Vince Cable is a silly old sausage, but he was right yesterday.


Thomas Hoenig: the lone voice in banking who knows what to to – and what is right.

You’ve probably never heard of Tom Hoenig (left). I hadn’t until yesterday. But after reading the full strength of Ben Bernanker’s um, er, agh Fed statement again, I noticed one dissenting voice on the Fed Reserve committee: Mr Hoenig. Googling the guy made for an interesting experience….and points up yet again what a hopelessly conservative President Barack Obama has been.

In February 2008, Simon Johnson, former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management wrote a post on his blog, “Tom Hoenig for Treasury”. Johnson wrote to suggest that Hoenig should replace Treasury Secretary Tim Geithner should he fall….which at the time, looked quite likely.

Tom Hoenig himself is no academic – he runs the hugely successful Reserve Bank of Kansas City, and is the longest-serving Fed member. He is a deficit and anti-inflation monetarist hawk, but he thinks that if you’re going to QE it, then you have to really pile in and not muck about. Hence his dissent last Tuesday.

But where he differs profoundly from the other Establishment deadbeats around him at the Fed Reserve is in calling for sweeping changes in the U.S. financial system: breaking up the big banks, imploring Congress to establish tough rules so that bank regulators will never again be put in a position to bail out troubled firms, jailing the bad guys – and a whole bunch of other stuff which has ensured he stays firmly outside the tent where the Big Boys play with the President at ruining sorry running the US.

You might therefore think that Hoenig is America’s Vince Cable, but he’s nothing like Vince Cable: he knows banking inside out, and his beef with the Bernanke-Geithner axis is that they don’t know which way is up. He’s an empiricist with ethics who dares to speak the truth about what an unholy and crooked mess the US financial system is.

However, yesterday the Establishment media came down like a ton of bricks on UK Business Minister Cable for doing pretty much the same thing. So I thought it would be helpful for you to read about what Hoenig, a hard-starched US capitalist banker with a morality implant, thinks about the situation Over There. Because it sounds to me remarkably like the situation Over Here.

Tom calls Too Big To Fail an excuse, period. Recently he said, “TBTF has resulted in the greatest concentration of financial resources in this country’s history. That concentration has nearly doubled over the last 15 to 20 years. That’s what we have to end.”

He thinks the Government should simply break up the megabanks, and split them off into their component parts.”I think there’s no reason why we can’t find the right mechanisms to break them into their components…..Underwriting [securities], hedge fund activities, trading for their own accounts — that should be in a separate institution,” Hoenig says, ” in doing so, I think you’ll make the financial system itself more stable. I think you will make it more competitive, and I think you will have long-run benefits over our current system, [which] mixes it and therefore leads to bailouts when crises occur.”

Any of this familiar? Of course it is: it’s what everyone and his dog in Government promised would happen after 2007. But the banks lobbied against it, and won. Imagine that.

He also thinks one rule on capitalisation gives the Big Banks a built-in advantage:

“If the top 20 firms held the same equity capital levels as other smaller banking institutions, they would require $210 billion in new equity or reduced assets of over $3 trillion, or some combination of both,” he said.

Which is sort of what Basel IV would like to do. But the banks are lobbying etc etc (see above).

Is Tom Hoenig right? Let’s look at the numbers.

The top 12 banks in the U.S. control half the country’s deposits. By comparison, it took 25 banks to accomplish this feat in 2003 and 42 banks in 1998, according to a research study conducted by Jason M. Goldberg at Barcap in 2008.

The banks owned by the four largest financial firms in the U.S. — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — collectively account for about 45% of all assets in the U.S. banking system

Those four megabanks collectively hold about $7.4 trillion in assets, according to the most recent regulatory filings with the Federal Reserve. That’s equal to over half of the nation’s estimated gdp.

You may recall previous Slog posts about asking banking and other cash-hoarding multinationals to put their hands in their pockets for the next round of QE. The numbers above tell you why I think that. But for the big banking institutions in America, it’s win-win-win: we can trade with less capital, we can get bigger every year just by being here, and we can get bailed out by all those dumb Washington guys when it all goes head over backside.

There’s one final reason why The Slog likes the cut of Tom Hoenig’s jib. He regularly slams the Federal Reserve’s ongoing policy of keeping the main interest rate near zero. This enables what he calls “unearned profits”, a polite way of saying they can buy Government securities at 3-4% – with the taxpayers’ bailout money, mark you – and make a clear profit at the expense of the depositing customer who is also a taxpayer and without whom etc etc recurring.

Regular Sloggers will know I’ve been banging on about the zero interest rates scam since the day this site was founded. And of course you will recognise the 0% rates scam, because Mervyn King employs the same racket over here.

So while I think that much of the time Vince Cable is a Fluffy old woman with a face to match, he was right to say what he said yesterday. The venom with which the British media went for him on the basis of his Conference speech reminds us what, I suspect, we already know: the Establishment elephant filling the room will hang on to the door-jamb by its fingernails come hell or high water. As both those eventualies are coming soon, this morning – for perhaps the first time since I began blogging seven years ago – I’m beginning to think it’s going to get very unpleasant.