Kansas City Federal Reserve Bank President Thomas Hoenig warned that actions taken by so far by the Federal Reserve risk prolonging the lingering credit crisis. Hoenig addressed the problem of too-big-to-fail Tuesday, as he faced lawmakers looking into how the financial crisis grew so fast and so serious.

He warned that until confidence and transparency are returned to financial markets, it will be impossible for us to achieve full economic recovery. In order to restore confidence, several regulatory issues must be addressed.

Hoenig noted in prepared remarks delivered before the Joint Economic Committee that the knee-jerk reaction of the Federal Reserve to flood the frozen credit markets with substantial liquidity, without addressing the core issue of dealing with financial institutions on the brink of failure.

We have taken these steps instead of defining a consistent plan or addressing the core issue of how to deal with these institutions that now block our path to recovery, Hoenig said. Our actions so far risk prolonging the crisis while increasing the cost and raising serious questions about how we eventually unwind these programs without creating another financial crisis as bad or worse than the one we currently face.

In order to counteract the Fed solution that makes the situation worse rather than better, Hoenig reiterated a proposal he made in a speech delivered in early April.

There has been much talk lately about a new resolution process for systemically important firms that Congress could enact, and I would encourage this be implemented as quickly as possible, but we do not have to wait for new authority, Hoenig told the Tulsa Metro Chamber of Commerce on April 9th. We can act immediately, using essentially the same steps we used for Continental.

Honeig called for a form of conservatorship for systemically important firms, allowing for reorganization and then reprivatization.

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. We cannot simply add more capital without a change in the firm's ownership and management and expect different outcomes.

In his remarks Tuesday Hoenig also called for a reworking of the Basel II capital framework, which has failed miserably in the current crisis.

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