A veteran Federal Reserve official criticized the government's response to the credit crisis as ad hoc and said insolvent financial institutions should be resolved in the same way failed banks have long been dealt with.
Federal Reserve Bank of Kansas City President Thomas Hoenig, speaking Thursday before the Tulsa Metro Chamber of Commerce, specifically took issue with the way the central bank and government have sought to aid troubled financial companies by recapitalizing them with private funds.
That approach has failed to resolve the issue, he said, and "the economy will not recover until the financial system is stabilized and credit flows improve."
Hoenig, who is not a voting member of the interest rate-setting Federal Open Market Committee, said that a financial institution has failed when the value of its assets is less than the value of its liabilities, or if it suffers a huge loss in liquidity.
"Although a bank might still be open and operating, if it is insolvent by these definitions, it has failed," he said.
Hoenig also argued that the same methods used in the past to unwind a failed bank would be effective with other types of financial institutions, although he acknowledged that the size and complexity of some banks would make that difficult.
"An extremely large firm that has failed would have to be temporarily operated as a conservatorship or a bridge organization and then reprivatized as quickly as is economically feasible," Hoenig said.