The United States must break up the big banks, said Thomas Hoenig, president of the Reserve Bank of Kansas City, because the "too big to fail" institutions threaten our financial system.
"Extremely powerful institutions, both financially and politically, undermine the long-term strength of our system and make us look like a financial oligarchy," he told The New York Times.
If the government is going to rescue financial institutions when they get into trouble, he argued, it should limit their activities.
(Associated Press photo)
Many people wonder why they should accept fewer benefits, fewer tax deductions or more taxes when the largest financial institutions always get bailed out, he said.
"We have to bring a greater sense of equitable treatment. When we do that Americans will say, 'Yes, we are all in this together.'"
In 1996 he warned about providing a federal safety net to financial institutions involved with structured finance complicated derivatives, saying in would encourage them to take unwarranted risks, the Times article noted.
He urged government to stop insuring their deposits and urged the Fed to limit their access to emergency loans. "I was trying to point out that these kinds of activities are beyond management’s control," he said, "and that if you want to do this, you cannot have the taxpayers subsidizing it."
Although events have vindicated him, his ideas were unpopular at the time.
He again warned about "too big to fail" institutions in 1999 when Congress dismantled the Glass-Steagall Act, which separated commercial banking and investment banking. Fearing the impact on the overall financial system, governments might be unwilling to shut down large financial institutions.
"To the extent these institutions become 'too big to fail,'" he warned an audience at a banking conference at the time, "and where uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious."
Opposing continually low interest rates, Hoenig is known as a dissenter at the Federal Reserve Board. The nation, he believes, should be consuming less and producing more, but low rates only encourage more consumption.
Hoenig recently said the Fed's low rates subsidies large banks. Banks can borrow at 0.25 percent and buy Treasury bonds with a 3 percent yield, he told a House subcommittee, according to Bloomberg. The Fed, he said, should not be providing guaranteed returns to Wall Street or any special interest group.
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