Rulemakers at the Fed Need to Come Out of Their Ivory Tower

 |  Includes: BAC, C, GS, JPM
by: Tom Brown

As I told Betty Liu on Bloomberg TV the other day, Jamie Dimon is my hero!

"Has anyone bothered to study the cumulative effect of all [the new Dodd-Frank-mandated rules and regulations the Fed is heaping on the banking industry]?" Jamie asked Ben Bernanke in Atlanta yesterday, "And do you have a fear, like I do, that when we look back and look at them ... they will be a reason that it took so long that our banks, our credit, our businesses and most importantly, job creation started going again?"

A reasonable question! And coming from Jamie, one that invites a special level of candor. Bernanke's answer was astonishing. The FT reports:

Mr Bernanke replied: "I can't pretend that anybody really has ... We don't really have the quantitative tools to do that." But the Fed was trying to produce rules that "do not unnecessarily impose costs or unnecessarily constrict credit", he said.

Heaven help me if I'm tempted to wonder whether Ron Paul might be on to something, after all. Did the chairman of the Federal Reserve really say that the central bank of the greatest economic power on earth "doesn't really have the quantitative tools" to estimate what the real-world economic effects of it recent orgy of rulemaking might be? And that he "can't pretend that anybody" at the Fed has even tried?

As I say, astonishing. You'll give me no argument, I assume, if I venture the view that the Federal Reserve is a very big bank. It's even bigger than the lesser lights in the private sector that it oversees, such as, say, Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC). Yet the Goldmans and Morgans of the world have all sorts of quantitative modeling tools at their disposal, and the intellectual firepower to use them reasonably skillfully. The people at the Fed are just as smart and their computers are just as fast. And, if anything, they have access to lots, lots more data. Yet the Federal Reserve isn't up to the same sort of quantitative effort?

This, unfortunately, explains a lot. First, there was the nutty swipe-card rule the Fed has put forward, that would turn the banking industry's debit-card business into a money-losing public utility. Then this past weekend came Fed governor Dan Tarullo's crazy idea that big banks might have to carry capital ratios of as high as 14%. That would essentially make large American banks obsolete. Based on what Bernanke told Jamie yesterday, the regulators at the Fed persist in coming up with crazy rules like this because they simply haven't given the matter a whole lot of thought. Wonderful.

Ideas and proposals like the ones the Fed has promulgated lately will have the effect of weakening the country's banking system, not strengthening it. One might have thought that the people at the Fed would have taken such real-world implications of their rulemaking into account. But they apparently haven't. This is not encouraging.

What do you think?