FORMER FED GOVERNOR: Today's Biggest Banks Know They'll Be At The Top Forever

What would happen if a major U.S. bank called up its favorite regulator and said it was going to have trouble opening tomorrow?

"There's no way the government let's them fail," said former Federal Reserve governor Kevin Warsh. "And the market knows they wouldn't."

Speaking at a Reuters Breakingviews panel alongside Blackstone's Tony James and M&A advisor Paul Taubman, Warsh said that Dodd-Frank hasn't done much to curb "too big to fail," the buzzword that dogged Wall Street and Washington during the financial crisis.

"I'm not afraid of having big banks," Warsh said, adding that we need to have small banks that can go big and big banks that can lose market share without the system collapsing. Instead, today's biggest banks know they'll be at the top forever, Warsh said.

Warsh, who served as a Federal Reserve governor during the crisis, says his former colleague Janet Yellen has the necessary tools to lead the Fed through a trying time.

But the Fed's signature monetary policy tool of quantitative easing is "quickly outliving its usefulness," Warsh said, and he suspects those at the Fed know it.

It remains to be seen whether markets will take to forward guidance - or "open mouth operations" - like they did QE, Warsh said. The Fed will have to calm markets into believing guidance on future interest rates is somewhat equal to $85 billion in purchases.

But overall, Warsh said the Fed - and monetary policy - is "not a good repair shop" for what needs to be done in Washington regarding fiscal issues and tax, trade, and immigration reform.

The president should "spend political capital" to get these measures through, according to Warsh, who added that he hoped the president uses his upcoming State of the Union address to highlight those policies.