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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.


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