Thomas Hoenig is my new favorite board member of the Federal Reserve. Although he is not a voting member yet, he is expressing ideas that make some sense to me. He made a statement earlier this week saying that protecting insolvent financial firms was going to make the crisis worse.
I could not agree more. The government stepping in and propping up institutions that they are not really familiar with is a huge waste of money and resources. They pump money into companies and banks without any real investigation into what they are paying for. These are failed operations. If we don’t let these companies fail, what is the incentive to run an efficient business? Not to mention, why should you or I pay to prop up someone that doesn’t know what they are doing?
You can argue that the problem is too widespread to put a number or expectation on, and I will agree, but there isn’t much incentive for change if these companies think that the government is going to save them.
If we allowed these “too big to fail” companies to fail, it would be over with quickly. We can’t be sure how big the mess would be, but it would be over. We could rebuild the system carefully and correctly. The same money that is being invested in these failing institutions now, would go much farther.
We have to have some guts and some financial prudence to get through this mess. No one knows how big the hole is, and until some of these large firms are allowed to fail, there will not be any truth in any markets they trade in, or in asset prices.