May 31, 2011 12:09PM

Hoenig for FDIC

On July 8th, Sheila Bair will step down as Chair of the Federal Deposit Insurance Corporation (FDIC). While I believe she’s gotten a lot wrong (such as not preparing the fund for the coming crisis), she has been about the only voice among senior bank regulators for actually ending too‐​big‐​to‐​fail. With her departure, we might lose that one voice. Later this year, Kansas City Fed President Tom Hoenig is also scheduled to leave his current position.

Hoenig has actually gone beyond Bair in trying to address too‐​big‐​to‐​fail, having called for the largest banks to be broken up. While I don’t believe that should be our first approach, having an advocate for both the taxpayer and the overall economy at the helm of the FDIC could make a significant difference.

Given that Section 2 of the Federal Deposit Insurance Act requires the FDIC to have a bipartisan board, President Obama is faced with the choice of either appointing a non‐​Democrat or asking Vice‐​Chair Marty Gruenberg to leave. While I have no idea as to Hoenig’s politics, he’d likely be able to pass that test.

Hoenig has also been willing to publicly challenge Bernanke on a number of issues. Given the narrow group‐​think among regulators that contributed to the crisis, having a loud, credible, independent voice among bank regulators is solely needed. Hoenig again fits that bill. His appointment would also offer Obama a chance to show that he is not completely beholden to the Geithner “never seen a bailout I didn’t like” worldview.

Perhaps with Hoenig at the helm, we can actually begin a debate about reducing the moral hazard created by the Federal Reserve. While Bair was all too willing to see both insurance coverage and regulatory powers of the FDIC expanded, Hoenig strikes me as open‐​minded to the very real excess bank risk‐​taking that is encouraged by the existence of the FDIC.