The Oracle of Kansas City

By James Kwak
Many of you have probably already seen Shahien Nasiripour’s interview with Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the most prominent advocate of simply breaking up big banks. (Paul Volcker is more prominent, but his views are more nuanced; the famous Volcker limit on bank size, it turns out, would not affect any existing banks, at least as interpreted by the Treasury Department.) It largely elaborates on Hoenig’s positions that we’ve previously applauded in this blog, so I’ll just jump to the direct quotations:
On megabanks:
“I think they should be broken up. . . . We’ve provided this support and allowed Too Big To Fail and that subsidy, so that they’ve become larger than I think they otherwise would. I think by breaking them up, the market itself would begin to help tell you what the right size was over time.”
On whether the United States needs megabanks to compete globally:
“That is a fantasy — I don’t know how else to describe it. Our strengths will be from having a strong industrial economy. We will have financial institutions that are large enough to give us influence in the markets but not so large that they’re too big to fail. . . .
“The United States became a financial center not because we had large institutions but because we had a strong industrial economy with a good working financial system across the United States — not just highly-concentrated in one market area.”
On the Dodd bill and regulatory discretion:
“There’s still this desire to leave discretion in the hands of the Secretary of the Treasury, and while I understand that desire — because you never know what the circumstance is going to be — the problem is in those circumstances you always take the path of least resistance because of the nature of the crisis.
“You don’t want to be the person responsible for the meltdown, so you take the exception and you move it through.
“But if you had a good firm rule of law, and the markets knew. . . there were no exceptions . . . you would be in the long run much better off.”
There was one thing I didn’t agree with. Hoenig seems to say that if you break up the big banks, the market will determine what size they should be. I think that if you broke up the big banks and left them to their own devices, they would reaggregate into new megabanks — precisely because of the funding advantages that you get from being too big to fail. So I think there needs to be a size limit that is actively policed by the government.