Monday, April 05, 2010

Tommy can you hear me

If a guy came up to you and started laying down a cogent, rational argument that creating a system in which giant taxpayer funded bailouts were necessary to keep the economy (barely) afloat would result in continued economic doomsday spiral, some of you would call him a crazy, racist, extremist Tea Bagger.

But you would be wrong. He's actually one of the more respected, clear thinking personalities to come out of the fecal tempest that was the economy over the past two years.

And he happens to be from Kansas City.

No, it's not me (but that's a good guess). It's none other than Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, and he's not a Tommy-come-lately to criticizing the system that resulted in the megabailouts we saw last year. He reiterated his criticism in a recent speech to the U.S. Chamber of Commerce.
In a 1999 speech on financial megamergers, I concluded that, "To the extent these institutions become 'too big to fail and ... uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious. Indeed, the result may be a less stable and a less efficient financial system."

More than a decade later, the only thing I can change about that statement is the government guarantees are no longer juts implicit. Actions during the financial crisis have made this protection quite explicit.
The speech essentially chides regulators and legislators for paying lip service to reforms without actually doing anything. Democrats have controlled the entire government for over a year now, dangling a shiny new fake health care reform act in front of the public so that we would forget about the causes and effects of the biggest financial meltdown in a generation.

Hoenig has specific recommendations that the D.C. crew can ignore, including allowing failing banks to fail (duh) and requiring maximum leverage and loan-to-value ratios.

These are all reasonable and obvious (in my opinion) reforms. Unfortunately, the chance of them being implemented is about the same as me buying the next Justin Bieber album.

Why? Well I'm glad I asked that. The problem is that despite all of the rhetoric about hope and change, there's no benefit in these reforms to the people who run the government right now.

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1 comment:

  1. As it turns out, I had a discussion about this topic over beers in your neck of the woods this weekend, when a friend of mine argued that "too big to fail" allowed industries a "easy landing" and enabled the workers who were displaced greater time to adjust or retool for newer industries. I argued that having safety nets for businesses deemed "too big," essentially destroys nascent industries through absence of capital.

    Of course, the above assumes that the failure will occur eventually. Alas, the government never ceases to be able to reinforce failure and double down on stupid.



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