NEW YORK - Dallas Federal Reserve Bank President Richard Fisher dramatized his view of who should be doing the financial regulating, saying Wednesday that removing the Fed's supervisory role "would be the equivalent of ripping out the patient's heart."
Looking to the future, Fisher recommended dismantling the largest financial institutions into ones of a size that can be "prudently managed."
Speaking to the Council on Foreign Relations, Fisher said proposals being discussed in Congress to shrink the Fed's regulatory and supervisory responsibilities "are misguided."
Rip out the heart of the financial system like that he said, and "That would surely prevent another heart attack but would likely have serious consequences for the patient." The best way to keep the patient healthy, he said, "is to keep the Fed in supervision."
Tuesday evening on the lawmakers holding the key to the Fed's role, Senate Banking Committee Chairman Chris Dodd, told MSNBC that nothing has yet been decided despite reports he once again favored giving putting the proposed Consumer Financial Protection agency in the Fed, a prospect his counterpart on the House Side, Barney Frank earlier in the day called a "bad joke."
Fisher said the Fed depends on its regulatory arm "to provide in-dept, hands-on assessments to guide us as we perform our duty as the lender of last resort."
"It is simply impossible to properly evaluate the health of a potentially troubled borrower with information generated by another agency," he said. "This was one of the harsh lessons learned from examining the entrails of Lehman and AIG, over whom we had no regulatory oversight at the time they went into cardiac arrest."
Fisher said he was speaking as a "fierce advocate of free markets." Yet, he added, "Capitalism wasn't designed to be stable. Asset prices overshoot during booms and bubbles; they overcorrect during busts. Panic happens."
In the economy, "the central bank is the heart, money is the lifeblood, and financial markets are the arteries and capillaries that provide critical sustenance to the muscles that the makers of goods and services and the creators of employment," Fisher said.
In the financial crisis, "elaborate statistical models and complex securitization products created the illusion of control over credit and liquidity risk in the banking system," he said. "The economy, starved of the lifeblood of capital, shut down."
Fisher said to maintain the health of the economy, to "properly operate a discount window or perform the functions of lender of last resort" the Fed must have "firsthand knowledge of our borrower's financial health."
The Fed "cannot implement monetary policy effectively without staying abreast of developments in the banking and financial system through the eyes and ears and constant contact of the 12 banks in our system who observe close and personal the activities of banks of all sizes -- from the roughly $1.7 trillion in assets we observe in the 843 state member banks we regulate to the roughly $16.8 trillion in assets of the 5,002 bank holding companies."
The 10 largest of the financial institutions overseen by the Fed now have almost 60% of the banking industry's assets and are an "acute regulatory challenge," he said.
Their operations are so sprawling and complex "their own management teams may not fully understand their own risk exposures," he said. "The dangers posed by the too-big-to-fail banks are too great."
Fisher said he recommends "an international accord to break up these institutions into ones of more manageable size -- more manageable for both the executives of these institutions and their regulatory supervisors."
Fisher said he aligns himself for former Fed Chairman Paul Volcker's proposal to eliminate the threat posed by "too big to fail" unilaterally if necessary. "I think 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."
Added Fisher, "This should be done before the next financial crisis because it surely cannot be done in the middle of a crisis."
In an interview Tuesday evening on the PBS Nightly Business Report, Fisher said the unemployment rate "may bounce around at current levels because there are a lot of people that aren't on the employment-seeking rolls, they've sort of give up." But when they come back into the system they'll swell the numbers of jobseekers, again, not helping the unemployment rate.
He said he cannot be very precise about when the Fed will again raise rates. "Right now, I don't think that's going to happen for some time."
He said he's not worried about inflation now because, "In fact, we're seeing pressures that are in the opposite direction."
He said he is "less worried about inflation in the short term, if we do our business well, then I won't worry about the intermediate term or the long term either."
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