QE “is not a Buzz Lightyear policy,” Dallas Fed’s Fisher explains to Bloomberg TV’s Stephanie Ruhle, “this will not go on forever.” He admits there are limits to their (and implicitly the ECB or BoJ) policies – “we just have to figure out what they are.” The always outspoken fed head goes on to explain why he believes the Fed’s policy should be “dialed back… Not go from wild turkey, the liquor by the way, to cold turkey; but certainly slowing it down now.” The too-big-to-fail banks are absolutely gaining from a substantial cost-of-funding advantage (over smaller banks) with their implicit government guarantee and Fisher expresses disappointment in the reams of pages that constitute new regulation adding that he would prefer “a simple statement saying they understand there is no government guarantee… It could be written by a sixth grader,” as Dodd-Frank “needs repair.” His fears are exacerbated by Cyprus as he notes, “[in Cyprus] you have an economy that is held hostage by bank failure and institutions that are too big to fail. We cannot let that happen in the U.S. ever again and the American people will not tolerate it.”
Fisher on whether the BOJ’s move puts the ECB or the Fed in a corner where they’ll have to continue QE in order to stay on par:
The rates are already very low in Japan. I think people will want to wait and see how successful the program really is. Does it put pressure on us to continue? No, we have to conduct monetary policy according to what we feel is best to get our economy moving.
There has a consensus on the table to pursue along these lines of quantitative easing. I have voted and spoken against it. There is no QE infinity. I have never heard an argument at the table from anybody that we will take the Fed’s balance sheet to $5 million or whatever number. We already have a very active program. The chairman spoke about this at his press conference. We have to judge the efficacy of what we’re doing and either dial it back or dial it up a little bit. This will not go on forever and ever.
It is not a Buzz Lightyear policy. Neither we nor the ECB nor anyone else can follow that because there are limits and we just have to figure out what those limits are.”
On whether he believes that QE, up until a certain point, was a success:
“I can only speak for myself, not my colleagues. I was in favor of the first tranche of mortgage-backed securities purchases. I am not in favor of continuing that process. I think we have to dial it back. Not go from wild turkey, the liquor by the way, to cold turkey. Certainly slowing it down now. I wasn’t in favor of the second tranche. The housing market has come back significantly… We’ve seen a resurrection in that market and I think Fed policy was very helpful. I’m only giving my position. I think we need to dial that program back. That worked. And it is clearly working from the standpoint of driving up the stock market. It is not yet clear that this has been what has been regenerated, employment to robust degree that we would like to see. It has not happened yet. Corporations have clearly refinanced their balance sheets. Our businesses from a financial standpoint are lean and mean and ripped and strong. But they are not spending it on hiring people.
They are refinancing their debt, bolstering their balance sheets, making acquisitions, and it is too early to argue whether it has been successful or not, in my opinion. It has certainly helped the federal government, by the way. It has helped the federal government significantly.
We are buying so many treasuries now — and I made this argument a long time before it was enormously unpopular. We have been monetizing the debt, and we continue to do so. At some point, we end up taking it all down. I’m not sure that incents the Congress deal what they have to deal with which is correct our fiscal imbalances. That is what I worry about the most.”
On whether he believes that we are subsidizing too-big-to-fail banks right now:
“Absolutely. There is no question about it. There is some debate about what the size of the subsidy is. Bloomberg itself had a long report about being in the $80 billion range. There are numbers higher and less than that. It depends on how you calculate this. I can tell you one thing with certainty. There is a cost of funding advantage and it is substantial. It is unfair. We need to level the playing field. I’m not trying to bust these institutions up.
Our proposal at the Dallas Fed has been very simple: limit the taxpayer’s liability to covering the deposit base, and making sure through that government guarantee, which is what we do in this country and only allowing the commercial banking operation of a large complex bank holding company to have access to the discount window.
The rest of their operations would be totally free standing that each counterparty to those operations, whatever the transaction may be, would sign a simple statement saying they understand there is no government guarantee. It would be agreed upon by both sides. We have drafted it up and shown it. It could be written by a sixth grader. It would make clear that no one would expect the government to step in for the risk taken in those areas…Yes, they currently being subsidized…It puts the smaller banking institutions at a competitive disadvantage and that is not the American way.”
On why he believes that it’s up to Congress, not regulators, to create new incentives so market discipline is restored to the banking industry:
“You are talking about Dodd-Frank, which does not work and in its preamble its outstated purpose was to stop too big to fail because congress makes the laws of the United States. They make the regulations that we as regulators have to follow. And right now, the Federal Reserve and others under the leadership of Dan Tarullo, one of our governors, is doing our absolute best to follow what is prescribed by Dodd-Frank. I’m not a critic of what we’re doing. We’re doing our very best to follow the law, but regulations have to be made and only Congress can make it.”
On whether Dodd-Frank should just be scrapped entirely:
“I would not go that far, but I’d think it needs repair. We have advocated a small repair…All we are trying to do at the Dallas Fed is that we do not want to do this again. Cyprus is a great example, once again, as we saw in Iceland, of banks that jeopardize their entire country. We cannot let that happen. We can deal with this now that our financial institutions have been restored and the economy is moving forward. We’re not a crisis situation like we were before. And to be fair to Dodd-Frank, it was forged in the crucible of a crisis.”
On whether he’s likening the situation in Cyprus to the situation that the U.S. could face if Dodd-Frank isn’t repaired:
“No, I’m not. I’m saying that to solve a problem during a crisis is a lot harder than when you’re on a level plane. That’s where we are right now thanks to Fed policy and other actions that have been taken. We can deal with this now. There is bipartisan accord that too big to fail has not been solved. There is bipartisan agreement, and even the attorney general admitted he is afraid to prosecute these large institutions for whatever their misdeeds are because it might create economic damage. The problems are still there. Now that we are in economic recovery, we can deal with the problem. It is a different situation. The reason I mention Cyprus is because you have an economy that is held hostage by bank failure and institutions that are too big to fail. We cannot let that happen in the U.S. ever again and the American people will not tolerate it, so let’s solve it.”