Thomas M. Hoenig of the Kansas City FED on Financial Institutions: “Too Big Has Failed”

Another economist who joined Simon Johnson and Joseph Stiglitz in presenting testimony before Congress’ Joint Economic Committee earlier this week was Thomas M. Hoenig, currently President and Chief Executive Officer of the Federal Reserve Bank of Kansas City.

In a recent paper, Hoenig evaluates actions thus far taken to ease the financial crisis and suggests some “alternative solutions,” based on his familiarity with similar past crises, such as those experienced by Japan and Sweden. 

Generally, Hoenig observes that market confidence and credit has not been restored by reductions in the Federal Funds Rate, bailouts, TARP (the Troubled Assets Relief Program), etc., because large institutions (those described as “too big to fail”) seem unwilling to fully acknowledge their losses.  But these losses, he argues, can not be avoided; and the ad hoc solutions thus far employed are really “every bit a process that results in a protracted nationalization of ‘too big to fail’ institutions.”  

In order to restore confidence and credit as soon as possible and thus limit the ill effects suffered by the broader economy, a framework for a resolution process should be developed whereby these large, insolvent institutions are taken over by the government and existing obligations addressed; in addition, much like Simon Johnson, Hoenig believes over-large institutions should be sold off “in more manageable pieces.”       

Once again, this previous post includes links to some recent works on the financial crisis owned by Greensboro Public Library.

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