The Bankwatch

Tracking the consumer evolution of financial services

Success depends on failure| Kansas City Federal Reserve

Thomas M. Hoenig, President and Chief Executive Officer, of the Kansas City Fed offers up some sobering and pragmatic advice for allowing market forces to deal with banks.

Success depends on failure| Kansas City Federal Reserve

The first principle is to properly understand our goals and correctly identify the problems we are attempting to solve. This may sound  obvious. However, when we are  in the middle of a crisis where more than a half million people are losing their jobs every month, it is tempting to pour money into the institutions thinking that it will correct the problem and get credit flowing once again. Also, rather than letting the market system objectively discipline the firms through failure and stockholder loss, we tend to micromanage the institutions and punish those within reach.

He goes on to identify a systematic approach to addressing the US bank situation based on the Continental Illinois failure in 1984 in which he was involved along with 347 other bank failures between 1982 and 1992.

Let me make two final points.
First, the debate over the resolution of the largest financial firms is often sensationalized because it is framed in terms of nationalizing failed institutions. It is also pointed out that government officials may not be effective managers of private business concerns.
In response, I would note that no firm would be nationalized in this program. Nationalization is the process of the government taking over a going concern with the intent of operating it. Though a bridge institution is the most likely outcome when a large financial firm fails, the goal is for the firm to be reprivatized as quickly as possible. In  addition, subject to regulatory agency oversight, the bridge firm would  be managed by private sector managers selected for their experience in operating well-run, large, complex organizations.
The second point is related to the complexity issue, which is that it would be hard to find enough people with the required knowledge, experience and skills to fill the open positions. Going back to the Continental Illinois example, we were able to do it then. More generally: The United States is a vast country with a tremendous amount of management resources in a broad-based economic and industrial system. If the United States does not have the talent to run these firms, then we are much worse off than I thought. I refuse to accept that conclusion.

Written by Colin Henderson

April 10, 2009 at 00:26

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