The president of the Federal Reserve Bank of Kansas City, Thomas M. Hoenig, said on Monday that for economies to work best, institutions must be allowed to fail.Which is what anyone would say, but then do we let the institution actually fail when it does get into trouble? If the prospect of such failure is missing, there is an increased moral hazard problem where institutions take on larger and larger risks while allowing the government to hold the cards of a losing hand.
Economies must “find a balance between financial stability and a stable price environment and in doing so must be able to allow individual institutions to fail....”"
Hoeing's speech is available here.
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