Without Glass-Steagall, Financial Crisis
Will Soon Re-Emerge, Says Hoenig
Sept. 20, 2012 (EIRNS)—If big U.S. banks are not forced to sever their investment arms from traditional banking in a modern version of Glass-Steagall, they will return to behavior that led to the 2008 credit crisis, said FDIC board member Thomas Hoenig, speaking at the Exchequer Club in Washington Sept. 19.
Hoenig, former chairman of the Kansas City Fed, said in his prepared remarks:
"The behavior and practices leading to this crisis will soon re-emerge, and these highly complex, more vulnerable firms will have an even more devastating effect on the economy. Activities leading to the crisis continue today—and continue to be subsidized—well after the lessons should have been learned."
The nation cannot effect meaningful fiscal reforms, involving taxing and spending policies, if the public does not trust its government and financial institutions, Hoenig said.
"How can we possibly convince Americans that the fiscal steps will be equitable when we bailed out the largest banks and yet they remain—larger, more powerful, and insulated from the market's discipline?"
In a speech on Sept. 14, to the American Banker Regulatory Symposium, Hoenig also called for the separation of banking and brokerage, in the context of saying that the proposal for Basel III capital standards should either go back to the drawing board, or if not, the U.S. should "reject the Basel approach to capital and go back to the basics."
Hoenig's message was echoed in large part in an interview given by Neil Barofsky, the former Special Inspector General for the TARP bailout program:
"The real issue is the potential for another financial crisis, because we haven't fixed the core problems of our financial system. We still have banks that are too big to fail... The big banks are 20-25% bigger now than they were before the crisis. The 'too big to fail' banks are also too big to manage effectively. They've become Frankenstein monsters."
When asked at the conclusion of the interview what it would take for U.S. lawmakers to finally take on the big banks, Barofsky said:
"Some candidates have made reforms like reinstating Glass-Steagall part of their campaigns, but the size and power of the largest banks in terms of lobbying campaign contributions is incredible. It may well take another financial crisis before we deal with this."