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“Capitalism Without Failure is Like Religion Without Sin”

Posted by Larry Doyle on August 20, 2009 8:54 AM |

Did our markets and economy look into the abyss during the 1st quarter of this year only to be saved by the policies and programs of Uncle Sam? Are we on the road to recovery or have we merely papered over the problems embedded in a host of our larger institutions?

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City

The decision to effectively bail out certain financial institutions deemed ‘too big to fail’ was not unanimous amongst the Federal Reserve governors. The head of the Kansas City Fed, Thomas Hoenig, believes the Fed, Treasury, and other members of Uncle Sam’s family should have allowed more institutions to fail.

Hoenig addressed this topic last Spring in writing Too Big Has Failed. I resubmit his review simply because I do not believe the underlying issues have changed or been effectively addressed. What are these issues?

1. Losses must be identified and realized.

2. Management must be replaced.

Until both these steps are taken, true health can not return to the system.

Hoenig discounts the systemic risk argument put forth by government officials and believes we have chosen a path of slow recovery with an increased cost borne by the American taxpayer. The powers that be are effectively transferring the losses from the institutions to the public.

Hoenig echoes economist Allan Meltzer’s view that “capitalism without failure is like religion without sin.”

Hoenig provides a number of examples of institutions deemed too big to fail in the past and the manner in which their failure was addressed. Suffice it to say, the prior paths are vastly different than the paths taken in this crisis. Additionally, Hoenig provides a blueprint for the future.

I address these points which have been heavily debated over the last number of months because Mr. Hoenig is back in the news today. He is hosting a number of central bankers, including Ben Bernanke and Jean-Claude Trichet of the ECB at a conference in Jackson Hole, WY.

Bloomberg offers insights on this conference, Hoenig Stirs Debate on Bank Failures as Fed Forum Convenes:

The host for central bankers attending the Federal Reserve conference this weekend to discuss the financial crisis is a regional Fed chief who’s making waves with his proposal for letting big U.S. banks fail.

Thomas Hoenig, the Kansas City Fed president, will welcome Fed ChairmanBen S. Bernanke, European Central Bank President Jean-Claude Trichet and dozens of other central bankers to the annual symposium in Jackson Hole, Wyoming, starting today. Hoenig said he hopes the gathering will serve as a model for handling crises in the future.

Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it.

Stay tuned. Many in Washington and on Wall Street would clearly choose to continue the rope-a-dope style of ‘wait and see how things work out’ and stick the American public with the tab. Fed governor Thomas Hoenig has a vastly different opinion.


  • Mountainaires

    Securities Restructuring is the newest financial “innovation” apparently; well, some say it’s “risky business.” I’m not well enough informed to say, but it seems to me that they got away with it so far, why not try it again? Wow. This was a stunning article to me:

    • Larry Doyle


      Thanks for that link. Wall street is running the same plays in an attempt to clean up the mess. Do you think these firms will take their best or quality loans and resecuritize those?

      To a large extent, it will once again be ‘garbage in, garbage out.’ BTW…these deals are not “bought,” meaning customers want to buy them; these deals are “sold,” meaning clever minds on the street are able to package and place them with customers.

      Thanks again.

  • Randy Bowman

    Hoenig is absolutely spot on the mark about finally dealing with the covered-over asset rot and management disease in our “too big to fail” institutions. I was a banker for almost 25 years and the greed and arrogance at the very top was clearly on display for all to see. Of course it was always made apparent that your job was to turn a blind eye and soldier on if you knew what was good for you.

    However, whom amongst this readership truly believes that Hoenig will carry the day when it comes to actually getting our government to commit to doing what’s right and breaking up some of these behemoth institutions? I suspect many of us believed in the tooth fairy at one time as well but we finally came to our senses by age 6 or 7…did we not?

    At first, it was said Obama simply knew he would not yet have the political capital in his first 6 mos. to take on the giant banks and clean house as was needed. However, does anyone believe his political capital has actually increased since taking office? Somehow, constant apologies to foreign powers for America’s behavior and then privatizing corporate profits while socializing the losses by foisting them on the American public seems at tremendous odds with what we all expected from the “change” promised by our new leader.

    It appears to this humble reader that the banks dictate to Obama, not the other way around. The giant derivatives elephant is still in the room and little has been done about him. Sooner or later that elephant will tromp all over those “green shoots” all the fancy accounting put in place to cover up his tracks won’t deter his rampage one little bit.

    Having said all the above, it seems we, the American public, are content to just sit back and watch the circus instead of providing grassroots support to those brave few souls who stand up to be counted in support of doing what’s right. Will we eventually rise up from our fat national behinds and do something productive before we lose it all?

    • Larry Doyle


      You are all over it. I wholeheartedly agree with you on all these points.

      The derivatives market is going to be very, very interesting as there are still plenty of defaults and resulting transfer payments yet to be made. How will that all net out?

      Thanks again.

      • Randy Bowman

        My pleasure Larry.. I enjoy contributing to a blog that I find intereseting, focused and hard-hitting like yours. Others are too busy trying to please all comers and in their attempt to remain politically correct, they fail to achieve lasting value. I just learned of your blog about a week or two ago. I will try to come up with something intresting to contribute once in awhile.

  • Larry Doyle


    Thanks for the plugs. Glad you found Sense on Cents.

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