Sense on Cents

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. (more…)