Government aid to financial institutions may raise the total cost of the crisis by not allowing insolvent firms to fail, according to Kansas City Fed President Thomas Hoenig.
Testifying before the Joint Congressional Committee on Tuesday, Hoenig urged lawmakers to hold back from pouring additional cash into large firms, as it could add to the "risks of prolonging the crisis and increasing its cost."
Despite record spending, confidence has not been restored to the U.S. financial system a prerequisite to recovery, he added.
He also criticized the U.S. Treasury's doling out of TARP capital, which failed to adequately identify systemically-important firms.
His comments echo those made two weeks ago in Tulsa, Oklahoma, where he said bank failures must always be an option - even for large, systemically important firms, and that developing a means of dealing with the so-called "too big to fail" firms is integral to putting the U.S. economy on the path to recovery.
Hoenig is not a voting member on the Federal Open Market Committee.