Too big has failed

This is the name of a speech made by Kansas City Fed CEO Thomas Hoenig which is creating quite a stir. He makes the following points in his speech:

Turning to the current crisis, there are several lessons we can draw from these past experiences.

  • First, the losses in the financial system won’t go away – they will only fester and increase while impeding our chances for a recovery.
  • Second, we must take a consistent, timely, and specific approach to major institutions and their problems if we are to reduce market uncertainty and bring in private investors and market funding.
  • Third, if institutions — no matter what their size — have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.

There are varying explanations as to why the Obama Administration has not gone this route. I believe it is because of cognitive regulatory capture. Read another viewpoint here:

Do Americans Want to Nationalize the Banks? – Five Thirty Eight

Read the full text of Hoenig’s speech in pdf form below. One thing you will note in his speech is a reference to

“The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed to fail.”

This is the first time I have heard a Fed official confirm that the Countrywide and Merrill deals were both facilitated by government.

Too Big Has Failed – Thomas Hoenig, Kansas City Fed

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