The Case for Simple Rules and Limiting the Safety Net
In this essay in the CATO Journal, thomas Hoenig writes that for the last 100 years, government officials and bank CEOs have insisted that new policies, rules, and laws—combined with greater market discipline, resolution schemes, and enhanced supervision—would ensure that future financial crises, should they occur, would be more effectively handled. In the United States, the creation of the Federal Reserve System and Federal Deposit Insurance Corporation are examples where such assurances were given to the public. More recently, the FDIC Improvement Act of 1991 and other legislation were intended to end public bailouts of failing banks and, in particu- lar, prevent the moral hazard problem inherent in “too big to fail.” Such assurances seem even more significant following a U.S. Treasury (1991) study that found that “too big to fail” resolution policies used for six of the largest banks cost taxpayers more than $5 billion (in current dollars). If only the cost of the six largest bailouts in this recent crisis were just $5 billion. Unfortunately, it was many times greater.