Fed’s Hoenig: Recovery Plan Lacks Consistency

While overlooking fundamental problems in the economy, the government has thrown around money to fix the system but has not defined a consistent plan for recovery, Federal Reserve Bank of Kansas City president Thomas Hoenig said in a speech in Omaha late Friday.

“We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions,” Hoenig said, according to prepared text of the speech released by the Fed.

“We are slowly beginning to deal with the overhang of problem assets and management weaknesses in some of our largest firms that this crisis is revealing,” he said. “We have been quick to provide liquidity and public capital, but we have not defined a consistent plan and not addressed basic shortcomings, and in some cases, the insolvent position of these institutions.”

While the preference is not to nationalize these companies, Hoenig said, “we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”

Assailing the “too large to fail” mentality, he noted that in the past, large institutions have been allowed to fail and new leadership was brought in and the companies were re-privatized. When countries have tried to avoid failures, the recoveries have been slower and cost taxpayers more.

To repair the economy, Hoenig suggested taking a consistent, timely, and specific approach to major institutions and their problems, and allowing large institutions to fail if they have lost market confidence and can’t survive on their own.

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