Posted: 07 Mar 2009 01:10 PM PST
Nemo alerted me (after in turn being alerted by Calculated Risk) to a recent paper by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, brilliantly entitled “Too Big Has Failed.” Here is an excerpt:
[T]he current path is beset by ad hoc decision making and the potential for much political interference, including efforts to force problem institutions to lend if they accept public funds; operate under other imposed controls; and limit management pay, bonuses and severance.
If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and then micro-managed, as we are now doing under TARP, with a set of political strings attached.
You could call this a free market argument in favor of temporary nationalization.
Here’s another:
[F]or failed institutions that have proven to be too big or too complex to manage well, steps must be taken to break up their operations and sell them off in more manageable pieces. We must also look for other ways to limit the creation and growth of firms that might be considered “too big to fail.”And my favorite:
[S]ome are now claiming that public authorities do not have the expertise and capacity to take over and run a “too big to fail” institution. They contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for the restructuring process. We should ask, though, why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of “toxic” assets they created and coping with a raft of politically imposed controls that would be placed on their operations?This is coming from the head of a Federal Reserve member bank, not some blogger working on too little sleep. Calculated Risk speculates about the significance:
This strikes me as a break in the ranks, and although Hoenig is speaking for himself (not the Fed), this might indicate a change in direction.
The paper is only 15 pages and is very accessibly written.