning stretch.”
However, on Wednesday, the president of the Dallas Federal Reserve Bank may have made even bigger headlines when he said, in no uncertain terms, that the big banks should be broken up. Speaking to the Council on Foreign Relations in New York, Mr. Fisher said, "I align myself closer to Paul Volcker in this argument and would say that if we have to (break up banks) unilaterally, we should.''
Fisher continued with a fairly reasonable explanation saying, "The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders.''
Fisher opined that the arguments for keeping the status quo in the financial system, is weak at best. He cited Japan’s experiences as Exhibit A in the argument for not allowing the banking system to continue with business-as-usual now that the crisis appears to have passed.
Mr. Fisher also strongly voiced his opinion that the Fed must be allowed to maintain autonomy from the U.S. government. The Fed has been publically accused of being too hands off when it came to supervision, something that allowed the mortgage bubble to percolate and eventually burst.
However Fisher says the Fed has learned their lesson and is becoming more proactive about not only measuring risks to specific institutions, but also risks to the broader financial system.
On the subject of the economy, Fisher told CNBC that he sees a tepid, but gradual recovery. "It is sort of a post-traumatic shock syndrome that the economy goes through and it will take a long time to cure,” Fisher said.
The Dallas Fed President also sees a “significant problem” with the unemployment rate. He cautions that America needs to be patient with this recovery and that businesses are not going to expand until they feel more confident about the direction of the economy and the country’s politics.
Fisher says that he personally surveys more than 50 businesses before each Fed meeting and in his words, “just listens to what they have to say.” Fisher contends that businesses in his district are concerned about “social overhead costs” which include the big uncertainty of health care cost increases.
Turning to the Fed’s current monetary policy, Fisher opines that the Fed has done its job in dealing with the credit crisis and that “we were successful.” However, he says “we’re done” with many of those emergency measures and that the Fed is now in the process of normalizing the banking system.
When asked about inflation, Mr. Fisher explained that there is reason for concern as the economy recovers. He said that bank reserves at the Fed have grown to over $1 Trillion and that when things pick up, that money will find its way back into the economy. Fisher’s question is “How will this $1 trillion go back into the system without creating inflationary pressures?”
Finally, Fisher agrees with the idea that the Fed must keep rates low for an “extended period.” When asked what that means exactly, Fisher said that the question of when the Fed will hike rates will depend on the pace of the economic recovery.
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