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A Fed Official Takes a Minority View of "Too Big to Fail"

A dissenting view has emerged in the Federal Reserve. Federal Reserve Bank of Kansas City President Thomas Hoenig recently said that "insolvent financial firms must...
April 28, 2009

A dissenting view has emerged in the Federal Reserve. Federal Reserve Bank of Kansas City President Thomas Hoenig recently said that "insolvent financial firms must be allowed to fail regardless of their size, and sheltering such 'too big to fail' institutions risks making the financial crisis worse."

Hoenig's comments came in a speech to the Joint Economic Committee of the Congress. It is not unheard of, but highly unusual, for a high-ranking Fed official to take such disagreements with prevailing Fed policy public, especially to Congress. Hoenig will serve as a member of the Fed's policy-setting committee beginning next year.

"Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations," said Hoenig. "Of particular concern to me is the fact that the financial support provided to firms considered 'too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds." Hoenig added that some of these firms were simply too complicated, and too well-connected in Washington, for the good of the country. 

Top Federal Reserve Official: Let 'Too Big' Insolvent Financial Firms Fail (Reuters 4/21/09)