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Goldman Joins JPMorgan On The PR Offensive Against The US Middle Class, As Americans Find A Surprise Champion In The Face Of Fed’s Tom Hoenig

Thomas Hoenig

(iStockAnalyst) – “I think there’s no reason why as we’ve done in other instances of (sic) finding the right mechanism to break them into their components.

“Without the fear of loss to creditors, these large firms can use higher leverage, which allows them to fund more assets with lower cost debt instead of more expensive equity,” he said.

That allows them to get even bigger, leaving their smaller competitors behind who need to worry about raising equity before they can fund more loans.

“If the top 20 firms held the same equity capital levels as other smaller banking institutions, they would require $210 billion in new equity or reduced assets of over $3 trillion, or some combination of both,” he said.

…The need for MegaBanks:

“That is a fantasy — I don’t know how else to describe it. Our strengths will be from having a strong industrial economy. We will have financial institutions that are large enough to give us influence in the markets but not so large that they’re too big to fail.

“The outcome of that is that strong banks (and) strong economies bring capital to themselves, and they are by themselves competitive.

“The United States became a financial center not because we had large institutions but because we had a strong industrial economy with a good working financial system across the United States — not just highly-concentrated in one market area,” he said in an apparent reference to Wall Street.

JPMorgan Chase Chairman and Chief Executive Officer Jamie Dimon defended megabanks in his annual letter to shareholders this week, arguing for the economic benefits of outsized financial institutions.

…Glass Steagall and its return: The U.S. should revive parts of Glass-Steagall, the Depression-era law that long prohibited banks from underwriting securities and engaging in other Wall Street-like activities, to break up megabanks, Hoenig told HuffPost.

“At the moment I would be inclined to break them up along those lines of activities, and then let the market define what the right size is, and it will be, I suspect, smaller, much smaller, given our recent experience,” he said.

“When Glass-Steagall was set aside and Gramm-Leach-Bliley (the law that repealed it) was introduced, I gave a speech which raised the concern that we would encounter megainstitutions,” Hoenig said. “People would say… ‘They’re not too big to fail’, but when the crisis came they would be too big to fail, and that’s what we’ve gotten.

‘So I am partially in favor of re-establishing elements of Glass-Steagall that separates the very important commercial banking that is so critical to our economy and our payment system from what I call high-risk activities in investment banks and hedge funds. I have nothing, nothing at all against high-risk activities in hedge funds and so forth, but they should not be part of our commercial banking payment system.

…On the ZIRP-fueled carry trade and why it should be immediately abolished before the next asset bubble become too untenous:

Popularly known as the lone dissenter on the Fed’s policy-making panel who twice this year has voted against the Fed’s decision to keep the main interest rate “exceptionally low” for “an extended period,” Hoenig said part of the problem with near-zero rates is that it guarantees Wall Street profits.

“When you guarantee a zero rate, you guarantee a spread to Wall Street or to others, and you encourage speculation, and that’s what you want to avoid,” he said. “If we’ve learned anything from the last episode, we want to avoid encouraging speculative activity and zero rates, I’m afraid, have the effect of encouraging it.”

On Wall Street, “industry profits could exceed an unprecedented $55 billion in 2009, nearly three times greater than the previous all-time record,” according to a Feb. 23 report by New York State Comptroller Thomas P. DiNapoli.

The national unemployment rate, meanwhile, is nearly 10 percent. Hoenig calls that “unfair.”

Low interest rates enable banks to make a killing because they borrow at near zero yet lend or invest at much higher rates. They also can trade in securities. For banks facing debilitating losses on consumer lending products like credit cards, auto loans and home mortgages — something that happens in every recession — low interest rates are an easy way to make money and protect against losses.

But while Hoenig acknowledges that low rates were necessary in the immediate aftermath of the crisis, he said they should now be steadily raised.

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