Hoenig Talks Sense On Casino Banks

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

23 thoughts on “Hoenig Talks Sense On Casino Banks

  1. For the attentive, reasonably intelligent citizen, no one in government has any credibility at all. Does the elite not get that yet?

  2. As far as those within the system go, it would be good if the phalanx of this idea keeps gathering mass, holding together, moving forward.

    But I won’t believe any of it’s real until I see some real action. So far the McCain/Cantwell proposal is in the realm of a stunt.

    Needless to say, “resolution authority” is a scam (and so was Swedish-style “nationalization”, which in retrospect we should look at has having been a “public option” type gambit; if really politically pressed they would’ve pretended to be going that route, to buy time and wear down the cowards among the opposition).

    No one will ever resolve any big bank instead of bailing it out. For as long as it’s politically possible for these rackets to buy the Congress and regulators so that measures like monopoly breakups and/or Glass-Steagal restoration are politically impossible, it’ll also be impossible for any resolution authority to be imposed in the actual crisis event.

    (Besides, they already have full resolution authority under the PCA, and we saw how well that worked. There’s a whole cottage industry denying this even exists.)

    Either the racketeering power exists, in which case it’ll always seek to aggrandize itself, or it doesn’t.

    That’s why the only solution is to forcibly smash it and never let it recoalesce.

  3. Well, some good news in the morning. Love it. Sounds like we can include Thomas Hoenig with Alan Blinder as a gentleman who would make a good Federal Reserve Chairman. Maybe he can take Bernanke away from the “dark side” of the force??? I’m entitled to my little fantasies aren’t I ???

    Great stuff Simon. Keep punching to the gut. Jab! Jab!

  4. You have such a shallow understanding of these issues that it’s embarrassing. Which of your so-called “arguments” should Bernanke address? The one where you said that with the resolution authority that Treasury proposed, “the problem of moral hazard … would at once be forgotten”? Or the one where you said all banks should be capped at $250bn in assets? Or the one where you said banks should be capped at $500bn in assets? Or the one where you said the real problem is prop trading?

    First make a coherent argument (if you can, which I seriously doubt), and then maybe Bernanke will consider responding. But as someone who’s been at this for a lot longer than you, I can assure you that Fed chairmen don’t respond to ranting professors pandering to the Ignorati. Face it, Simon: you’re not on Bernanke’s level. Hell, you’re not even on Tom Hoenig’s level, and Hoenig is a career minor-leaguer.

    Truly, I pity your students. They are not getting their money’s worth.

  5. It is nice to see “casino banks” in the title if not in the story. Bank gambling as naked insurance would not pass the test of a legitimate book-keeping framework of rules. The transactions simply would not enter balanced because the value of each trade is an unknown.

    Legitimate book-keeping seems to me a sensible tactical approach to chipping away at what is a colossal banking danger.

    Legitimate gambling casinos use chips for a good book-keeping reason. The casino needs to know that they are not spending more to buy their chips back after a session than they received for selling the chips to the gambling customer.

    When banks use dollars as chips and then set their gaming rules to win/win, and then top that off by hiring gamblers to play for the house, this is illicit activity in anybody’s court of law.

    Why not study a little book-keeping history and chip away at the colossal problem by making the casino bank, if they must gamble for a living, follow a lawful business policy? Why should they be treated more favorably than Vegas?

  6. O.K., Simon’s inconsistent and you’re frustrated with him. I’d like to know what a person who’s been around as long as Volcker thinks, especially if it differs. What’s your analysis of the present situation and your proposak for remedy if any is warranted?

  7. Exactly, quoting Mr. Hoenig (Pres of the Kansas City Fed) “Capitalism is a process of failure and renewal, and a “too big to fail” policy undermines this renewal and makes the financial system and our economy less efficient.”

    I would agree that capitalism is the better economic model but it could also be argued, there are aspects of socialism that can play a positive role in how a society functions – government bailouts notwithstanding. Wall Street probably hates any socio-economic system that doesn’t pander to their inner greed, power and control or any other psychological high.

  8. Respond to Volcker’s critique, then inform us what have been ‘at’ lo these many years. Are you on the gravy train?

  9. David Dodge a former head of the Bank of Canada memorably said, capitalism will emerge changed from the 2008 financial meltdown.

  10. Peter:

    As a member of the ‘ignorati’ I can assure you that we plebs are quite capable of smelling rank arrogance when we come across it. Simon has his moments to be sure, but he has done a fine job keeping us all up to date.

    Meanwhile you, who have been at it a long time apparently, contributed nothing to my education. Would you care to? Could you list for me all of Simon’s arguments so I can go read them myself? Or are you too busy? Or do you simply think the ‘ignorati’ should play no role in this democracy of ours?

    My unwashed contribution is that Bernanke needs to go for one simple reason: he was running the ship when it hit the rocks. It’s called taking responsibility. Something our elites, and in particular the economics profession, Peter, don’t seem to grasp. As for TBTF: once a bank gets too expensive for us to afford we should break it up before it has the chance to break us up.

    I apologize in advance for disturbing your supreme thoughts with my mindless chatter.

  11. I think the problem is that the Repugs need to see that they are wrong about everything and the Rubin Demos wrong about almost everything. That ship(the Titanic) will be hard to turn. In the meantime the rest of us are almost certainly permanently screwed.

  12. Tippy why are we letting something that is so obviously corrupt, and so dangerous, go on? I’m a little confused. Do regulators understand the potential for danger?

  13. I read Bernanke’s speech on Sunday night. I thought to myself could this person be this dumb? I found not an intelligent word in the entire speech. I thought to myself, again, is this the Hermann Goebbels new millennium method of gaining power? Bernanke has the power of a King; his speech is looking for more power.

    “Systemic capture” seems to say it best. I’m amazed.

  14. For quite some time I have felt that Thomas Hoenig would be a more than adequate replacement for BB, and now, hearing this, even more so. If we don’t clean up our wildly out of kilter economy (vastly over-weighted in finance), we will pay an even heavier price in terms of our ability to compete in the global economy. Blessing, Simon, for the fine work, as always.

  15. True that Russ and Dan Palanza. Casino Banks??? “Bandit Banks” more accurately. Crimes were, and are being committed, – grotesque distortions of costs and revenue, unreasonable and curious lack of disclosure and accounting. I ask all the erudite economist and financiers – “would you could you pretty please” – explain how exactly the entire “derivatives” “innovative products” markets are not exceedingly complex PONZI schemes?

    PONZI schemes are illegal?

    Do these products and markets constitute PONZI schemes?

    From my pedestrian perspective, they do – the “bandit banks”, the TBTF predatorclass “vipers and thieves” own the government, – and the people are ruthlessly abused and insidiously enslaved. And the banks and the bankers make out like bandits from the “blood, swet, and tears” – and the mortgages, social services, and pensions of the people.

    Crimes! If this kind of insipid finance defines America – heaven help us, because we are party to crimes!!!

    We know the Fed and the Treasury and all the lower minions manipulate the flow and substance of information. The people are told one fairytale, while the vipers and thieves posing as our leaders are shielding and cloaking the nefarious activities of Goldman Sachs and chums. We know they LIE to us.

    The people are robbed and abused!!! Predatorclass oligarchs rule as Olympians. Godz among men, untouchable, immune, shielded, favored, enjoying the luxuries of imponderable wealth, and never accountable for any crime or failure.

    History proves – The Masters of the Universe were in fact- not so masterful. Both the bush and Obama governments’ shielded, protected, advanced, and ‘bailedout’ the TBTF bandit banks, and the predatorclass management, – all of whom FAILED, or were outright criminals!!! – and all of whom should in a perfect world be held accountable for CRIMES!!!

    Alas we sadly do not inhabit a perfect world.

    Distribute $13tr, or 13 thousand billion dollars to every American taxpayer, – and I suspect the economy would rebound. But no!! Our socalled leaders dished $13tr into the offshore, offsheet accounts of the finance sector alone, .01% if the population – the den of vipers and thieves that caused, exacerbated, cloaked, and profited wantonly from the most severe economic crisis since the Great Depression.

    Lessons were learned. Most of them wrong. Thieving and swindly became expert and somehow tolerable, – but education, manufacturing, social services, and scientific research are starved.

    If this is the America we support and defend, – count me out!!

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  17. Actually, I believe Sheila Bair at the FDIC has credibility right now.

    There may be a few others.

  18. The “Commodity Futures Modernization Act”, thank you Phil Gramm, exempted a bunch of the derivatives which are currently weapons of mass destruction from insurance law.

    But it also exempted them from *gambling law*. The state gambling regulators had already noticed that they explicitly satisfied the legal requirements to be pure gambling.

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