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CNBC EXCLUSIVE: CNBC TRANSCRIPT: THOMAS HOENIG, FEDERAL RESERVE BANK OF KANSAS CITY PRESIDENT & CEO, INTERVIEWED ON CNBC'S "SQUAWK BOX" TODAY, FRIDAY, JUNE 19TH AT 8AM ET

QUICK: JOINING US RIGHT NOW ON A CNBC EXCLUSIVE IS A RARE INTERVIEW WITH TOM HOENIG, PRESIDENT AND CEO OF THE FEDERAL RESERVE BANK OF KANSAS CITY. OUR SENIOR ECONOMICS REPORTER STEVE LIESMAN IS SITTING DOWN WITH US AS WELL, AND OUR GUEST HOST CAM FINE. THANK YOU FOR JOINING YOU THIS MORNING. WE APPRECIATE YOUR TIME.OBVIOUSLY, THERE'S SO MUCH THAT'S BEEN HAPPENING WITH REGULATORY REFORM. THE CENTRAL PART OF WHICH IS A PLAN TO GIVE MORE POWER TO THE FEDERAL RESERVE. WHAT DO YOU THINK ABOUT THAT?

HOENIG: WELL, FIRST OF ALL, GOOD MORNING. AS FAR AS GIVING MORE POWER TO THE FEDERAL RESERVE, I WOULD FIRST OF ALL POINT OUT THAT FROM MY PERSPECTIVE AND MY YEARS OF EXPERIENCE, THE FEDERAL RESERVE IS VERY MUCH INVOLVED IN THE ISSUES AROUND FINANCIAL STABILITY NOW. I MEAN, IT'S A FACT THAT WE ARE -- WE DO HAVE MONETARY POLICY RESPONSIBILITY THAT DOES HAVE SYSTEMATIC IMPLICATIONS. WE ARE IMPORTANTLY THE LENDER OFLAST RESORT TO COMMERCIAL BANKS. NOW THROUGH THE SO-CALLED SPECIAL AUTHORITIES. WE ARE RESPONSIBLE IN A VERY IMPORTANT WAY FOR THE STABILITY OF THE FINANCIAL INSTITUTIONS AND ECONOMY BROADLY. WHAT THIS DOES, I THINK, IS PUTS A SHARPER POINT ON IT AND MAKE US MORE DIRECTLY RESPONSIBLE IN TERMS OF FOLLOW-UP IN SOME OF THESE INSTITUTIONS AND ACCOUNTABLE FOR THE OUTCOMES OF THAT. SO THAT REALLY DOES SHARPEN THE RESPONSIBILITY THAT IS THERE.AND I THINK THAT'S PROBABLY A GOOD THING.

QUICK: WE WERE JUST SPEAKING WITH SHEILA BAIR, THE HEAD OF THE FDIC, WHO SAYS THE MOST IMPORTANT PART OF ALL THIS REFORM IS MAKING SURE THERE ARE NOT INSTITUTIONS TOO BIG TO FAIL IN THE FUTURE. WHAT DO YOU THINK ABOUT THAT?

HOENIG: THAT HAS BEEN MY THEME FOR SOME TIME. I THINK INSTITUTIONS SHOULD NOT BE TOO BIG TO FAIL.IN A SYSTEM LIKE OURS WHERE CAPITALISM IS SO IMPORTANT, SUCCESS AND FAILURE IS PART OF THE PROCESS. AND THE FAILURE DOES HELP RENEW THE SYSTEM. I THINK THAT'S EXTREMELY IMPORTANT. I DON'T THINK ANY INSTITUTION SHOULD BE TOO BIG TO FAIL. I THINK IT IS -- IT IS HARMFUL TO THE SYSTEM IN THE LONG RUN AND, PERHAPS, EVEN IN THE SHORT RUN WHEN YOU THINK OF THE CONSEQUENCES OF HAVING INSTITUTIONS THAT ARE ALLOWED TO ONLY GET LARGER AND NOT FAIL.

LIESMAN: TOM, STEVE LIESMAN, VERY GOODTO SEW YOU THIS MORNING. THANK YOU FOR JOINING US.LET'S FOLLOW THAT THROUGH PIP MEAN, AS FAR AS I UNDERSTAND, YOU DON'T THINK THAT IT'S TOO LATE TO DO -- TO GET OUT OF THISTOO BIG TO FAIL.YOU HAVE TALKED ABOUT IN SOME OF YOUR SPEECHES, THE IDEA OF JUST SHUTTING THESE BANKS DOWN. IT ALSO COMES WITH A KICKER TO IT, WHICH IS THAT MAYBE THE GOVERNMENT COMES IN AND TAKES OVER THESE ASSETS OR THESE TOXICASSETS.EXPLAIN YOUR THINKING THERE.

HOENIG: WELL, I THINK FIRST OF ALL THIS LEGISLATION IS VERY HELPFUL TO MOVING THIS FORWARD. MY COMMENT WAS, WE -- WE HAVE MECHANISMS THAT WE COULD USE WITHOUT THE LEGISLATION IN THAT I WOULD ENCOURAGE US TO DO SO. THAT IS, THIS IDEA, WHICH IS IN THE LEGISLATION, TO HAVE -- TO TAKE THE INSTITUTION INTO RECEIVERSHIP OR CONSERVATORSHIP, TO BREAK OUT THE ASSETS, WHAT WE NOW REFER TO AS TOXIC ASSETS, PUT THEM INTO A SEPARATE ORGANIZATION TO LIQUIDATE, MAKE SURE WE TAKE THE LOSSES AGAINST THE STOCKHOLDERS, AT LEAST, IF NOT SOME OF THE LONGER-TERM CREDITORS. AND THEN LEAVE THE -- WHAT WE CALL THE GOOD BANK WITH FRANCHISE VALUE IN PLACE. THAT, THEREFORE, TAKES THE INSTITUTION, HOLDS THE INVESTORSACCOUNTABLE AND, IN A SENSE, ALLOWS THE INSTITUTION TO FAIL, BUT DOES IT IN AN ORDERLY FASHION. THAT'S REALLY THE GOAL I THINK THIS LEGISLATION HAS AND I THINKTHROUGH THE DEBATE MIGHT EVEN IMPROVE SOME.

LIESMAN: TOM, JUST FOLLOWING UP HERE, AND NOT GETTING TOO FAR INTO THE LEGISLATION, BUT WE HAVE HEARD CONCERNS FROM THE FEDERAL RESERVE ABOUT THIS IDEA OF FORMING THIS NEW CONSUMER PROTECTION AGENCY AND SEPARATINGT HIS CONSUMER ADVOCACY FUNCTION FROM SAFETY AND SOUNDNESS. DO YOU HAVE A CONCERN OF THE FEDLOSING THAT OVERSIGHT IT HAS RIGHT NOW?

HOENIG: WELL, I THINK IT'S PART OF THE DEBATE THAT HAS TO GO FORWARD. MY COMMENT WOULD BE, THOUGH, THAT IN THE -- THE FACT OF THE MATTER IS, YOU HAVE TO -- THERE'S NO REALLY SEPARATING THE GOOD OR THE CONSUMER OR CONSUMER PROTECTION FROM THE QUALITY OF THE LOAN, AS SOME PEOPLE WOULD SUGGEST. I THINK IT'S VERY IMPORTANT IF YOU'RE GOING TO HAVE A GOOD CREDIT, THAT IT BE PROPERLY CONSTRUCTED, THAT THE CONSUMER BE WELL -- UNDERSTAND THE CREDITAND BE ABLE TO REPAY IT SO THERE ISN'T THAT CONFLICT SOME PEOPLE SUGGEST. AND I THINK LAYERING ANOTHER OVERSIGHT BODY ON THAT COULD BE TRICKY, AS YOU TRY AND DO SAFETY AND SOUNDNESS IN ONE ORGANIZATION AND CONSUMER PRODUCTION, WHICH HAS COMPLICATIONS BOTH WAYS. SO WHAT I THINK YOU'LL DO IS START CROSSING OVERONTO ONE ANOTHER ROLE AS YOU TRY TO MAKE SURE THE CONSUMER'S PROTECTED AND YET THE INSTITUTION IS ALSO MAKING SOUND LOANS.

LIESMAN: TOM, ONE OTHER THING HERE.A LOT OF PEOPLE HAVE SAID -- AT LEAST A SERIOUS LINE OF THINKINGTHAT THE REASON WE'RE IN THIS IS BECAUSE A LOOSE MONETARY POLICY FROM THE FED DO YOU SHARE THAT POINT OF VIEW?IS IT ALSO YOUR BELIEF THAT IF WE FIX THE POLICY PART OF THIS, THE MONETARY POLICY PART OF THIS, WE WON'T END UP IN A SITUATION LIKE THIS?

HOENIG: WELL, CERTAINLY I THINK THE FACT THAT MONETARY POLICY AND THE EARLY PART OF THE DECADE, AS WE TRY TO RESPOND TO 9/11, AS WE TRIED TO REACT TO THE TECH BUBBLE COLLAPSE, THAT THERE WAS THIS PERIOD OF VERY ACCOMMODATIVE POLICY, SO THAT DID EASE THE CREDIT ENVIRONMENT. BUT THE FACT OF THE MATTER IS, I HAVE ARGUED FOR SOME TIME, THE ISSUES AROUND FINANCIAL STABILITY WERE THAT WE REMOVE SOME OF THE CONSTRAINTS, SOME RULES THAT WERE IN PLACE. THOSE ARE IMPORTANT TO PUT BACK INTO PLACE SO THAT YOU DON'T HAVE DEBATES ABOUT WHETHER OR NOT YOUHAVE GOOD UNDERWRITING STANDARDSIN TERMS OF LOAN TO VALUE RATIO,YOU DON'T HAVE DEBATES OVER WHETHER YOU HAVE SUFFICIENT CAPITAL.YOU HAVE LEVERAGE RATIOS AT OUR FIRM, SO WITH AN EXAMINER GOES IN, IT'S NOT A MATTER OF YOUR OPINION VERSUS MY OPINION, IT'S HERE ARE PRUDENT PRACTICES THAT HAVE BEEN THOUGHT THROUGH AND ARE THE RULES OF THE DAY AND OBEY THEM. IF YOU DON'T, WE'LL WRITE YOU UP.I THINK THAT WOULD HAVE DONE A LOT TO PREVENT SOME OF THESE VERY SERIOUS PROBLEMS.

QUICK: TOM, MANY OF US CONSIDER THE FED TO HAVE BEEN A VERY HEROIC ORGANIZATION, LOOKING BAT AT WHAT'S HAPPENED IN THE LAST SIX TO NINE MONTHS, THE ACTIONS TAKEN.THERE'S ALSO A LOT OF CONCERNS ABOUT HOW WE GET OUT OF MANY OF THESE PROGRAMS.IS THERE A PLAN IN PLACE FOR HOW TO GET OUT? WHAT'S THE FED GOING TO BE LOOKING AT?

HOENIG: WELL, THERE IS -- AS SOON AS YOU INTRODUCE METHODS TO DEAL WITH A CRISIS, AS WE DID, THAT ARE OUT OF THE NORM, YOU SHOULD VERY QUICKLY BEGIN TO THINK ABOUT WHAT YOUR EXIT STRATEGY IS. THAT'S THE PROCESS WE'RE IN RIGHT NOW.AND WE'RE THINKING THAT THROUGH. I DON'T HAVE A PLAN TO LAY OUT BEFORE YOU. AS NO ONE DOES. WE'RE VERY SERIOUSLY THINKING ABOUT IT.AND I'M ON THE RECORD AS SAYING THAT'S EXTREMELY IMPORTANT. BECAUSE WE HAVE PUT AN ENORMOUS AMOUNT OF LIQUIDITY INTO THE SYSTEM. THAT IS THERE.AND IF IT IS ALLOWED TO REMAIN INDEFINITELY, AND WE KEEP RATES AT A VERY LOW RATE FOR AN EXTENDED PERIOD OF TIME, THEN WE DO RISK INFLATIONARY OUTBREAK. NOT NEXT YEAR, NECESSARILY, BUT THREE OR FOUR YEARS AGO. SOME PEOPLE THINK THAT'S A LONG WAYS OFF, BUT IN THE CONTEXT OF HISTORY, THAT'S VERY QUICK.AND I THINK IT'S SOMETHING WE NEED TO BE CONCERNED ABOUT.

FINE: TOM, THIS IS CAM. HOW ARE YOU?

HOENIG: I'M GOOD, CAM.

FINE: GOOD TO SEE YOU. THANK YOU. I'M GOING TO SWITCH GEARS ON YOU JUST A LITTLE. SURE. REGARDING THE REGIONAL STRUCTURE OF THE FED, YOU KNOW, IN WASHINGTON THEY THINK A LITTLE DIFFERENTLY THAN THOSE OFUS THAT CAME FROM THE MIDWEST, AS YOU KNOW. AND THERE ARE 12 DISTRICT BANKS. DO YOU THINK THE REGIONAL STRUCTURE STILL HAS RELEVANCE THAT THE DISTRICT BANKS STILL HAVE RELEVANCE?THERE ARE THOSE THAT SUGGEST IT DON'T.WHAT'S YOUR OPINION ON THAT?

HOENIG: WELL, COMING -- FIRST OF ALL, I AM A REGIONAL PRESIDENT BUT I HAVE A LOT OF EXPERIENCE AS A REGIONAL PRESIDENT. I WILL TELL YOU THE 12-BANK SYSTEM, AS I'VE SAID MANY TIMES IS ABSOLUTELY ESSENTIAL TO HAVINGAN EFFECTIVE CENTRAL BANK. I WILL TELL YOU, CAM, YOU KNOW THIS VERY WELL, THAT THE BANKINGACTIVITIES IN THE MIDWEST, IN OUR REGION, ARE IN MANY WAYS DIFFERENT THAN WHAT YOU'RE GOING TO FIND IN MANHATTAN OR IN CALIFORNIA. AND HAVING A RESERVE BANK THAT UNDERSTANDS NOT JUST ITS BANKING BUT THE BUSINESSES THAT ARE UNIQUE TO THIS REGION, WE'RE IN AGRICULTURAL REGION, WE HAVE A LOT OF ENERGY IN THIS REGION, I THINK, IS ABSOLUTELY ESSENTIAL TO THE POLICYMAKING PROCESS AS I GO BACK TO WASHINGTON AND PARTICIPATE IN THAT. AND AS I COMMUNICATE ABOUT IT. AND AS I DEAL WITH COMMERCIAL BANKS HERE, COMMUNITY BANKS OR REGIONAL BANKS AND BUSINESSES. SO -- AND I'VE TOLD PEOPLE, IN 1913, WHEN THIS INSTITUTION WAS ORGANIZED, THERE WAS NOT AN OPERATIONAL NEED FOR 12 BANKS. THERE WAS A VERY IMPORTANT PART OF RINGING CONSENSUS OF SUPPORT AROUND THE CENTRAL BANK AND IMPROVING THE COMMUNICATIONS OF THAT CENTRAL BANK. IT HASN'T CHANGED ONE IOTA. I WOULD SAY, IF YOU LOOK AT THESE TIMES, IT'S PROBABLY MORE IMPORTANT THAN EVER, CAM.

FINE: I AGREE.

LIESMAN: TOM, LET ME -- WE CAN'T LET YOU GO WITHOUT -- CAN YOU HEAR ME?

HOENIG: YEAH, NOW I CAN HEAR YOU.

LIESMAN: WE CAN'T LET YOU GO WITHOUT GETTING YOUR ECONOMIC OUTLOOK FOR WHEN THE ECONOMY TURNS AROUND AND WHATEVER CONCERNS YOU HAVE RIGHT NOW, HOW SERIOUS THEYARE ABOUT INFLATION.

HOENIG: WELL, THE -- YOU KNOW, PROJECTIONS ON THE ECONOMY ARE, AS MOST PEOPLE SAY, I'M CONFIDENT IT WILL TURN AROUND.THE TURNING POINT, I DON'T KNOW AT ALL, BUT I DO KNOW WITH THE AMOUNT OF STIMULUS, MONETARY AND FISCAL POLICY, IT WILL TURN AROUND. I THINK THAT THE INFLATION OUTLOOK IS ONE THAT IS A LONGER TERM. BUT I THINK, AS I'VE SAID MANY TIMES BEFORE, THE ROLE OF THE CENTRAL BANK IS TO THINK LONGER TERM. THEREFORE, WE ARE TO BE MINDFUL OF THAT. THAT'S WHAT THIS FOCUS ON AN EXIT STRATEGY IS ALL ABOUT AND WHY IT IS SO IMPORTANT.

QUICK: TOM, WE'D LIKE TO THANK YOU VERY MUCH FOR JOINING US TODAY. WE APPRECIATE YOUR TIME.




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