Top Fed Official Changes His Tune

September 1, 2008 by admin · Leave a Comment 

Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, made headlines today with a controversial speech in Beunos Aires. Hoenig posited that, rather than trying to help out large financial institutions which are in danger of failure, the Fed should simply let these businesses fail.

This approach is one which many pure economists may agree with, but it is hard for the common man among us to understand. The common knowledge, and indeed the theory the Fed has been operated under recently, says that some institutions are simply “…too big to fail.” One prime example is Bear Stearns and Co. which the Fed rescued in March. The company has since been bought out by JPMorgan Chase and Co..

Hoenig’s concern seems to be that as more and more mergers take place, that there are more institutions which are under the “too big to fail” category. The Fed can not save them all.

According to Hoenig, the perfect economic equilibrium of financial and price stability to come naturally, and he is prepared to watch major institutions fall, with all the repercussions that may follow.

The Fed has yet to make any official response to Hoenig’s speech.