An institutional flaw at the heart of the federal reserve

Our take: The ever brilliant Simon Johnson argues for why the governance rules of the New York Federal Reserve that helped launch the central bank 100 years ago no longer work in a world of too-big-to-fail banks.

This is partly an anachronistic holdover from the original Federal Reserve Act of 1913 and reflects the political milieu of that time, in which bankers had to be persuaded to accept a central bank . . . But it is also an

all-too-accurate reflection of where we stand today with regard to global mega-banks and the large, nontransparent and highly dangerous subsidies they extract from the rest of society by being too big to fail.

The people who run global mega-banks get the upside when things go well they are paid based on their return on equity unadjusted for risk, so they prefer a lot of debt piled on top of very little equity. When things go badly, the downside is someone elses problem in the first instance, typically, the Federal Reserves.

Read more about Dimon's position on the Federal Reserve Bank of New York on The Baseline Scenario.