Gary Stern, President of the Minneapolis Fed, must be experiencing a true I told you so moment, today evangelizing before the Brookings Institute in Washington the importance of addressing the all-important "Too Big to Fail" issue which has been the hallmark of the Fedhead's central banking career - so much so that Stern has published several pieces on TBTF. But there will be no celebrating for Stern in knowing that he warned the Fed all along the way to tackle TBTF.

Reuters reports on Stern's comments today:

Years of inaction dramatically raised the economic costs of the U.S. financial crisis, highlighting the need for a new approach, a top Federal Reserve policy-maker said on Tuesday.

"Policy-makers did not prepare for the 'too big to fail' flood; indeed, they situated themselves in the flood plain, ignored the flood warning, and hoped for the best," Gary Stern, Minneapolis Federal Reserve Bank president, said in Washington.

What Stern proposes may be taken as a slap in the face to financial institutions (especially those which have behaved recklessly in the recent past now lining up for two, three, and even four trips to milk to government teat for bailout money and protection from risky investments) but certainly sounds less revolutionary than any Geithner scheme hatched thus far.

Instead, Stern reiterated a plan he floated several months ago to combat the 'too big to fail' issue, centered on early identification of problems, prompt corrective action and clear communication related to maintenance of stability.

This "systematic focused supervision" is aimed at limiting the spillover from failing institutions.

"Our approach does not simply seek to limit systemic risk, but takes the next step of directly trying to address TBTF by putting creditors at risk of loss," he said.

Without the risk of loss, the cycle of moral hazard and excessive risk-taking will be repeated, Stern warned.

I might interject here that "the risk of loss" was always present in the business model - it is simply that these institutions for whatever reason have been allowed to proceed dangerously in spite of such risks and have been continually "rewarded" with more taxpayer backstops and conjured-up Fed funny money to cover said risks.

I give Stern points for a more realistic view of what regulatory bodies must do to prevent a repeat of the current economic collapse - unless he's just trying to sell another book, in which case he's just being a tool. Doubtful.

"The track record of (supervision and regulation) does not suggest it prevents risk-taking that seems excessive. True, long shots occasionally come in, but ... a 15 seed rarely beats a number two," said Stern in regards to recent regulatory suggestions by the current administration.

Did a Fedhead just trash Geithner's scam? It's a beautiful day for regulation indeed.

Stern may be a non-voting FOMC member and certainly the goofiest looking of the Fedheads but he also appears to have his head screwed on straight. Count him my 3rd favorite (after Lacker and Plosser) if he keeps this up. We need some sanity over there.