Lawmakers want to kill ‘Too Big to Fail’ by making the Fed act sensibly in times of crisis

New bipartisan legislation offered in both the House and Senate could limit the power of the nation’s central bank by limiting how it’s able to react during a financial crisis.

No matter how much greed or poor management led to the impending demise of some of the nation’s largest and wealthiest financial institutions during the 2008 financial collapse, the Federal Reserve determined that all was forgiven. The banks, according to the Fed, were simply too big to fail and would require billions of dollars in financial bailouts.

At the height of the banking crisis, the Fed handed out more than $1 trillion in virtually interest-free loans to the nation’s largest banks. The funds were handed exclusively to the United States’ largest and most influential financial institutions, most of which had close ties to top Fed officials.

Legislation proposed in the House by Reps. Scott Garrett (R-N.J.) and Michael Capuano (D-Mass.) and in the Senate by Sens. Elizabeth Warren (D-Mass.) and David Vitter (R-La.) would make sure that future banking crises are handled by the Fed with less cronyism and more market sensibility.

The proposals would bar the Fed from emergency lending unless the funds were made available to a broad range of financial institutions and outright prohibit lending to banks already deemed insolvent. In the event that the Fed does provide emergency funding, the bill would mandate that the money be loaned to struggling institutions at interest rates at least five percent higher than the current rate of Treasury debt.

According to the lawmaker, the Fed’s “unprecedented assistance” during the last crisis gave rise to the problematic assumption among top banking officials that as long as they’re big enough, the government exists as a safety net to hedge against reckless banking behavior.

“While the Dodd-Frank Act brought some reforms, the perception lingers that some financial institutions are simply Too Big to Fail and could be bailed out again,” Capuano said.

Accepting the notion that some banks are too big to fail, the lawmakers contend, provides institutions that are already the nation’s largest and most powerful financial institutions a massive market advantage against smaller lenders.

The new banking proposals come just a week after legislative proposals designed to alter the Fed’s structure to require the central bank to vote publically on any settlements reached with bad-acting banks.

“The Fed needs to be independent, transparent and accountable. But under its current structure, the Board of Governors doesn’t act with complete autonomy and succumbs to groupthink. If Board members can think for themselves and are held accountable, taxpayers are less likely to be asked to bail out the megabanks,” Vitter said of those proposals. “We recently made huge progress to improve the Federal Reserve by requiring that they have at least one member with Community banking experience. This bill will also help fix the too big to fail groupthink we’ve seen at the Fed.”

Big Congress usually faces an uphill battle in passing legislation that changes Fed policy in any substantial way. But the recently introduced proposals come as powerful Senate Banking Committee Chairman Richard Shelby (R-Ala.) is putting the final touches on his own massive financial regulatory overhaul. Warren, who is a member of the committee, could have some luck working the aforementioned bipartisan proposals into that package as amendments.

The post Lawmakers want to kill ‘Too Big to Fail’ by making the Fed act sensibly in times of crisis appeared first on Personal Liberty.

from PropagandaGuard https://propagandaguard.wordpress.com/2015/06/03/lawmakers-want-to-kill-too-big-to-fail-by-making-the-fed-act-sensibly-in-times-of-crisis/

from WordPress https://toddmsiebert.wordpress.com/2015/06/03/lawmakers-want-to-kill-too-big-to-fail-by-making-the-fed-act-sensibly-in-times-of-crisis/