Hoenig Explains His Dissenting Views One Last Time

This October, Thomas Hoenig, president of the Kansas City Fed (10th Federal Reserve district) is retiring from the Fed.  With him the US loses one of the few central bank officials who consistently diverged from the party line (the party line being a mixture of neo- and post-Keynesianism with a bit of monetarism strewn in, all of which we would regard as left-fringe economic philosophies. 'Mainstream' they may be these days, but that doesn't alter their essence).

During his stint as a voting member at the FOMC, Mr. Hoenig was well known for being the lone dissenter who regularly voted against additional easing measures.  In the US heartland central economic planning is evidently not as highly thought of as elsewhere.

In our opinion, Mr. Hoenig was always the one FOMC board member who really seemed to 'get it' – namely, that no wealth can possibly be created by printing more money and that an enormous mistake was made when certain financial institutions were declared to be 'too big to fail' (in fact, in a speech in July Hoenig said verbatim: “You print money, print money and print money, but you don’t create real wealth.”)

Hoenig took the opportunity last week to criticize current Fed policies one more time before retiring. His former colleagues would do well to consider his words, but most of them probably won't.

Along with the current crop of dissenters (Richard Fisher, Charles Plosser and Narayana Kocherlakota), Hoenig is living proof that it would be highly problematic if Barney Frank's attempt to remove the voting powers of regional Fed presidents were to succeed. Precisely because the regional presidents are not subject to political nomination and vetting, they are an important feature of the central bank's nominal independence. It is of course clear that in the bigger picture, said independence is a sham anyway; but if not for the dissent uttered by the Fed's politically least compromised members, an important contribution to public debate would simply be missing.

The Fed does after all not exist in a vacuum and the fact that it is apparently worried about public opinion (as evidenced by its recent 'big brother'-like  initiative of monitoring social media) goes to show that there is a feedback loop between the central bank and public opinion. Every bureaucracy is first and foremost concerned with its own survival and the monetary bureaucracy is no different.  As Etienne de la Boetie showed in his famous monograph 'The Politics of Obedience' (pdf), even tyrants need the grudging consent of the populace if they want to remain in office and survive.

The Fed's self-preservation instinct may eventually stop it from 'overdoing' it with its inflationary policy. It faces political headwinds due to increasingly negative public perceptions and may also face resistance from the banking system itself at some point down the road. The banks are only in favor of the current policies as far as they help bailing them out – but they would surely balk if a large decline in the purchasing power of money were to eventually occur or become a tangible threat.

Below we excerpt the most important points from various press reports on Hoenig's last official speech and interviews he gave thereafter.

Reuters reports:


“A departing Federal Reserve official lit into the U.S. central bank's ultra-easy policies on Wednesday, saying they may be doing more harm than good and could harm economic growth over the long term.

"When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems," Kansas City Federal Reserve Bank President Thomas Hoenig said in his final speech in office.

[…]

Hoenig leveled blame at lawmakers as well, saying the Fed's stimulative policies were a band-aid for a failure to credibly commit to lowering the United States' long-term debt. Lack of political courage to curb spending and government subsidies and rein in debt would likely lower the U.S. economy's long-term growth potential from about 3 percent a year to as low as 2.5 percent, he said.

"We will not fall off the cliff," Hoenig said. "But what it does is it lowers the potential growth rate of your economy."

 

(emphasis added)

What Hoenig refers to as the 'equilibrium interest rate' is what we would call the 'natural interest rate' as dictated by the social rate of time preference. We agree of course that artificially lowering interest rates below their natural level 'buys problems'. Note also that Hoenig's view of the federal debt markedly differs from those crying for more fiscal stimulus.

The Denver Post reports:


"History only defines what was right in the long run. I am not prepared to say I was right and someone else was wrong. But I wouldn't change my mind," he [Hoenig, ed.] said on Monday during a visit to Denver.

Hoenig said his issue isn't so much with low interest rates as with the Federal Reserve distorting market signals and creating a false faith in monetary policy.

Artificially high rates can crush an economy as readily as low ones can misallocate resources and fuel asset bubbles, he said.

"We can't rely on monetary policy. We can't solve the international imbalances with monetary policy, but people don't know that yet," warned Hoenig, who oversees banks in Colorado, which is part of the Fed's 10th District based in Kansas City, Mo.

The core problem is that the United States has consumed more than it has produced for 20 years running. Consumers and governments in the developed world have piled on too much debt.

Every time a crisis arose, the Fed would cut interest rates and inject money into the system. Easings after the Asian financial crisis, the Russian debt crisis and dot-com bust boosted confidence that lower interest rates were the answer.

But each crisis required more medicine and triggered more side effects, including the construction of 3 million more homes than necessary between 2002 and 2007.

Now the patient isn't responding, he said.

Although he voted twice against Fed easing in 2001, Hoenig wishes he had been more vocal back then. His boldness is born in part of regret.

"What you do when you artificially hold rates down is ask the savers to subsidize the debtors. In an emergency and a crisis that is justifiable, perhaps," he said.

But to do it repeatedly and indefinitely risks distortions in the market and creating unintended consequences and eventually inflation, he warns.

"It would be better if we were not as accommodative so the market could function and send out proper signals," Hoenig said. "I think interest rates would be low. I just don't know how low."

Excessive debt took years to accumulate and will take years to resolve, he said, adding that the bipartisan Bowles-Simpson Commission offers a good place to start debt reduction.

"I am optimistic that the hard choices can be made," Hoenig said. "The American people understand it better than we give them credit for. They know it is serious, but they want the sacrifices to be shared."

 

(emphasis added)

There is nothing in this analysis we disagree with. In fact, Hoenig seems to fully espouse the Austrian position that too low interest rates cause capital malinvestment by distorting an important market signal. His remarks on the imbalance between production and consumption and the error of 'papering over' every crisis by lowering interest rates are spot on as well, as is his observation that 'the patient is no longer responding'. As we have often pointed out, once the economy refuses to respond to monetary pumping, it is a sign that deep structural damage has occurred during the preceding credit boom. The possibility that more wealth is in fact consumed than produced must be considered in this case, and if so, then there is no longer much of a time lag between monetary pumping and its ultimately negative effects. 

If Hoenig weren't a central banker himself, we would almost think he is making an argument against the institution of central banking as such. For instance, he pleads for 'letting the market function' to determine interest rates. It should be obvious that as long as there is a central bank this is simply not possible.

As Hoenig notes at the beginning, the administered interest rate can be set both too high and too low by the central bank, with negative consequences ensuing in either case. The central problem is enunciated when he says that “I think interest rates would be low. I just don't know how low”.

Neither does anyone else know of course – it is simply not possible for a 'body of experts' to make the correct determination. Note here that this is independent of the motives and good intentions of the committee charged with doing so. As an aside to this particular point, here is J.H. De Soto quoting Janos Kornai (in “Socialism: Economic Calculation and Entrepreneurship”):


The people at his [Lange's – this is a critique of Lange's defense of socialism, ed.] Central Planning Board are reincarnations of Plato’s philosophers, embodiments of unity, unselfishness, and wisdom. They are satisfied with doing nothing else but strictly enforcing the ‘Rule,’ adjusting prices to excess demand. Such an unworldly bureaucracy never existed in the past and will never exist in the future. Political bureaucracies have inner conflicts reflecting the divisions of society and the diverse pressures of various social groups. They pursue their own individual and group interests, including the interests of the particular specialized agency to which they belong. Power creates an irresistible temptation to make use of it. A bureaucrat must be interventionist because that is his role in society; it is dictated by his situation …”


The FOMC's position is very similar to that the central planners of command economies found themselves in. In order to get around these limitations, various rules of thumb have been invented, such as e.g. the 'Taylor rule' or 'inflation rate targeting' (such as employed by the ECB). However, all these approaches are by necessity flawed – the economy is simply too complex and too dynamic to allow for such simple rules to work, or in fact for any rigid mathematical system to deliver the desired results. In the end, the same problem keeps getting in the way: it is not possible to 'know' what the natural interest rate is – unless it is freely determined by market forces.

In 'Critique of Interventionism', Ludwig von Mises noted that even the interventionists themselves are bound to be thwarted in terms of the results they want to achieve and what they do in fact achieve:


“…all varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which – from the point of view of their authors’ and advocates’ valuations – is less desirable than the previous state of affairs which they were designed to alter.”

 

Not surprisingly, Hoenig also expressed skepticism about 'Operation Twist' and Charles Evans' idea that the Fed should aim for higher 'inflation' (a higher rate of change of CPI). According to Bloomberg:


“Federal Reserve Bank of Kansas City President Thomas Hoenig said the Fed’s plan to push down long- term interest rates may produce accidental outcomes and policy makers risk creating “imbalances” in the economy.

I have real concerns about trying to fine-tune and micro- manage the economy when monetary policy is a blunt tool,” he said today in an interview with Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. Efforts to “redefine yield curves” may “introduce new complexities and risk new unintended consequences,” he said.

[…]

“We ought to be very, very humble in our expectations of what we can do with this instrument we call monetary policy.”

[…]

The Kansas City Fed chief rejected an idea posed by Chicago Fed President Charles Evans, who suggested policy makers tolerate higher inflation for some time in order to bring down unemployment.  “That is a terrible policy,” Hoenig said. “I just can’t believe that we would think that as economists.”

 

(emphasis added)

We never thought we'd be sad to see a Federal Reserve official sail off into retirement, but we will miss Thomas Hoenig. With him, one of the few voices of reason will be gone from the Fed.

 


 

Retiring Kansas City Fed president Thomas Hoenig: “You print money, print money and print money, but you don’t create real wealth.”

(Photo via: crestresstest.com)

 


 

 

 

 

 

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • On the Marc Faber Controversy
      Il n'y a rien à défendre - by Vidocq   Dr. Marc Faber, author of the Gloom, Boom and Doom Report Photo credit: Michael Wildi / RDB     Il n'y a rien à défendre - There is nothing to defend Personne n'a lu ce qui a été écrit. - Nobody read what was written. Personne n'a pensé avant d'agir, comme la plupart des gens de nos jours. - No one thought before acting, like most people nowadays. L'homme que tu pends est l'homme que tu as fait, pas l'homme que...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • Tales From a Late Stage Bull Market
      Pro-Growth Occurrences An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.   This happens almost every time Bigfoot is in front of a camera. [PT] Cartoon by Gary Larson   Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com