Kansas City Fed's Hoenig Warns Financial Reform May Be Open to Interpretation

Filed under: no shit, Sherlock.

Kansas City Fed President Thomas Hoenig has a few concerns about financial reform, or, specifically, its inherent loopholability, which leaves the door wide open for the same type of sheisty maneuvering that got us here in the first place. Surely we knew it was a joke already and did not need him to tell us that.

Check out "Hard Choices" from Lincoln, Nebraska:

The legislation primarily hoped to address the public’s concerns about too-big-to-fail institutions—that is, those that are so large and interconnected that they will be bailed out by taxpayers no matter what risks and bad decisions they make because they are too “systemically important” to be allowed to fail. Whether or not too-big-to-fail is addressed by this legislation depends on the leadership at the regulatory agencies when the next crisis occurs. The law now requires that the FDIC take into receivership an institution that is designated as “in default or danger of default” for which the regular bankruptcy process would have systemic consequences. The process for taking this action is complex, requiring multiple regulatory parties to agree, the Treasury Secretary making the final determination with the President’s concurrence, and a court ruling that the action isn’t arbitrary and capricious. This will be an incredible challenge for the regulatory agencies. Recent experience tells us that time is of the essence in a national liquidity crisis. It will be extremely difficult in practice to designate the largest institutions as insolvent, take them over and liquidate. The simple truth is “too-big-to-fail” will not go away easily.

Our largest institutions, even after their poor performance during this last crisis, remain financially and politically powerful institutions. It gives me pause, for example, that after the recent devastating experience of the global banking crisis, regulatory authorities are already backing off initial attempts to strengthen international capital requirements for these largest banks and financial firms. The Basel Committee just announced an agreement to establish for our largest global banks a Tier 1 capital-to-asset ratio of 3 percent. This is a 33-to-1 leverage ratio. Bear Stearns entered this crisis and failed with a 34-to-1 leverage ratio. It leaves a small cushion for error and is a level of risk that I judge unacceptable.

As I consider the outlook for financial regulation, I am hopeful but realistic regarding whether next time things will be different. Regulatory agencies have been given a mandate and authority to strengthen oversight of the largest firms. Success will depend on whether we choose to make hard calls and to use the new authority with integrity, fairness and resolve.

In his speech, Hoenig also takes a subtle jab at Wall Street Journal reporter Jon Hilsenrath, who has demonstrated a suspicious remarkable ability to predict what the FOMC will do just before they do it:

I have been at the Fed through past swings in the business cycle. There is today a familiar theme as I listen to the media, various economists and “market experts.” They say we are entering the era of a “new normal” in which we have to accept high unemployment and low income growth and that interest rates will remain at zero indefinitely. They warn that deflation is a serious risk and that the U.S. could become another Japan, which must be avoided at all costs. Before this week’s FOMC meeting, The Wall Street Journal wrote that the Fed would add more stimulus into the economy—including the purchase of long-term treasuries. It turns out that reporter was remarkably prescient.

I think I smell a rat and I'm not the only one.

Lastly, he reminds those of us without a PhD in economics that easy money and bubble-blowing brought this crisis to our doorstep, a process that took years to take hold and one that will take quite some time to reverse. Of course, reversing the effect of cheap money would require a commitment to monetary responsibility and we all know that ain't happening over at the Fed any time soon (as evidenced by this week's FOMC statement).

We are recovering from a horrific set of shocks, and it will take time to “right the ship.” Moreover, the financial and economic shocks we have experienced did not “just happen.” The financial collapse followed years of too-low interest rates, too-high leverage, and too-lax financial supervision as prescribed by deregulation from both Democratic and Republican administrations. In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001. If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring.

Anyway, nothing new here and Hoenig's thoughts confirm my worst suspicions: "Reform" is little more than a rewrite of the former loopholes that the unwashed masses caught on to. Shock and awe, I tell you.

"Horrific" is such a beautiful word for it.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.