Fed Rebels Fight The Evil Empire

Earlier I had posted my prediction that the Fed is hopelessly always going to be dominated by banking interests due to regulatory capture.  Fortunately, there are sometimes public servants in government who feel an obligation to do what is best for America even if it might hurt the banks.  Today Federal Reserve governor Donald Tarullo said that the Fed will raise reserve requirements on the eight largest American banks to 6% of their debts.  This is a tremendous step towards reducing systemic risk and eliminating the problem of too-big-to-fail banks.  It could be due to public spirited public servants at the Fed, or it could be due to the smaller banks having enough political clout to reduce the large banks’ advantage for being too-big-to-fail.  It would be interesting to find out the political machinations that led to this result, but in any case, this is welcome news.  Raising reserve requirements was seldom mentioned a year ago, but partly thanks to Anat Admati, Martin Hellwig’s recent book, it has rapidly become the conventional wisdom about how to regulate the banking system to prevent a repeat of the 2008 financial crisis.  It is amazing how fast economics is changing today.  Nobody was talking about raising reserve requirements a couple years ago and it may soon become the law of the land.