In a blunt assessment of what went wrong and what is not being done about it, Kansas City Federal Reserve Bank president Thomas Hoenig Tuesday night blamed a lot of the financial crisis on the Gramm-Leach-Bliley legislation that allowed an “astonishing” concentration of banking power, and he repeated his view that the Obama administration’s reform plan is on the wrong track.
On monetary policy, Hoenig — who is not a Federal Open Markets Committee voter this year — said the Fed will have to tighten sooner rather than later but didn’t define how soon or too late. On the economy, the debt overhang and a still-faltering banking system are slowing down the recovery, according to Hoenig. He added that he does not see a threat of a double-dip recession.
Hoenig cranked up his criticism of the biggest banks and said Congress and the administration are acting too slowly in tackling the primary failing of the U.S. financial system — how Gramm-Leach-Bliley broke down the barriers between commercial and investment banking and allowed fewer than two dozen of the biggest banks to aggregate more than 70% of the nation’s banking assets.
“Consumer confidence is rebounding and we are starting to see improvement in business and manufacturing,” Hoenig continued. “Additionally, yield spreads between low-risk assets, such as Treasuries, and higher-risk assets are narrowing.”
Removing the “extensive policy accommodation” will be a “delicate process because removing too soon could return the economy to recession while waiting too longer will foster an inflationary spiral,” he said.
While bit supporting a tightening now, he said: “My experience tells me that we will need to remove our very accommodative policy sooner rather than later.”
Hoenig’s main theme was to push for what he considers most vital in the crisis aftermath — the speedy creation of a mechanism to put big banks that should be failing into receivership or conservatorship so their managements can be fired, shareholders punished, and the possibility of bad behavior eliminated. The rest of regulatory reform can wait, he said.
— Market News International