Top Economists Say ‘Too Big to Fail’ Mentality Must Change

Federal Reserve Bank of Kansas City President Thomas Hoenig, told the Joint Economic Committee of Congress on Tuesday that bailing out insolvent financial institutions and troubled firms is prolonging the recession and increasing its cost. Non-viable institutions should be allowed to fail, Hoenig said.

“The first principle is to properly understand our goals and correctly identify the problems we are attempting to solve…Rather than letting the market system objectively discipline the firms through failure and stockholder loss,” Hoenig said of the current approach to bailouts, “we tend to micromanage the institutions and punish those within reach”….”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….Our actions so far risk prolonging the crisis….” Hoenig added. [Kansas City Fed]

Two other skeptics of the government’s approach to saving troubled financial firms, Columbia University professor and 2001 Noble prize winner Joseph Stiglitz, and MIT professor Simon Johnson echoed Mr. Hoenig’s sentiment. They also warned that spending massive amount of taxpayer dollars on behalf of struggling big institutions risks deteriorating U.S. productive capacity in debt – which in turn could impede an economic recovery.

“We have little to lose, and much to gain, by breaking up these behemoths, which are not just too big to fail, but also too big to save and too big to manage”, Stiglitz said. [WSJ]

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