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Bailout of banks should never happen again: Fischer

Stanley Fischer, the nominee to be Federal Reserve Chair Janet Yellen’s top lieutenant, said governments must devise measures to ensure taxpayer dollars are never used again to save a failing bank.

“It is critical to develop now the tools needed to deal with potential future crises without injecting public funds,” Fischer said in the text of remarks prepared for a speech today in Stanford, California.

Efforts to avert future crises are driven “by the view that we should never again be in a situation in which the public sector has to inject public money into failing financial institutions in order to mitigate a financial crisis,” he said.

Fischer, 70, has spent much of the past quarter century involved in global policy making as a former World Bank chief economist and top official at the International Monetary Fund. Yellen — sworn in as central bank chief last month — urged the White House to ask Fischer to succeed her as vice chairman.

Fischer, speaking at Stanford University while receiving this year’s Stanford Institute for Economic Policy Research Prize, declined to discuss current events pending his confirmation by the Senate. Still, he affirmed his support for efforts to combat “too big to fail,” or the perception that the largest banks could count on a government bailout.

“Based in part on aspects of the Dodd-Frank Act, real progress has been made in putting in place measures to deal with the ‘too big to fail’ problem,” Fischer said, citing tools including stress tests of banks and new capital requirements.

Fischer in his speech drew on lessons he learned combating economic crises while at the IMF and the Bank of Israel. Among them: It’s better for governments to act quickly when banks need to rebuild capital instead of waiting for the institutions to restore solvency.

“One important reason that the US economy recovered more rapidly than the Eurozone is that the US moved very quickly, using stress tests for diagnosis and the TARP for financing, to restore bank capital levels,” he said, referring to the Troubled Asset Relief Program. “Banks in the eurozone are still awaiting the rigorous examination of the value of their assets that needs to be the first step on the road to restoring the health of the banking system.”

The US government created the TARP during the 2008 credit crisis and disbursed about $423 billion to help bail out companies including banks and automakers. Fischer spent much of his early career at the Massachusetts Institute of Technology in Cambridge, where he earned his economics Ph.D. in 1969 and later taught future Fed Chairman Ben S. Bernanke and European Central Bank President Mario Draghi.