Thomas Hoenig, President of the Kansas City Fed, has been talking sense for a long time about the dangers posed by “too big to fail” banks. On Tuesday, he went a step further: “Beginning to break them, to dismember them, is a fair thing to consider.”
Hoenig joins the ranks of highly respected policymakers pushing for priority action on TBTF, including some combination of size reduction and/or Glass-Steagall type separation of casino banks and boring banks.
As Paul Volcker continues to hammer home his points, more policymakers will come on board. Mervyn King – one of the most respected central bankers in the world - moves global technocratic opinion. Smart people on Capitol Hill begin to understand that this is an issue that can win or lose elections.
Ben Bernanke still refuses to address “too big to fail” directly and coherently. He needs to make a major speech focussing on bank size, confronting the critics of today’s big banks in detail (if he can) and specifying concretely how banks will be prevented from becoming even larger. Without such a clear statement, he will have lost all credibility even before his second term begins.
The independence of central banks is earned, not written in stone for all time. Mr. Bernanke seriously undermines the Federal Reserve System by remaining essentially silent on this crucial issue.
By Simon Johnson