Bernanke testimony reveals solution to TBTF – ask pigs to fly

Bernanke opted for a solution for TBTF which will work when pigs can fly.  He relies on bureaucrats to pull the regulatory trigger to close TBTF banks, which itself may cause all other TBTF banks to simultaneously collapse based on the dynamic of interconnectedness.

The bureaucrat class he relies on is the same class which could not finger Bernie Madoff even when they had four free kicks on goal and they were told where to look.  Its the same class which failed to confirm whether there was wherewithal behind CDO obligations, a’la AIG.

In addition to finding a solution to TBTF by asking pigs to fly, Bernanke expects pixie dust will fall from the sky on the TBTF banks causing them to spontaneously downsize.  He has faith in pixie dust, notwithstanding that TBTF banks lobbied furiously to stem Congressional efforts to limit their size.  Apparently they opposed legislation to limit their size so that they could voluntarily downsize on their own initiative.

Megabanks Will Shrink, Bernanke Tells Financial Crisis Commission, Yet Doubts Over Too Big To Fail Remain

“The most important lesson of this crisis is we have to end Too Big To Fail,” Federal Reserve Chairman Ben Bernanke testified before the Financial Crisis Inquiry Commission. “My projection is that, even without direct intervention by the government, that over time we’re going to see some breakups and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures, and regulatory pressures as well.”

He told them that the breakup of the big banks will happen naturally. In effect, it will be too expensive to be Too Big To Fail, and so the firms will get smaller.

Bernanke echoed that point during his testimony when he said regulators could make firms unwind to make dealing with their potential failures “feasible.”

“There’s been a concentration of size and strength, obviously a disturbing trend,” Georgiou said. “It doesn’t give one a great deal of confidence” that regulators will be able to allow these firms to fail should they be near failure, he added, “but we hope for the best.”

Prominent critics of the bill’s perceived shortcomings in ending Too Big To Fail — like Simon Johnson, a former chief economist of the International Monetary Fund and a contributing editor for the Huffington Post — have pointed to the byzantine structures of massive international lenders like Citigroup and JPMorgan Chase. It’s nearly impossible to shut down a U.S-based megabank with extensive overseas operations, they warn. Regulators will thus feel pressure to simply keep them alive.

Asked if he thought regulators would be able to shut down one of the nation’s largest banks if its failure could cause other big banks to fall, Douglas Holtz-Eakin, another crisis commissioner, responded with a question of his own: “Are you going to pull the trigger and wind down the six largest financial institutions simultaneously?”

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