Much of the Dodd-Frank discussion revolves around the economic distortions and disruptions caused by the largest and most complex financial companies, the so-called systemically important financial institutions, or SIFIs.
As we consider the topic of SIFIs, let me ask the following questions: How can one firm of relatively small global significance merit a government bailout? How can a single investment bank on Wall Street bring the world to the brink of financial collapse? How can a single insurance company require billions of dollars of public funds to stay solvent and yet continue to operate as a private institution? How can a relatively small country such as Greece hold Europe financially hostage? These are the questions for which I have found no satisfactory answers. That’s because there are none. It is not acceptable to say that these events occurred because they involved systemically important financial institutions.
Because there are no satisfactory answers to these questions, I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, he future of capitalism is at risk and our market economy is in peril.
-Thomas Hoenig, Pew Financial Reform Project and New York University Stern School of Business, 27 June 2011
Hoenig, like many Fed leaders from the Reserve banks outside of Washington and the money centers in New York, Boston and San Francisco, is more comfortable with safe and boring banking than the higher risk model that brought the global economy to its knees. Hoenig recommends re-imposing Glass-Steagall but allowing banks to engage in underwriting securities and advisory services, and asset and wealth management services as well. This is an important speech criticising the status quo in money, banking and politics from one of America’s most respected regulators. I have embedded a copy of the full piece below.