Kansas City Fed President Supports Blanche Lincoln's Derivatives Ban and "Glass-Steagall-Type Laws"

In a June 10 letter to Sen. Blanche Lincoln (D-Ark.), Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, supports Lincoln's provision to curtail derivatives trading by depository banks. Hoenig's intervention is seen as strengthening Lincoln's hand against the Wall Street puppets in the White House and Congress who are conspiring to eliminate Lincoln's proposal.

"This is a sign of the times," commented Lyndon LaRouche. We will be seeing more of this kind of support from non-Wall Street types, as the crisis deepens, and the LaRouche alternative becomes more prominent.

"As you know, commercial banks are the trusted guardian of depositors' funds and the primary intermediary of the national and global payments system—a role that is critical to our country's financial and economic stability," Hoenig wrote. "I have been a long-time proponent of limiting the derivative activities of commercial banks to only those designed to mitigate the institution's balance sheet risk. Accordingly, I support the reinstatement of Glass-Steagall-type laws to separate higher-risk, often more-leveraged, activities of investment banks from the commercial banking system."

"Section 716 appropriately allows banks to hedge their own portfolios with swaps or to offer them to customers in combination with traditional banking products," Hoenig continued, citing the Lincoln provision in the Senate finance reform bill. "However, it prohibits them from being a swaps broker or dealer, or conducting proprietary trading in derivatives. The risks related to these latter activities are generally inconsistent with the funding subsidy afforded institutions backed by a public safety net. Such activities should be placed in a separate entity that does not have access to government backstops. These entities should be required to place their own funds at risk."

Having Hoenig on board strengthens Lincoln's hand, a Senate aide involved in the negotiations told the Huffington Post. "It's an impressive voice to have in her camp."