Over the weekend, Federal Reserve Chief Ben Bernanke said what others have been saying for quite some time: Get rid of financial institutions that are "too big to fail."
Now Kansas City Federal Reserve Bank President Thomas Hoenig has said much the same to the U.S. Chamber of Commerce in prepared remarks:
As a nation we have violated the central ten[e]ts of any successful system. We have seen the formation of a powerful group of financial firms. We have inadvertently granted them implied guarantees and favors. We must correct these violations. We must reinvigorate fair competition within our system in a culture of business ethics that operates under the rule of law. ...
Although banking legislation in 1991 specifically tried to limit the Federal Deposit Insurance Corporation's (FDIC) ability to protect failing banks and their creditors, regulators could make an exception for large institutions whose failure might pose a threat to the economy or to financial stability. As a result TBTF was embedded in our legal framework.
The growth of large institutions has distorted the framework of the financial system in ways other than just TBTF. Larger and more complex institutions have become more difficult to regulate and to supervise. ... It has been very difficult for examiners to get large banks to tighten their operations, especially when the banks were generating tremendous profits. ...
...we must improve the regulatory framework, which may involve reversing some of the deregulation that occurred in the 1990s.
As would be expected, there's nothing radical or draconian in Hoenig's prescription, nothing that can be remotely labeled socialist, more's the pity. Just a version of the Volcker rule - a separation of brokerage and private investment functions, a ban on financial holding companies being involved in hedge funds, and more transparency.
Although the Restoring Financial Stability Act of 2010 contains some of these prescriptions, it does not go nearly far enough to regulate financial institutions. The National Community Reinvestment Coalition provides an excellent critique of it here. But because it does include some measure of what Hoenig suggests, you can expect the Republicans and some Democrats to spend a portion of their spring break trying to figure out how to dilute the bill even more. Without some constituent pressure and soon, they'll get away with it both now and when the fall-out from the next economic crisis batters Americans who don't live among the Top 10%.