If the rest of the leadership at the Fed came out in support of breaking up firms deemed too big to fail, then I would have a far easier time supporting its getting the role of systemic risk regulator. If its directive is to make sure firms don't grow too large, break them up if they already are and prevent mergers when systemically risky firms might be created, then I would be less worried about its other conflicts of interest. Of course, Congress would also have to give the Fed its blessing to have that power.

Could this happen? The House version of financial regulation that passed does contain some language providing break up authority. The Senate's original version did too. But it's unclear at this time whether whatever bill that the Senate finally comes up with will still contain this authority. Given the challenge Banking Committee Chairman Christopher Dodd (D-CT) faces in getting anything controversial in there, I kind of doubt we'll see break up authority included.

And that's a problem. Even though larger firms could create failure plans to detail how they would be wound down by a resolution authority if they ran into trouble, there's no guarantee these plans would actually work. It sounds great in theory, but only in theory. Until the economy enters another financial crisis, it's impossible to know if these failure plans will really hold up when the economic landscape looks very different.

Breaking up systemically risky firms is the most direct way to address the too big to fail problem. It would be messy, but it's also the only way we can have some certainty that firms can collapse without taking the entire economy down with them. It's nice to see another Fed president join the cause, but unless others follow, it might not much matter.

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