Today’s must read speech comes from Federal Reserve Bank of Kansas City President Thomas Hoenig, who warns that the nation’s biggest banks are putting the U.S. capitalist society at risk: Do Systemically Important Financial Institutions (SIFIs) Have a Future?

Hoenig is one of the most outspoken Fed members regarding the systemic risk Too Big Too Fail banks have created. He and Dallas Fed President Richard Fisher have suggested a break-up of the TBTF banks.

Hoenig believes that the massive benefits of the FDIC insurance on deposits makes banks almost utilities. He supports the reinstatement of Glass Steagall and the Volcker rule. If banks want to go beyond their core lending activities or any other Wall Street-like speculation, they need to give up that deposit insurance. Otherwise, taxpayers are guaranteeing every speculative bet made by every bank.

The entire speech is filled with insight and commentary not typically heard from sitting Fed members.

Hoenig’s concern is not for the welfare of any specific bank or even the banking system, but rather for the entire capitalist system itself:

“How can one firm of relatively small global significance merit a government bailout? How can a single investment bank on Wall Street bring the world to the brink of financial collapse? How can a single insurance company require billions of dollars of public funds to stay solvent and yet continue to operate as a private institution? How can a relatively small country such as Greece hold Europe financially hostage? These are the questions for which I have found no satisfactory answers. That’s because there are none. It is not acceptable to say that these events occurred because they involved systemically important financial institutions.

Because there are no satisfactory answers to these questions, I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.”

Hoenig’s comments on the decline in competition and accountability in banking are especially noteworthy:

“The U.S. economy is the most successful in the history of the world. It achieved this success because it is based on the rules of capitalism, in which private ownership dominates markets and individuals reap the rewards of their success. However, for capitalism to work, businesses, including financial firms, must be allowed, or compelled, to compete freely and openly and must be held accountable for their failures. Only under these conditions do markets objectively allocate credit to those businesses that provide the highest value. For most of our history, the United States held fast to these rules of capitalism. It maintained a relatively open banking and financial system with thousands of banks from small community banks to large global players that allocated credit under this system. As late as 1980, the U.S. banking industry was relatively unconcentrated, with 14,000 commercial banks and the assets of the five largest amounting to 29 percent of total banking organization assets and 14 percent of GDP.

Today, we have a far more concentrated and less competitive banking system. There are fewer banks operating across the country, and the five largest institutions control more than half of the industry’s assets, which is equal to almost 60 percent of GDP. The largest 20 institutions control 80 percent of the industry’s assets, which amounts to about 86 percent of GDP.”

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “FRBKC Pres Hoenig: “Big Banks Put Capitalism at Risk””

  1. Moss says:

    Since Hoenig and Fisher do not have the TBTF banks as constituents they can speak the truth. The TBTF banks and the subsequent assistance afforded them have made a mockery of Capitalism, and Democracy even though our Democracy is not close to being representative.

  2. wally says:

    Consolidation is a distinct characteristic of modern capitalism, and it doesn’t only affect financial institutions. It’s just that that is Hoenig’s specialty. You could make similar arguments in the auto industry, oil industry, tech industires, phone industry… and in come cases, bailouts of private businesses have been regarded as essential there, too.
    In fact, that consolidation leading to monopoly or near monopoly – with destructive power – has been a bedeviling factor in the US for over 100 years. At other times we just broke those businesses up (railroads, Standard Oil, AT&T), but now they have gotten smart enough to buy Congress and thus limit the regulators. We live in a world of gutless politicians today. Panderers.

  3. Orange14 says:

    BR, thanks for this. The urge for large institutions to engage in Ponzi economics (the Minsky term) is unavoidable. The only question is when the next bailout will take place. Too bad that Paulson didn’t let Citi or BofA fail in addition to Lehmann. That would have sent a shot across the bow of all the banks.

  4. Fred C Dobbs says:

    Twiddle Twaddle, a sharp mind can make fine distinctions, but the point is good. TBTF Banks are too big for government to take over and manage. Their very existence demonstrates the limits of the current governmental power. It shows they are above government, superior to government, that they are in charge of government, and, while this may be true for the present, it should not be true for long. We voters elect people to run our society, and not let unelected bankers back by Wall Street run our financial system for us. It is an insult to the remainder of the banking system too, who are small enough to fail, and is manifestly unfair. Close the TBTF banks on a Friday p.m. and reopen them on Monday a.m. The same employees will return to work, and the government will be in charge, not the Bankers and Wall Street. Try it. Other countries have, successfully. Put the people back in charge. That is democracy.

  5. rip says:

    Hoenig speak truth. Refreshing. False hope?

  6. Tim says:

    Brilliantly insightful…..but how do we get the Pandering Polidickheads to act? Honestly, how do we do that? Are there any congress members behind this idea?

  7. reedsch says:

    Broken up by who? And how? Does anyone expect such massive concentarations of power to divest themselves willlingly? The logic of consolidation, the Big Fish eating the Small Fish, is almost too compelling, especially in light of the fact that the countervailing (centrifugal) forces have been so comprehensively negated and a counterbalancing philosophy yet to be effectively articulated (Preservation of Capitalism, oh yea, try to get people into the streets with that batttle cry…not to mention the possibility that this IS the net result of Capitalism {see: Big Fish, etc.} )

    分久必合, 合久必分
    The Kingdom long divided must unite; long united must divide.

  8. socaljoe says:

    “How can one firm of relatively small global significance merit a government bailout?”

    When my campaign donations are more important to me than the welfare of society.

  9. DeDude says:

    Who can disagree with this, except the big banksters.

  10. wngoju says:

    Sounds like he read Simon Johnson’s “13 Bankers” (break ‘em up), Jamie Galbraith’s “Predator State” (banks are / should be utilities), and Joe Stiglitz’s “Freefall” (it ain’t Capitalism), with a bit of Yves Smith’s “Econned” thrown in for fun. Good for Hoenig. Instead of complaining about Bernanke, he seems to be saying something useful for a change.