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Hoenig Takes a Stand

It is fair to say that most of us have never heard of – and never hear from – presidents of the 12 regional Reserve Banks that, together with the Board of Governors, make up the Federal Reserve System.

Thomas Hoenig, president of the Kansas City Fed, is a significant exception to this rule; his outspokenness this year has had a major positive impact on the public debate about banks. At 4 p.m. today, with a speech at New York University’s Stern School of Business, Hoenig will elaborate further on his views; wire reporters will be standing by to see if he can, once again, shake up our political and financial establishment.

Hoenig grabbed national attention in March of this year when he argued clearly and publicly that “Too Big Has Failed.” Major U.S. banks, in his view, were insolvent and should be put through a resolution process very much like that used for small and medium-sized banks today and for Continental Illinois in the 1980s.

This was not a radical view at the time, but hearing it from the president of a regional Fed was a shock – and a wake-up call – for many. Hoenig followed up with other powerful statements, part manifesto and part “how to” guide for dealing with large failed banks. Drawing on his extensive professional experience, Hoenig testified to Congress that all financial institutions, regardless of size, must be able to fail. That is, there should be no sense in which, if you manage a bank into trouble, that bank fails if it is small but is rescued at taxpayer expense if it is large enough.

We have, of course, moved beyond the phase of an immediate banking crisis – largely because the government decided to exercise the full scope of its regulatory forbearance powers (i.e., looking the other way in terms of problems that could have been uncovered by the bank stress tests).

So where does Hoenig stand today? Will he continue to press for reform, including the breakup of - or effective constraints on - the largest banks? In his April appearance before Congress and again in a June speech, he stated plainly that anytime you have banks that are “too big to fail,” you will get “an oligarchy of interests”; and that’s not a good thing.

As a voice of calm competence, Hoenig carries considerable weight. But there must now be enormous pressure on him to fall into line with the government in general and the rest of the Federal Reserve in particular.

-- Simon Johnson

By Terri Rupar  |  June 30, 2009; 2:45 PM ET
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