Most commentary has therefore focused on market failure in the housing and credit markets. But what if the house price bubble developed because the economy needed a bubble to ensure continued growth? In that case the real cause of the crisis would be the economy’s underlying macroeconomic structure. A focus on the housing and credit markets would miss that.
"[I]t remains tempting to pour additional funds into large firms in hopes of a turnaround,” {Kansas City Fed Chief Thomas] Hoenig said today in remarks prepared for a hearing of Congress’s Joint Economic Committee in Washington. Yet efforts “to protect our largest institutions from failure risk prolonging the crisis and increasing its cost.”
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Hoenig said “we must maintain limits on financial leverage through strict rules setting minimum capital-to-asset ratios” to avoid risks of excessive leverage at financial companies.
Hoenig reiterated his view that the government, rather than prop up failing financial institutions, should temporarily take them over and wind them down. Speaking April 9 in Tulsa, Oklahoma, he said calling an institution “too big to fail” is a “misstatement.”
Let me introduce myself. I am not an economist; I am a retired physics professor learning economics on my own. My notes, in the form of a tutorial, exist as a webpage.
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