BUENOS AIRES (Bloomberg) — Federal Reserve Bank of Kansas City president Thomas Hoenig said for economies to work best, institutions must be allowed to 'fail'.

Economies must "find a balance between financial stability and a stable price environment and in doing so must be able to allow individual institutions to fail", Hoenig said in a speech yesterday in Buenos Aires.

Turmoil in financial markets has persisted, even after the Fed started and expanded emergency programmes to lend to commercial and investment banks. Changes in financial markets combined with the sub-prime-mortgage crisis have "raised anew questions about the role of central banks in maintaining financial stability," he said.

The sub-prime-mortgage collapse has taken a toll on banks and other financial companies, which have reported $514 billion of write-downs since the start of 2007. The Fed rescued Bear Stearns Cos. from bankruptcy in March, facilitating the firm's merger with JPMorgan Chase & Co. by lending against $29 billion of Bear securities.

"Financial crises will occur despite our best efforts to prevent them," Hoenig said in prepared remarks at an event hosted by Argentina's central bank. "The 'Too Big to Fail' issue will only grow in importance as the consolidation of the financial industry grows in both size and scope in future decades."

Hoenig didn't comment on the US economic outlook or monetary policy in his remarks.

About 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending. Economists expect annualised rates of growth of one percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.

Earlier today, Federal Reserve Governor Randall Kroszner said the US housing slump and financial turmoil have rippled to global emerging markets, slowing growth and bringing stock market declines.

The Fed said on August 11 in a quarterly survey that more banks tightened lending for homes, small businesses and credit cards. About 75 percent of US banks indicated they raised standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.

Federal Reserve chairman Ben Bernanke said on August 22 that financial turmoil has "not yet subsided," and is contributing to weaker economic growth and higher unemployment. Policy-makers will "continue to review" the Fed's measures to ensure liquidity to determine "if they are having their intended effects", Bernanke said.

Hoenig, 61, dissented from a rate cut on October 31 because of inflation concerns.