Dallas Federal Reserve President Richard Fisher delivered a May Day gift to Occupy Wall Street.
Fisher, who has argued repeatedly for the end of too-big-to-fail banks, on Tuesday posted a presentation on the Dallas Fed's web site explaining why the biggest U.S. banks are dangerous and what should be done about them.
And most notably he called for those banks to be punished if they put the economy at risk again, in a way they weren't the first time around -- an oversight that is helping to fuel the Occupy protests today.
In the presentation, Fisher and Dallas Fed research director Harvey Rosenblum argue that the existence of banks that are so big that they essentially hold the economy hostage makes financial crises inevitable, because "implicit government support undermines market discipline."
Banks take bigger risks when they know the government will be forced to bail them out, in other words, particularly if the bailouts come with absolutely no strings attached, as the 2008 bailouts did.
Fisher and Rosenblum say there should be "a set of harsh, non‐negotiable consequences" for banks looking for bailouts in the future, including:
Removal of CEO and top executive team, replacement of Board of Directors, and making all employment / compensation and bonus contracts null and void as a precondition for taxpayer assistance. No golden parachutes.
Clawback of any bonus compensation (cash and stock) paid to the top management team in the two years prior to receiving federal assistance.
Fisher and Rosenblum also say that industry consolidation has made the financial system more dangerous, pointing out that the top five banks today control 52 percent of the industry's assets, compared with 17 percent in 1970.
"Human weakness will cause occasional market disruptions," they write. "Big banks backed by government turn these manageable episodes into catastrophes.”
Small banks, meanwhile, continue to struggle, in part because they don't have the same implied government guarantee that big banks do, which usually translates into lower borrowing costs for the banks and an easier time raising capital. The struggles of smaller banks have been a drag on the economic recovery, Fisher and Rosenblum argue.
They write that the Dodd-Frank financial reform act doesn't go far enough to make banks smaller or safer, though it does require them to hold more capital and have more ready cash in case of an emergency.
Fisher, a conservative, says he doesn't think more regulation is the answer -- he would prefer to "encourage" banks to "restructure and streamline," using market forces to whittle the banks down to more manageable pieces. He writes that this process has started already, with Bank of America and other too-big-to-fail banks selling off overseas operations and other businesses.
He acknowledges the industry's common complaint, the one they used when they got too big to fail in the first place, that "economies of scale and scope" help lower costs and reduce efficiencies and might hurt the "customer experience."
But he says the benefits to the economy and to society of having smaller banks far outweighs that. And there are lots of disgruntled big-bank customers, paying ever-rising fees, who would argue that they're not seeing the benefits of any "economies of scale."