In a sign of potential discord among the Federal Reserve regional bank presidents, Kansas City Fed Chief Thomas Hoenig testified this morning before the Joint Economic Committee of Congress that 'too big to fail' is false. This is in distinct contrast with Fed Chairman Bernanke's stated objective of not allowing any large bank failures, though it seems likely B-52's statements on 60 minutes were meant to allay fears more than define policy.
Economists Simon Johnson and Joseph Stiglitz testified alongside Hoenig before the JEC, and their comments echoed those of the Fed Governor. More on today's testimony can be found in this outstanding summary piece from the Huffington Post.
Below are a few gems from Hoenig's prepared statement; he becomes a voting member of the Fed next year.
"The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just 'too big to fail.' I do not."
"Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations."
"The use of anti-trust (laws) to break up the largest banks will be essential, this is a very serious, imminent danger that needs to be addressed."
"Actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost."
"Of particular concern to me is the fact that the financial support provided to firms considered "too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds."
"These "too big to fail" institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge."
"In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery."
From HuffPo:
Hoenig declined to specify which banks he was referring to. "I won't say who of the four are insolvent/should be taken in, but I will say if any of the four have insufficient capital to manage their circumstance," he said, "then the government should take a supervisory position."
From Paul Jackson at Housing Wire:
"In surprisingly blunt criticism of both the government and his colleagues, Federal Reserve Bank of Kansas City chief Thomas Hoenig argued that “insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations.” His Congressional testimony Tuesday morning to the Joint Economic Committee provided some of the strongest criticism of the government bailout yet by any major figure within the Federal Reserve."