You didn't hear about it today but they did on Wall Street. Venerated Henry Kaufman penned an editorial in the WSJ that laid bare the future of the Fed, Wall St, and Main St banking. You may read about it here - (all quotes are from this article):
http://online.wsj.com/...
Be forewarned - his editorial is wonkish for the non-finance types. I break the article down in small bites below.
First - a comfortable supposition for Krugman fans and detractors of Bernanke to date:
the Fed favors constraining giant institutions to the point where they would become, in effect, financial public utilities.
That is huge! Financial public utilities? Excellent.
His reasoning? Chris Dodd and Barney Frank will lead Congress to require large banks
to increase equity capital and to limit their activities in proprietary trading and other risky activities.
Great! No (or regulated) derivatives and no massive leverage on YOUR deposits!
Thus no future bailouts!
Now here is the tricky part Kaufman notices. This scenario will cause Too-Big-To-Fail banks to soak up massive capital and force hundreds of community banks deprived of such capital to consolidate and thus become large banks or fail. This is already happening.
All of this would narrow the gap between the Federal Reserve and the political arena. Taken to its logical conclusion, our market-based system of credit allocation would be replaced by a socialized financial system, and the Federal Reserve would become part of it.
Meaning that the Fed and Treasury are already applying most TARP capital 'triage' style to the Big Banks.
Well, this is not the preferred alternative - instead
A much better approach would be to prohibit any financial institution from remaining or becoming too big to fail. This would require that regulators downsize large financial conglomerates. In this process, the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.
So we're back to breaking up the Too-Big-To-Fail banks! With the proper breakup regulations the nine Big Banks will be forced to break up AT&T style and serve their communities rather than feast on securitization and public largesse.
The Fed is on board and Congress is working on it.
Of course this will meet the same kind of resistance health care reform has.
Its time for real financial reform.
This is just the beginning.