Fantasy Politics: On Reforming the Banking System

Special Note:


by Gary North

Recently by Gary North: The Crackpot Economist Who Provided Milton Friedman With His Monetary Theory

Via Lew Rockwell

The largest banks are immune to reform or regulation. They control the Federal Reserve System, and have since the beginning in 1914, when it opened for business. The Congress defers to the FED. So, the banking system never changes much. There is never a significant reform.

Today, the 12 largest U.S. commercial banks hold 69% of the deposits. If you think the free market produced this allocation, you are the victim of a Keynesian economic theory. The centralization continues relentlessly. All the “democracy” chatter in Congress is simply a form of self-delusion.

Woodrow Wilson, the so-called reformer, signed the Federal Reserve Act of 1913, passed in the final hours before the Christmas recess. He signed it within two hours after the Senate passed the bill.

The fix was in.

The fix has been in ever since.

There are three main approaches for banking reform: the Austrian approach (end the FED: the free market precious metals coin standard), the monetarist approach (reduce bank regulation: automatic fiat money), and the Greenback approach (bank nationalization: fiat money). None of this is likely until after Washington defaults.


Richard Fisher is the president of the Federal Reserve Bank of Dallas, a privately owned regional central bank that operates under the monopoly-granting authority of the United States government. This year, he is a member of the Federal Open Market Committee (FOMC). The FOMC is described as follows on the website of the Federal Reserve System, a government agency.

Fisher is the FOMC’s lone monetarist. He is a disciple of Irving Fisher (no relation), the Yale University economist whose monetary theories were adopted by Milton Friedman. Friedman called him America’s greatest economist. In a previous article, I have argued that Irving Fisher was a true crackpot. He was a racist. He was a leading eugenicist. He believed that science could be used by the government to reverse the negative effects of mentally and morally inferior races that reproduce more rapidly than whites do.

Richard Fisher wrote this laudatory recommendation of Irving Fisher’s monetary theory.


During the first quarter of the 20tth century, Irving Fisher was one of America’s most celebrated economists. But sadly, most Americans today have not heard of him. Even as his reputation among the public faded with the years, his reputation within the economics profession has steadily risen. Fisher (no relation to the undersigned, though I would like to claim access to his gene pool) was a pioneer in many theoretical and technical areas of economics that today are the foundation of central bank policy. One such achievement was the creation of indexes to measure average prices, the bedrock for all current monetary policy.

Ludwig von Mises in The Theory of Money and Credit (1912) spend many pages refuting Fisher’s monetary theories. I can do no better than to parrot Richard Fisher: “But sadly, most Americans today have not heard of him.”

Fisher was correct when he said that Irving Fisher’s reputation has been restored among professional economists. I have described this rehabilitation as an aspect of academia’s war against free market money.

Richard Fisher was a vocal opponent of Run Paul.

As I said, Richard Fisher is a member of the FOMC this year. What is the FOMC? Here is a description on the website of the Federal Reserve System.


The Federal Open Market Committee (FOMC) consists of twelve members – the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

Notice: the government’s members, meaning the Board of Governors, have a majority vote if they vote as a bloc. They usually do. Notice also that the New York FED has a permanent vote. This is where the power resides among the 12 regional FED banks.

With this as background, I will now analyze a January 16 speech by Fisher on banks that are too big to be allowed to fail.

As you read this, remember: Fisher is the closest thing to a free market economist on the FOMC.


Fisher refers to “the injustice of being held hostage to large financial institutions considered “too big to fail,” or TBTF for short.” He describes the situation correctly. The problem comes when he gets to a solution. He calls for a government-enforced break-up of the large banks. He does not believe that free market competition is adequate to do this. In this, he follows his mentors: Irving Fisher and Milton Friedman.


I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people. Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nation’s economic prosperity.

He wants to free up “the transmission of monetary policy.” Whose policy is that? Not the free market’s policy, which is achieved through unregulated open entry and competition. It is the FED’s policy, which has been ad hoc hyperinflating of the monetary base ever since later 2008. There is policy; there is no theory undergirding policy.

Where do they get their privileged status? Where all privileged status originates: from the State. So, why not just revoke this privileged status? Because that would not be scientific, according to Irving Fisher.

In this policy to break up the banks, he stands alone on the FOMC, and he knows this.


Now, Federal Reserve convention requires that I issue a disclaimer here: I speak only for the Federal Reserve Bank of Dallas, not for others associated with our central bank. That is usually abundantly clear. In many matters, my staff and I entertain opinions that are very different from those of many of our esteemed colleagues elsewhere in the Federal Reserve System. Today, I “speak forth my sentiments freely and without reserve” on the issue of TBTF, while meaning no disrespect to others who may hold different views.

Problem: if the other views have led to the injustice of the hostage-taking large banks, disrespect is called for. But Fisher is a well-paid team player. He is a lonely voice, but it is a polite voice.

He leads off with this:


Everyone and their sister knows that financial institutions deemed too big to fail were at the epicenter of the 2007 – 09 financial crisis. Previously thought of as islands of safety in a sea of risk, they became the enablers of a financial tsunami. Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery.

Everyone and “their” sister had no input with Secretary of the Treasury Hank “Goldman Sachs” Paulson in the bailouts of late 2008. The FOMC provided a trillion dollars of newly created fiat money to tide the big banks over. It has subsequently added another $800 billion or so. The FOMC says it will add lots more: $85 billion a month.

When you subsidize failure, you will get lots more failure. It’s a matter of supply and demand.


Congress thought it would address the issue of TBTF through the Dodd – Frank Wall Street Reform and Consumer Protection Act. Preventing TBTF from ever occurring again is in the very preamble of the act. We contend that Dodd – Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better. We submit that, in the short run, parts of Dodd – Frank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy. It has clearly benefited many lawyers and created new layers of bureaucracy. Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address.

I agree. Congress never makes things better. It makes things worse.

Why should Fisher ever trust the judgment of Congress? But he does, as we shall see. He thinks Congress has mandate successful reforms.


Let me define what we mean when we speak of TBTF. The Dallas Fed’s definition is financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction. Such firms capture the financial upside of their actions but largely avoid payment – bankruptcy and closure – for actions gone wrong, in violation of one of the basic tenets of market capitalism (at least as it is supposed to be practiced in the United States). Such firms enjoy subsidies relative to their non-TBTF competitors. They are thus more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome.

This is a good definition. The question is this: How did they get in this position? It is a government-sanctioned policy. They got it because Congress has deferred to the FED on everything, no questions asked.


The phenomenon of TBTF is the result of an implicit but widely taken-for-granted government-sanctioned policy of coming to the aid of the owners, managers and creditors of a financial institution deemed to be so large, interconnected and/or complex that its failure could substantially damage the financial system. By reducing a TBTF firm’s exposure to losses from excessive risk taking, such policies undermine the discipline that market forces normally assert on management decision-making.

I ask: Why not just reverse the policy? The answer: because government’s decision-makers want control.


The reduction of market discipline has been further eroded by implicit extensions of the federal safety net beyond commercial banks to their nonbank affiliates. Moreover, industry consolidation, fostered by subsidized growth (and during the crisis, encouraged by the federal government in the acquisitions of Merrill Lynch, Bear Stearns, Washington Mutual and Wachovia), has perpetuated and enlarged the weight of financial firms deemed TBTF. This reduces competition in lending.

Correct again. So, again, what can be done about it? “Dodd – Frank does not do enough to constrain the behemoth banks’ advantages. Indeed, given its complexity, it unwittingly exacerbates them.” Quite correct. What can be done about it?

Regulation failed. He admits this. Dodd-Frank fails. What to do?

He has a plan.



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