Paul Volcker Says Too-Big-To-Fail Still Hangs Over Us

Teni Sow | September 20, 2011 | 0 Comments

Too-big-to-fail may be here to stay, according to one former Fed chairman.

Speaking at a public event on Monday, former Federal Reserve Chairman Paul Volcker said that new financial regulations have not done enough to address the size of risk-taking banks, which could still bring the financial system to the brink of collapse.

“I think Dodd-Frank was close to as good as we could get, but it’s nowhere near what we need,” Volcker said in an interview with Charlie Rose at a Manhattan event sponsored by Syracuse University.

Volcker said the problems surrounding banks that are too systemically significant to be allowed to fail have “not yet been convincingly settled,” despite being “the heart of the reform question.”

He said some aspects of the Dodd-Frank Act — such as the Volcker rule and a provision that would wind down bankrupt banks — will make banks “less likely to get in trouble.” But he warned that financial regulators are “fighting against a presumption” that the government will save too-big-to-fail banks.

The Volcker rule, named after Volcker himself, limits federally insured banks from betting their own money (as opposed to their customers’) on certain types of investments.

Volcker also said that, while it is possible to solve the too-big-to-fail problem, the United States needs to enlist the help of other countries, such as Great Britain and Japan, in regulating financial institutions more strictly because large banks now “are all big international institutions.”

The Dodd-Frank Act, which was signed into law last year in response to the financial crisis, aims to address too-big-to-fail by placing more banks under government oversight, regulating the trading of derivatives and outlining a path for the federal government to dissolve troubled banks.

Nonetheless, too-big-to-fail is a bigger problem now than it was before the recession. U.S. banks are larger than they were before the recession, and the number of too-big-to-fail banks is set to increase 40 percent over the next 15 years, according to Bloomberg News.

Volcker, who as Fed chairman helped drive down inflation during the early 1980s, also warned that inflation is not the answer to fixing the economy, as many other economists have argued. He said that inflation would not help the economy in a significant way, and once inflation more than doubled, any benefits would not be worth the economic costs of rapidly rising prices.

“Once you’re there,” Volcker said, “you got a hell of a problem getting it down again.”

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