Tom Hoenig: "This System Distorts The Market And Turns Appropriate Risk-Taking Into Recklessness"

Tyler Durden's picture

From Thomas Hoenig, president of the Kansas Fed from 1991 to 2011, and current vice chairman of the FDIC, who deconstructs the state of the US financial system which can be further summarized as follows: think Titanic moments before it hit the iceberg.

Recently, Attorney General Eric Holder testified before the Senate that there is a reluctance to pursue legal actions against these firms for fear of destabilizing the markets. The subsidy and its effects remain entrenched and continue to distort the free market.


This form of corporate welfare allows the protected giants — those “too big to fail” — to profit when their subsidized bets pay off, while the safety net acts as a buffer when they lose, shifting much of the cost to the public. For example, the conglomerates can cover — and even double down on — their trading positions for extended periods using insured deposits or discounted loans from the Federal Reserve that come with the commercial bank charter. The subsidy often allows them to stay in the game long enough to win the bet, but it supersizes the loss if the bet should finally fall apart.


This system distorts the market and turns appropriate risk-taking into recklessness. The result is a more concentrated and powerful financial sector — and a more fragile economy. The way to return the financial services industry to the free market is by separating trading from commercial banks and by reforming the so-called shadow banking sector. Government guarantees should be limited primarily to those commercial banking activities that need it to function: the payments system and the intermediation process between short-term lenders and long-term borrowers.


Non-banking financial activities such as proprietary trading, market making and derivatives should be placed outside of commercial banks and so outside of the safety net. Trading and investment companies would be free to engage in these activities; they would be subject to the forces of market discipline and have greater incentives to innovate and thrive.


None of these reforms can be effective unless the shadow banking system is also removed from the safety net by ending the subsidy for money-market funds and the short-term institutional loans known as repurchase agreements or “repos.” Money-market funds should be required to represent themselves for what they are: uninsured investments, the value of which changes daily. Similarly, repo lenders that accept mortgage-related collateral should be subject to the same bankruptcy laws as other secured creditors.


* * *


It is time to return our financial system to one in which success is no longer achieved through government protections but, rather, through innovation and competition. While trading and investment activities are vital parts of the financial services industry, there is no economic or social rationale for protecting and subsidizing them. Financial services firms are in the business of taking risks. Our country shouldn’t attempt to take the risk out of the system. But we should absolutely stop subsidizing it.

It is, indeed, time to return to such a renormalized system, but unfortunately this will never happen until the grand systemic reboot finally takes place, this time wiping out the central banks who have doubled down in going all in on preserving the failed status quo. Then, and only then, can things be back to normal. Until then, the best anyone can do, is to allow them to reach their terminal unwind as rapidly as possible.

Full article in the WaPo, h/t jb

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
CH1's picture

A Fed guy really wrote this?

Life is full of surprises.

Alexandre Stavisky's picture

This system puts too great an emphasis on the future, in truth, believes too strongly in future acts of monetary merit than is prudent.  This, while diminishing the significant creations of the past, perpetually devaluing any hoarded past labour.  Synchronously, this system takes much too little collateral, cannot stand honest accounting, overestimates the values added by innovation and risk-taking and find contemptible steady manly task doing through time.  In short, it encapsulates the worst behaviour of economic animals, it looks for the large, quick profits made by skimming bubbles and mining overenthusiasm while gouging away false profits when inevitable despair returns.  It despises careful planning, long well-spent hours of toil, modest but perpetually accreting reward and judicious investment not pointed primarily to fast wins.  It loves rumours and innuendo which whip an investment crowd into frenzy, it prefers the cleanliness (but ultimately sterile nature) of paper instruments and oversubscriptions and manipulation of the counterfeit.

It vilifies farmers, mechanics, labourers--any, whose pedestrian skills require a constancy of honesty and daily punctual long-houred devotion for modest maintenance.

This system has dishonest money, dishonest accounting, dishonest allocation of rewards, dishonest credit.  The full faith and credit of the sovereign is no longer simple or pure; it is not an all-encompassing integrity.  Instead those who transact in this system or hold any claim from it must be ever vigilant as it continuously innovates upon its honour until finally, it is nothing more than dishonour.  We are very close to the bottom sediments that a system whose pillars are fraud and force and subtlety and connivance holding up arches of moral bankruptcy and racketeering, crash to become.  Moral ambivalence which is an unseen quality has infected the sphere of material creation so profoundly, that all who have eyes no longer believe any foundations firm.  All is turpitude!  Lost is incentive to the great.

Lordflin's picture

Great societies have always reached a state of such hubris as to deny wisdom... even hate it. What is different in our time, the world has reached such a state all at once and together. What happens from here is unknowable as it is unprecedented... What is unknowable is not wether our fate is to be grim... but rather how grim.

I pray there is something withstanding upon which to build... I pray this for my children's sake as most of my life is behind me.

lotsoffun's picture

my dear alexandre,  if one had any qualifcations, any quantities, any qualities one wouldn't be dazed infront of the television most of ones life and what time left one had wouldn't be eating macdonalds and shopping at walmart.  they (the powers) simply can't have free thought and education.  if you left the t.v. alone, your wife might have interest in making apple pie while you were pruning the trees that produce them. and lebron james makes xx million dollars a year because he is useless.  the more useless, the more valuable.

television replaced regligion.  it's very funny actually.  kardashian as venus.


Id fight Gandhi's picture

His resignation letter will be due this week. "Spend time with his family" and such.

RafterManFMJ's picture

Just checked Wiki, and this Thom character is still alive! Things at the top must really be chaotic right now.

btb2010's picture

Ex FED - left last year

cdntrader's picture

Well, is not at the Fed anymore... but as the Vice Chairman of the FDIC, the Cyprus banking bail-in must have been a rude wakeup call (!)

Radical Marijuana's picture

Yeah, CH1, the patently obvious ways that the established systems are flying apart are provoking all kinds of surprising statements from mainstream morons, who never could have been imagined to say things like that before! However, they are still mostly morons.

2007 was the last normal year. We are never going back to normal again.

All the bullshit "solutions" that I am aware of are based on somehow going backwards, to make things become like normal before ... That would be more laughable if it were not that those kinds of Black Sheep are the only people who appear to propose solutions which even remotely get close to understanding what the problems are.

The real problems are due to the central fact that money is backed by murder, while the combined money/murder systems have become global electronic fiat money frauds, backed by the threats of force from atomic bombs. The biggest problem of all is that thousands of years of Neolithic civilization, which have made and maintained all our social habits, and psychological attitudes, were based on being ABLE to back up lies with violence. For thousands of years, we could fight to exhaustion, until there were survivors who had won the fight. The idea that we are now in a situation were everyone would lose is NOT our social reality, despite that being the reality of weapons of mass destruction.

NOTHING in the past prepares us for a future where the weapons are trillions of times more powerful, so that actually using those weapons to back up the frauds will become almost omnicidal. We are living in a surreal world where science and technology have advanced by many orders of magnitude, but the main way that has manifested is to enable the social pyramid systems to become globalized. We are still the first generation to grow up with atomic bombs, and global electronic communications. So far, the only things those have done is enable the already established social systems of force backed frauds to be amplified to astronomical sizes. However, so far, there has been nothing to prove that backing up runaway fiat money frauds with the threats of using weapons of mass destruction is going to ever go back to being "normal" again!

I certainly agree that there is quite a level of surprises emerging in what gets published about the financial systems. (Another example was the recent article about the deal between China and Australia, to trade without going through the US dollar.)

However, I would be extremely surprised to ever see anything published which integrated enough of the range of the different exponential growth curves, all rushing towards the future at the same time. In my opinion, the more that one tries to integrate all of those trends together, the more readers one would lose by doing that.

People want to day dream that things will somehow go back to "normal." While the most mainstream of the morons think that the old normal is continuing, and could continue, the wide range of other, less mainstream, morons propose their preferred ways to go backwards, to make things become "normal" again.

I think that the future is going to keep piling up "surprises" on top of bigger "surprises," for as long as we survive that process. In my opinion, the closer one approaches whatever the deeper radical truth may be, the smaller the audience becomes willing and able to listen to that kind of presentation. Therefore, I would be very surprised to see anything remotely close to the radical truth being published in any significant way.

We are overwhelmingly still dominated by the mass media, which are pretending that things are still normal, or will soon be back to normal. The only significant alternatives that I am aware of are those who discuss the degree to which things no longer are normal, and then, suggest how to go backwards, in order to get back to being normal. Mixed up in that are the hybrids, like this article, which is somewhat flabbergasting, in that it was written by an apparently previous insider to the established systems.

So far, nobody that I am aware of addresses the fact that we are NEVER going back to anything like normal was during the whole history of Neolithic Civilization. Discussing whatever Translithic Civilization might be is something which would have such an infinitesimal audience, that nothing yet that I am aware of has ever been published, and so, that would surprise me even more, just by existing at all!

stant's picture

the band playing is called road rage titanic. thier next album is called  lets back up and hit it again

AG BCN's picture

Stay clear of boats Tom. 

spine001's picture

Unbeliavable, finally somebody who doesnt have a clue about the consequences of stopping the music. In summary all hell would break loose!!!

Either this guy is a terrorist or he is seriously dellusional...

A hard 3rd alternative is that he's been touched by the new pope's words and he sees the end in sight or simply that he is positioning himself for what he sees coming next as inevitable, thus wanting to go on record as someone who cautioned Congress and tried to fight it.

Until the next time, 


bank guy in Brussels's picture

No, the Titanic sinking in 1913 would not be the first American 11-Sept-type false flag operation

15 February 1898 - Battleship Maine is blown up in Havana Harbour, falsely blamed on Spain, to start the late 1890s Spanish-American war and US seizure of Spain's colonies ... leading to brutal American massacre of Filipinos and other human rights crimes

'Remember the Maine!' the Americans said as they stole territory and murdered

The great American writer, Mark Twain, was utterly disgusted at the Spanish-American war and its 11-Sept-type hysteria

Twain said the US flag should be changed to the Jolly Roger, as the USA was nothing more than a pirate nation in its foreign policy ... Still true right down to today

Urban Redneck's picture

There is neither proof nor evidence the Maine was sabotaged.

Before it was "Remember the Maine", it was "Remember the Virginius".

Cuban-Americans arming and attempting a naval invasion to overthrow the government in Havana -- 100 years before the Bay of Pigs, and 30 years before the Maine incident.

The urchins of Foggy Bottom had been eyeing and plotting to pick up Cuba and a bunch of other Spanish real-estate since before they stopped worrying about the foreign policy of Jefferson Davis.  

It could have been sabotage, and it could have been a negligent or unfortunate accident, regardless, the immoral and coveting elements of the US capitalized on the opportunity.

The DUMBING DOWN of history just faciliates its repetion by retards who never bothered to learn better.

If you want a conspiracy, why not check out the dates of the settlement of accounts (IN GOLD) between the Spanish Court and the US Treasury, and all the transgressions that were ignored while the diplomats were haggling over the various amounts gold to be transferred, and the speed with with thos same diplomats jumped the least transgression as soon they had the gold in their possession?  

DavidPierre's picture

 MEXICO 1913

The U.S. Ambassador to Mexico, Henry Lane Wilson, a corporate lawyer and close associate of the Rockefellers and Guggenheims, orchestrates a vitriolic propaganda campaign and the destabilization, overthrow and murder of the first democratically-elected President of Mexico, Francisco Madero.

In the U.S., the propaganda campaign against Madero is led by racist warmonger, yellow media baron and Nazi propagandist-to-be William Randolph Hearst, who had acquired seven million acres of land stolen from murdered Mexican peasants thanks to the U.S.-supported Diaz dictatorship.

Under Madero, the seven million acres "owned" by Hearst would have eventually been returned to its rightful owners. In Mexico, the hate campaign is led by the fabulously named newspaper, El Imparcial, owned by, you only have one guess.....the Rockefellers.

Madero had won the Mexican Revolution, deposing the U.S. and British-supported dictator, Porfirio Diaz. Diaz had ruled brutally for thirty years and sold the country out to foreign interests, primarily American and British, while being allowed to steal a fortune for himself, his relatives and his cronies. His regime committed genocide on a grand scale, enslaved millions and stole hundreds of millions of acres of land from the native people, giving rise to the Revolution.

Francisco Madero won the first democratic election in Mexican history after he ousted Diaz.

Madero was, from the point of view of the U.S. ruling class, that most dangerous of all God's creatures, a believer in genuine democracy who implemented a wide range of democratic reforms including true freedom of speech, true freedom of the press and genuine democratic elections.

Aside from taking the radical and dangerous step of implementing real democracy within shouting distance of the United States, which might give the huddled masses in the U.S. some naughty ideas, Madero’s greatest crime was imposing a three centavo (one and a half cent) per barrel tax on oil exports from Mexico, largely by Standard Oil (Exxon-Mobil) and the Texas Oil Company (Texaco), which infuriated the billionaire Rockefellers and their clubmates in the U.S. ruling class.

After Madero’s kidnapping, his wife pleads with Ambassador Wilson to spare her husband’s life.

Wilson, who is in the midst of a party at the U.S. Embassy celebrating freedom, liberty and demockracy on the birthday of slaveowner, land speculator, mass murderer and ethnic cleanser, George Washington, refuses... exploring the heights of hypocrisy by saying it “would be improper” for him to intervene “in Mexico’s internal affairs.”

After Madero’s cold-blooded murder and the torture and murder of his brother, Gustavo, the installation and recognition of the brutal Huerta dictatorship and its death squads is orchestrated by Ambassador Wilson.

Thousands of Mexicans loyal to Madero are slaughtered in the coup which deprives Mexico of the only democratic government it has ever had, plunges the country back into revolution, and leads directly to the wholesale destruction of the country and the deaths of almost two million people, about one eighth of the entire Mexican population.

prains's picture

you forgot the part where the american govt drove the guns down for them to use......oh wrong story, sorry

Urban Redneck's picture

The was plenty of literal gun-walking during the Texas War of Independence, the practice wasn't necessary in the Mexican-American War because the US Army was deployed.  The diplomatic cables between the US and Spain from the summer and fall of 1895 have almost weekly accusations of everything from US to Danish flagged vessels being used to walk/run guns from the US to Cuba, and the US envoys employ just about every excuse under sun for not intervening, down to "sorry the gunship that we have docked in that port is down for repairs..."  There were a few token "detentions" by revenue authorities who conveniently seized guns and ammunition, but strangely never enough evidence for a conviction.

And Richard Olney was the Attorney General right before Grover Cleveland appointed him Secretary of State.

Rinse, Repeat.

Santayana had a valid point.

Ghordius's picture

excellent thread - at the end it's really irrelevant if the Maine was sabotaged or not - the cat had it's paw ready for the mouse peeking out of it's hole - as in Afghanistan/Iraq

"vitriolic propaganda campaign" mhhh... what kind of them do we have today? and who sponsors them?

from the point of view that Rupert Murdoch has, last month was a very good month, particularly when it comes to Cyprus

Urban Redneck's picture


The press has turn a profit... except for the subsidized organs of official State propaganda.  Adolph Ochs was no less politically motivated than William Randolph Hearst, he just had different political motivations.

The problem is the sales job the institutions of the press have all done on the benevolence of the State, and the failure of both education and experience to teach the masses that the State operates for its own benefit, and the preservation of certain vested interests, and NOT that of the citizenry.

I hate lazy sourcing via Wikipedia, but there is a great from Olney in there on co-opting the ICC to serve big business at the expense of the sheeple  -

"The Commission… is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things.… The part of wisdom is not to destroy the Commission, but to utilize it."

Although it was Murdoch's WSJ that in 2009 dug up the 1892 quote from Olney, which had been published in at least a dozen books on US history in the 1960s and 1970s.


Ghordius's picture

sure, the press has to turn a profit, eventually - and yet what Murdoch's does goes beyond that - his is a cultural war, too, and against every entity capable to set up limitations to his or other cartels

The Dancer's picture

But he is an outsider now...not an insider...and who knows, maybe he was never truly ever on the real inside ofthe NWO....

ghandi's picture



Renormalize by marking real assets to market!

And hanging the banksters.



Pseudo Anonym's picture

the banksters' agencies have 2 billion bullets at their disposal to make sure the banksters dont end up hanging when the plebs finally realize they've been robbed

NoWayJose's picture

If Hoenig sees a cherry tree falling down along the Potomac River, and yells 'Timberrr', will anyone in Washington hear him?

IamtheREALmario's picture

Yes, yes, yes ... but to get there we need people in charge of things that care of more than just their own pocketbooks and legacy. Those who have the power to create and distribute money assume they also have the right and power to determine our destiny. Fortunately or possibly unfortunately each of our destinies is personal ... and most of us don't give a damn about the assumed despots, their roles in the game and their legacies.

kito's picture

fuck you you think the pitchforks and torches will pass you by because youve "suddenly" developed religion????  you are a made man, and we all know it..............................................

DutchR's picture

Who’s Who might come in handy...

Bay of Pigs's picture

Agreed kito. Fisher, Hoenig and other FED heads always play the good cop to the bad cop like Kocherlakota. There are no FED hawks.

Same thing with Bart Chilton at the CFTC. Just a charade at this point.

Sudden Debt's picture

Do a count in your surroundings on people who depend on the government, even partly for their income and you'll be fucking AMAZED!!!

And everybody thinks other people need to pay for it besides them.
It's sickening...

This week for example, they will raise taxes on tobacco. I'm a smoker so I'll pay more.
And with the extra revenue, they can keep public transportation for free....

FOR FREE!!!??!!?!?!







DutchR's picture

Relax, 2 duvel and you'll feel right as rain...

DutchR's picture

-1 really ?  , you never drank 2 Duvel, right?





Motorhead's picture

Duvel is not bad at all.  Now,'re asking for a headache with that stuff.

The Dancer's picture

Most folks are about one thing...their personal mortal survival.

1C3-N1N3's picture

This system is held together by common check-kite-like scheming. Apparently the people running this show had to go to prestigious universities for the better part of a decade in order to figure out what the common, broke, heroin-addicted jag-off does on instinct with an 8th grade education.

These Ivy League Econ grads will eventually realize that failure is a better teacher than any they ever studied under.

earleflorida's picture

'words without subtance, are like 'gambits-to-the-sea'--  wasting away on a hot crimson iron, a lowbrow sweat,... as the forger has bellow'd his last beating`breath-- whilst, carring coals to new castle in a bottomless brim of capitulation... whence, should he had held his own tongue too ones owe'd ire?'

Bingfa's picture

All they had to do from the beginning was to throw a few money changers tables over and this would have turned out different.

Now the whole thing is going to fall in on them....

The Dancer's picture

Ivy smart are they...wasn't it Harvard that lost about 50% of it's endowment during the crash....I'm a bush leaguer and I didn't lose a penny....does that make me smartwer than Mr. Paul K. ? Maybe!

Conman's picture

Hoenig was always the fed hawk. At least he's consistent. Fischer very much holds same views.

PUD's picture

"Trading" has no redeeming social value what so ever. Nothing about any market now has anything to do with genuine "investing"  Co-operation is better than competition in this capitalistic society that monetizes everything from forests to fish. Without ethics and morals and some measure of altruism this is nothing but dog eat dog till all the dogs are dead.

PUD's picture

"Reform" all you want, it will accomplish nothing. So long as money = debt and everything is valued from a pure monetary perspective, the cycle of self destruction will continue. The world needs a paradigm shift...a new methodology and money system not new cogs in the same machine

Benjamin Glutton's picture

Good news comrades!!! Our most Whoreable Attorney General Eric Holder has announced glorious policy of not paying criminal defense attorneys or their defendants for their consultations opinions and recommendations regarding the damage they can do to our precious motherland were they to be prosecuted for causing the financial crisis.


Apparently this Hoenig fellow doesn't understand that criminal enterprises rarely self terminate.

Radical Marijuana's picture

Too bad the YouTube links to that PBS "Untouchables" documentary in the Rolling Stone article you linked, Benjamin, do not work.