By James Kwak
Many of you have probably already seen Shahien Nasiripour’s interview with Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the most prominent advocate of simply breaking up big banks. (Paul Volcker is more prominent, but his views are more nuanced; the famous Volcker limit on bank size, it turns out, would not affect any existing banks, at least as interpreted by the Treasury Department.) It largely elaborates on Hoenig’s positions that we’ve previously applauded in this blog, so I’ll just jump to the direct quotations:
On megabanks:
“I think they should be broken up. . . . We’ve provided this support and allowed Too Big To Fail and that subsidy, so that they’ve become larger than I think they otherwise would. I think by breaking them up, the market itself would begin to help tell you what the right size was over time.”
On whether the United States needs megabanks to compete globally:
“That is a fantasy — I don’t know how else to describe it. Our strengths will be from having a strong industrial economy. We will have financial institutions that are large enough to give us influence in the markets but not so large that they’re too big to fail. . . .
“The United States became a financial center not because we had large institutions but because we had a strong industrial economy with a good working financial system across the United States — not just highly-concentrated in one market area.”
On the Dodd bill and regulatory discretion:
“There’s still this desire to leave discretion in the hands of the Secretary of the Treasury, and while I understand that desire — because you never know what the circumstance is going to be — the problem is in those circumstances you always take the path of least resistance because of the nature of the crisis.
“You don’t want to be the person responsible for the meltdown, so you take the exception and you move it through.
“But if you had a good firm rule of law, and the markets knew. . . there were no exceptions . . . you would be in the long run much better off.”
There was one thing I didn’t agree with. Hoenig seems to say that if you break up the big banks, the market will determine what size they should be. I think that if you broke up the big banks and left them to their own devices, they would reaggregate into new megabanks — precisely because of the funding advantages that you get from being too big to fail. So I think there needs to be a size limit that is actively policed by the government.
The Baseline Scenario 
“there needs to be a size limit that is actively policed by the government.”
I’m pretty much of a newcomer to this entire debate so would someone clue me in on how to do this.
Asset caps? Higher core requirements? Limiting the scope of banking operations a la Glass-Steagall? Harsh language? Something else? All of the above?
I should like to see Hoenig’s other proposals to help ensure that we develop a “strong industrial economy”, beyond breaking up TBTF banks and tightening credit.
“I think that if you broke up the big banks and left them to their own devices, they would reaggregate into new megabanks — precisely because of the funding advantages that you get from being too big to fail. So I think there needs to be a size limit that is actively policed by the government.”
Economic Darwanism in reverse?
This is Nectar from the Gods, whatever. You know I often comment on J’s but James won’t let me comment on J’a because I am a J-phile which is sometimes MISINTERPRETED as being a “Anti-J’mite” which is not true in my case. So I’ll just say Hebrew and hope it ‘scapes the filter. When they had the audit on all the money Switzerland and Austrian Banks stole from the Hebrews do you know who they chose to lead the audit??? Volcker. Hebrews are super super super intelligent and will not choose an amateur to do the audit. WHAT DOES ALL THIS TELL US???? Volcker is freaking super intelligent and a giant and the best at his job.
Now here’s one for Boomin’ Grandpa.
HEY HOENIG!!!!–Listen to this song before you figured out the meaning of it. Quick man–battle stations!!!!
HEY HOENIG!!!! This video is your colleagues on the current system. Greenspan’s system dependent thugs are looking for you now. Think “Lord of the Flies”, you’ll get a rough idea the situation.
James Kwak… “they would reaggregate into new megabanks — precisely because of the funding advantages that you get from being too big to fail. So I think there needs to be a size limit that is actively policed by the government.”
No James you are wrong in your thinking, probably because you haven’t yet studied enough about this subject… but don´t worry, you´ve got talent and I sincerely believe you will get to understand it, fairly soon.
The reason the big banks got to be megabanks had nothing to do with them being perceived as “too big to fail”, a quite recent evolution, but it had all to do with the minuscule capital requirements allowed by the regulators to the type of operations more typical of the big international banks than of the small national banks.
And so, much more important than putting a size limit, it is to get rid of the too-big-to-fail growth hormones.
I was wondering about that,too. Would building Hoenig’s strong industrial economy necessarily involve some sort of industrial policy and if so how would that work?
Maybe a tax credit and/or subsidy policy targeted towards selected high-tech industries(which raises the potential problem of “lemon socialism”). Or a policy aimed at strengthening education and infrastructure across-the-board and letting the private sector do the rest.
annoying and out of place; this cheapens an excellent site
Yes, a Darwinistic turning the tables, shock and awe in reverse, is exactly what we need, and the only thing which can work.
If the people want to survive as a people, if they want democracy to survive, if they want freedom to survive, then they must adapt to new circumstances.
Where a species is under assault by a homicidal parasite, it either fights back to eradicate that parasite (including relinquishing old adaptations which are by now maladaptive; I can think of a certain fundamentalist ideology which applies – also some political arrangements), or it perishes.
So to Smash the Banks would be Darwinism at its finest. Because as things are freedom, democracy, justice, morality, humanity, are all being selected out.
But for some reason those most enamored of competition metaphors want this competition to occur only among the parasites themselves. The victims are never supposed to be allowed to “compete” back.
I’d like to turn the tables and fight back with all the ferocity nature can muster.
This is the very reason I felt Tom Hoenig should replace Bernanke. In so far as the banks naturally “right-sizing” themselves, this is possible, but only if other rules (like Glass-Steagall) are used, as well as strict capital requirements, no favoritism at the FED discount window, no hidden derivatives, etc. And, I note that Hoenig, at least in these quotes, doesn’t specify how big the remainder banks should be. I would suggest no more than 100 billion or .5% of GDP. He’s right, we didn’t get strong because of mighty banking institutions. The largest banks globally are actually stalling the world’s economies by suppressing economic activity that benefits sectors other than banking. Sad, but true. Ours do the same by soaking up dollars and converting them to (useless) assets. This is the very reason why TR took on the large industrial trusts. They were coopting the economy and stifling others.
This one goes out to K.C. and all the Missouri area……..and Dalian….. and Shenzhen ……………and Zinan
“strict capital requirements, no favoritism at the FED discount window”
Of course the under, let us say 8 percent capital requirements, must disappear slowly, with time, but more than “strict capital requirements” what we most need are capital requirements that do not discriminate among client/assets and which imply no favoritism to the bigger banks.
Strong industrial base would first mean to make it expensive to produce overseas and sell in the US.
Tax-cuts towards corporations? I’d strongly qualify that by saying, reduce the regulatory and taxation burden for small business–give them a quasi-free pass for the first few years, if you like.
Then, I’d move against the management class by giving shareholders rights over the boards of directors.
Last but not least, if I were to cut taxes anywhere for the big business, that would be for any unit of US-produced output that sells on the international markets.
Mr. Thomas Hoenig is talking sense; chances are that he’s always thought, if not done, so! Which means that the Wall Street imposed Omerta has been broken. We’ll hear more and more the voice of reason. I cannot believe the land of +300million is populated by lunatics…
Strong industrial base would mean asking our banks to renew their role of risk-takers allocating capital to the most productive opportunities instead of having them pursuing the AAAs because that is what the regulators have decided they do by giving them very low capital requirements to finance what is perceived as low risk by some credit rating agencies… though no one is very little clear what low risk really means… low risk to default? … is that all there is to it?… we will have enough of that stability when in our graves.
Russ, get out of my head :-)
He said as he linked back to his site. See, I can take my link off my name–and you’ll never post if you didn’t post your link. You’re like a bank CEO. Your rear hanging out of your trousers critisizing poor people that didn’t pay their mortgages in Cleveland OHio.
Agreed. The traditional role of banking has been to allocate scarce capital to smaller (read riskier) businesses to enable them to grow. Banks that did this well, grew in tandem with the companies they helped to succeed. Organically.
In our modern days of megabanks, this George Bailey-style banking model has gone away in favor of smaller banks’ emulating the mega bank models of portfolio management. This enables further consolidation in ‘banking’, but doesn’t fill the vacuum left on the growth investment side.
In too many cases, the default ‘organic’ growth model for small and mid-sized banks today is to emulate the megabanks, thereby making themselves attractive aquisition targets – not drivers of our economy.
How many times have you heard people comment that ‘the banks only lend to those who don’t need the money’ in the last decade? Anecdotal, but meaningful evidence.
VC/PE loans in terms that further suck the oxygen from growth companies.
In a vaccum of productive pro-growth business loans to enable up-n-coming companies, the organic growth in our economy has been replaced by a large and comical game of banking pocket pool.
Traditional banking services are necessary component to a growing economy. So, not surprising that our economy is tanking.
Note: I read ‘strong industrial base’ to encompass service industries that facilitate growth – like technology implementation services, business formation services, management services, traditional banking services, etc… and I do not read it as a veil for protectionism or a plea to return to a manufacturing-only economy.
Without a flourishing, well-regulated, traditional George Bailey-style boring banking system – our economy will remain in the crapper for a very long time.
Still annoying and out of place.
Your point is does not contradict James’s. There are funding advantages to being bigger. People will lend to you for less because they are more confident in your ability to repay.
Of course, that is true even if no one believes that the bank would be bailed out by the government, which, frankly, before 2008 I don’t think many people actually believed that any individual wall street (i.e. non-GSE) institution would be bailed out.
I think the banks will re-aggregate because mergers generate huge fees for investment banks, lawyers, and accounting firms.
Cap investment banking fees and I bet you’ll see fewer mergers.
Yes there might be funding advantages of being bigger… but those were not so prevalent so as to make the big the current TBTF. For that we have to thanks in the first hand the regulators with their capital requirements… which by the way in Basel II even went as far in as to allow the TBTF to use their internal risk-models to set their capital requirements… and currently we have to thank for that those wanting to help out against the TBTF creating special arrangements for the TBTF and thereby making them officially TBTF.
I’m in favor of reimposing Glass-Steagel. The risks financial institutions are now allowed to take are ridiculous. What’s the big deal about SOMEBODY, Congress, regulators, establishing simple, straightforward rules limiting bank activity? Retroactively. On everybody.
Finance workers love gambling. They are compulsive gamblers. They must be kept from the tables.
It might as well be 1792. Hoenig sounds just like Madison and Jefferson in his complaints about Hamilton’s financial policies.
I’m not sure how the risk of lending to small businesses can be dealt with in a banking climate characterized as “boring.”
Therefore, the money in small business either comes from government(s), or risk-friendly banks.
Anyone else sees the slippery slope?
Capitals are by nature coward so the real slippery slope for the society is that there is insufficient risk-taking.