Now, I’m not suggesting that Hoenig has a single Austrian bone in his body, and I doubt he would ever make such a claim. But, for years now, he’s been one of the few establishment economists who actually speaks some sense every now and then.
On Tuesday, he once again spoke on the true threat of inflation, and noted that maybe, just maybe, massive and crushing amounts of debt aren’t the most wonderful things in the world. Last month, he was the lone voice of dissent against the Fed’s continued policy of full-bore inflation and easy money.
Hoenig, president of the Kansas City Fed, was also probably the only high ranking Fed official who ever expressed doubts about the true state of the economy back in 2007. While Hoenig was doubting, Bernanke and company were still touting the “fundamentally sound” American economy.
I’m not trying to make Hoenig out to be some kind of hero or sage, but Hoenig’s lone dissent helps to highlight just how divorced from reality most of the Fed’s leadership is. As a central banker, Hoenig is part of the problem, but a tight money policy is certainly better than a loose money policy in an age in which there is so little capital accumulation and in which the market-rate of interest would undoubtedly be many times the artificial Fed-set rate. So, I give him some credit.
Hoenig has been around for a long time and for whatever reason, seems to be the only person associated with the Fed right now who can even remember that the world existed prior to the 1990s. In Hoenig’s Fed district, which includes Kansas, Colorado, and New Mexico, the economy took a long time to recover after the economic disasters of the 70s and 80s, so inflationary binges have hit the region hard in the past.
Yet, everyone else at the Fed seems to have completely forgotten about Volcker and the money tightening that had to be done to prevent total runaway inflation. It’s as if Greenspan created the universe, and all that came before is formless void. It’s unseemly to see old men with such bad memories, but that seems to be the norm at the Fed with all in agreement except one apparent nut from Kansas City who insists that easy money policies can just possibly lead to inflation. This should be considered common sense, but in the bizzarro world of Geithners and Paulsons and Bernankes, up is down and left is right.
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Actually, Mr Hoenig seems to have a much broader time horizon than just the 70s and 80s:
Mr Hoenig said Germany’s harsh experience with runaway inflation after World War I should be remembered.
When named president of the Kansas City Fed in 1991, Mr Hoenig said his 85-year old neighbour gave him a 500,000 German mark note. The neighbour told him that, in 1921, the note would have bought a house. In 1923, it wouldn’t even buy a loaf of bread. The neighbour said, “I want you to have this note as a reminder. Your duty is to protect the value of the currency.”
“That note is framed and hanging in my office,” Mr Hoenig said.
Source: The Australian
mark this as the start of the great bullmarket in bread.
Would be interested in the well-educated views of some to the article recently published by the NY FRB found at the following link:
http://www.newyorkfed.org/research/current_issues/ci15-8.html
Clearly the fact that the FRB is paying interest on reserves is a new “tool” in the bag-o-tricks of the FRB; however, the real issue lost on many is that the velocity of money has fundamentally changed as a result of this crisis. It has, in fact, ground to a halt. The excess reserves are staying “parked” because the banks are still de-leveraging and building capital levels to the “new” unofficial capital requirements under PCA (namely 8% and 12%), and seeking ways to restructure their capital stack with more emphasis on tangible equity. Risk aversion, until just the last few weeks, has been steady and pronounced. My fear – and this will happen – is that the FRB will in no way be able to withdraw their $1 trillion in new excess reserves before the large banks get punch-drunk on risk-taking in the ZIRP world created by the Bernanke Circus. Once banks actually start “believing” the mythology being fed to them (no pun intended) that we have “turned the corner”, the dollars will find an outlet and result in another wave of malinvestment. The only question we should be asking is:
“Where is the capital and leverage going to find a home?”
If we can answer that question, we should invest, sit-back and take the ride up, get out, and retire to a more free market locale, like perhaps….(wait for it)….Venezuela.
Volker that old man, also gave an interview very recently on CNBC Europe, with a very grim outlook for the US economy….
I think everyone needs to read this:
http://transcripts.cnn.com/TRANSCRIPTS/1002/14/fzgps.01.html
I cannot resist to paste the last sentences:
“And your basic concern is, can our democratic system make the hard choices that it needs to make…”
We all know the answer to this. No, because that’s not the way democracy works. Democracy is not about making hard choices. It’s about self-righteous power.
The Constitution was meant to limit government, so it couldn’t get itself into these hard choice situations, but the Constitution hasn’t limited anything for at least 75 years. The only limit has been what people felt they could get away with. Well, now they think they can get away with anything, with everything. Liberty and rights mean nothing as long as you have some kind of majority vote.
Volcker doesn’t want to give this answer because he knows what is happening (and he’s probably very happy he is no longer young).
If Mr. Hoenig took his neighbor’s advice to heart, he should never have joined the Fed. The Fed is the source of inflation and he knows it.
Be kind. Many Many good people wind up in jobs doing what they don’t want to do in ways they don’t want to use and for institutions that they would really like to change for the better if they could, simply because it was the only realistic way for them to proceed with their lives, careers, education, and families.
When someone is right, say they are right. When they are wrong, say they are wrong, and why they are wrong, and offer a different take. But do not presume to judge them too harshly. That does not further human cooperation and understanding, and it adds to fear. It creates an unnecessary divide in discourse, and stagnates the tendency of people to move forward with the cooperation of their fellow people by guaranteeing a lack of cooperation, with yourself by your will and judgement.
Judgement is good to have, but sometimes it is not good to express it.
He knows what the Fed is. It’s impossible to me to imagine that he does not. The problem is that the legal fiction that makes their walls so thick is also the lie that must be told instead of the secrets that are kept. They have to lie every day of their careers in order to get a pay-check. A check written by the lier that he helped and works for, written against the lie of it’s own value. No matter the extent of his loans, no matter the heights of his own financial position, he knows who will own his stuff when he is gone. He knows.
“Yet, everyone else at the Fed seems to have completely forgotten about Volcker and the money tightening that had to be done to prevent total runaway inflation. It’s as if Greenspan created the universe, and all that came before is formless void.”
Those poor, deluded saps who insist on listening to and believing only the Fed-manager Alan Greenspan twin, without bothering to find out that the other twin, the libertarian Alan Greenspan, actually denounced the very act of printing paper money as a young man, and then as a very old man reiterated that he “wouldn’t change a single word” of his denunciation. The man is a Dr. Strangelove, and he could not have said so any more plainly when he signed the book for Ron Paul. Or if you prefer, a sort of Dionysus to the American body politic’s King Midas.
There is no other way of parsing Greenspan’s statements and his actions at the Fed, except to conclude that he hated the Fed and paper money, he tried for a while to run it in such a way as to mimic the gold standard and thus minimize its evil, but under political pressure he decided to give the boobs exactly what they wanted, good and hard.
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