Wednesday, April 22, 2009

AT WHAT POINT DOES RESPECTABLE CRITICISM TIP THINGS?

According to Reuters, Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, is speaking up against the continued policy of "Too Big To Fail." This is pretty remarkable for a central banker, and I think it demonstrates the continuing folly of the Geithner/Summers/Bernanke plans. Hoenig spoke out in March about this, but his comments yesterday were direct and unfiltered:
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

* * *
Actions that strive to protect our largest institutions from failure [such as Geithner's indication that none of the 19 largest banks will fail the so-called "stress tests," see below] 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.
Bravo. This guy is a voting member of the Federal Open Market Committee (the group primarily responsible for setting interest rates, and therefore monetary policy). Will we see some revolt within the Federal Reserve regarding Bernanke's lunacy? I have my doubts, but a wave of discontent is flooding over the Geithner/Summers/Bernanke policy from respected, mainstream quarters. It's too late to turn back the clock on what we've done over the last 8 months (and 25 years), but maybe we can stop some of the madness from continuing.

Anyway, what is the latest lunacy (hard to keep track)? As reported yesterday, Timmy's so-called "stress tests" will be more difficult for regional banks . . . meaning the tests will be easier for the national banking titans like Goldman Sachs and JP MorganChase. Check this out:
The federal bank stress tests rate the individual loans held by big regional banks as riskier than the complex troubled assets held by the industry titans, according to a Federal Reserve document obtained by The Associated Press. That approach could threaten some major regional banks while making the national banks appear in better shape when the government releases the results of the tests next month.

* * *
Under one scenario, the tests assume banks will see "no further losses" on the complex securities, according to the document obtained by AP. By contrast, it estimates that individual loans will lose up to 20 percent of their value. Regional banks are holding more individual loans and fewer of the securities Wall Street giants specialize in — complex derivatives backed by huge pools of mortgage-backed loans and other debt.
Every time a "respected" economist or a central banker speaks out against the Obama Administration's shenanigans, I suspect we get a step closer to stopping this trainwreck. maybe I'm wrong, but I'll hold out some sort of hope that maturity, sanity, and responsibility will win in the end. Again, it's too late to save a deeply corrupted system, but it may prevent utter ruin. We'll see.

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3 Comments:

Blogger Smitty said...

I think it has taken a while for some of these other financial sector experts to emerge partially because there was no media willing to pick up the story. It has been constant noise that has finally given light to other opinions about how the Admin is solving this besides for Krugman. Bravo to this guy.

8:47 AM  
Blogger DED said...

Every time a "respected" economist or a central banker speaks out against the Obama Administration's shenanigans, I suspect we get a step closer to stopping this trainwreck. Maybe I'm wrong, but I'll hold out some sort of hope that maturity, sanity, and responsibility will win in the end.

I think the fact that is guy is part of the fed is a positive sign. I'll certainly hope that his colleagues listen to his words and see the folly of Geithner, et al.

3:47 PM  
Blogger Rickey Henderson said...

What impresses Rickey most about this post it that you've constructed an entire narrative argument within your tags at the bottom. This habit of yours is highly impressive.

4:46 PM  

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