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Winehole23
09-24-2010, 01:18 AM
Thomas Hoenig Is Fed Up (http://www.businessweek.com/magazine/content/10_40/b4197074540076.htm)

Within the Federal Reserve, there is one very powerful voice of dissent

By Paul M. Barrett (http://www.businessweek.com/bios/Paul_Barrett.htm) and Scott Lanman (http://www.businessweek.com/bios/Scott_Lanman.htm)

(http://www.businessweek.com/magazine/toc/10_40/B4197magazine.htm)Thomas M. Hoenig, dressed in a gray suit, white shirt with French cuffs, and baby-blue tie, faces an edgy crowd of 150 people in a hotel meeting room in suburban Lenexa, Kan. A large "Kansas City Tea Party" banner covers a table at the door. Attendees wear anti-tax stickers on their lapels. This is not an after-dinner speech for which most central bankers would volunteer.

Hoenig heads the Federal Reserve Bank of Kansas City. This year he also serves as a voting member of the powerful Federal Open Market Committee in Washington, which controls interest rates and the money supply. Many of those just now finishing their chocolate-chip bread pudding dessert at Lenexa's Crowne Plaza Hotel would like to see Hoenig lose his job. Nothing personal: They just consider the Federal Reserve an affront to the Constitution and want to shut it down, lock, stock, and vault.

Hoenig smiles at his audience and begins: "This is a support-the-Fed rally, right?"

Dead silence.

Then the room erupts in laughter. Disarmed, the Tea Partiers listen politely as Hoenig defends the Federal Reserve as an indispensible institution, even if at the moment, he says, it happens to be heading in the wrong direction.

And, by the way, if it were up to him (though it's not, really) he would break up the biggest Wall Street banks.

The applause starts tentatively, then builds to respectful appreciation.

Afterwards, Steve Shute, a leader of the Hope for America Coalition, the Kansas group that sponsored the dinner, compliments Hoenig for impressing a tough crowd. "We believe the Federal Reserve should be abolished," he says. It "is helping to destroy the country." That said, Hoenig seems like an O.K. guy. "He is someone going toe-to-toe with Ben Bernanke and the Boston-New York-Washington-San Francisco elite axis at the Fed. He brought some Midwestern common sense to the Fed," says Shute. "We know he doesn't agree with us, but we're still proud of him."

This is Tom Hoenig's moment, and it's a strange one. In Washington, he is the burr in Fed Chairman Bernanke's saddle: the rogue heartland banker who keeps dissenting alone—for the sixth straight time on Sept. 21—to protest the Fed's rock-bottom interest-rate policy. Hoenig warns that the Bernanke majority is setting the country up for an as-yet-unknown asset bubble: the next dot-com or subprime craze. He can't tell yet where the boom-and-bust will materialize, but he can feel it coming, like a Missouri wheat farmer senses in his bones the storm that's just over the horizon.

Hoenig's outlying position seemed less eccentric earlier this year, when the recovery had more zip. "To continue to hold it through the kind of deterioration in the economy we've seen the past couple of months is, to me, quite puzzling," says Lyle Gramley, a Federal Reserve governor in the 1980s who works as a senior economic adviser with Potomac Research Group in Washington. Paul Krugman, the Princeton University Nobel laureate and New York Times columnist, has written that Hoenig and a couple of other Fed presidents from the provinces have intimidated Bernanke out of taking more aggressive steps to stimulate job growth.

"I think that's nonsense," Hoenig fires back. His irritation reveals how much he takes the disagreement to heart. Says Richard W. Fisher, president of the Dallas Fed and a Hoenig friend: "I know Tom anguishes over this. He and I have talked about it."

Hoenig's plainspoken rebellion has put him in the headlines, on cable television, and, in some cases, in the crosshairs for vituperative attacks. "In this environment, with 9.6 percent unemployment, Hoenig's position is just friggin' nuts," says Dirk Van Dijk, director of research at Zacks Investment Research in Chicago. "His idea for tightening monetary policy is roughly equivalent to a doctor giving anticoagulants to a patient suffering from severe internal bleeding." Part of Hoenig's pain comes from being typecast as a heartless inflation hawk, indifferent to the common man who can't find work.

read more:

http://www.businessweek.com/magazine/content/10_40/b4197074540076.htm

SnakeBoy
09-24-2010, 05:48 PM
This guy needs to shut up and get on board with Bernanke because I just took out a home equity loan for .86 over prime.

byrontx
09-24-2010, 11:45 PM
I am no maestro when it comes to macro-economics but in this environment cheap money could just provide the funding for leveraged buy-outs, acquisitions and mergers, all of which have negative impacts on employment. The problem with a loose credit policy is that you do not control who the credit is going to. Ironically, the best place to open up credit would be to the same players that created the current crisis, Fannie, Freddie and other lending institutions taking lower grade paper (this time with more control over speculative derivatives). That would re-start the housing market, firm up eroding equities, get people with dinged up credit back into homes.

Parker2112
09-25-2010, 05:29 AM
The son of an Iowa plumber, he argues that it's not primarily inflation he fears but the reckless borrowing and distortions engendered by sustained low interest rates. The hard truth, in his view, is that there just isn't much more the Fed can do to help, and we all ought to admit that.

Parker2112
09-25-2010, 05:31 AM
Hoenig has also been a harsh critic of Wall Street excess (an issue on which he and Krugman mostly agree). In abundant speeches and articles, Hoenig has condemned the political influence of the financial elite. "We've had a Treasury Secretary from Goldman Sachs (GS (http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=GS)) under a Democratic President and a Treasury Secretary from Goldman Sachs under a Republican President. The outcomes were not good," Hoenig says

:lol at the endless/mindless partisan debate over who is going to appoint the next crook to rob the American cookie jar...

Parker2112
09-25-2010, 05:38 AM
Hoenig personally helped administer more than 100 funerals for failed community banks. He recalls a memorable July 4 weekend in 1982 in his office at the Kansas City Fed, poring over the books of Penn Square Bank, an especially reckless Oklahoma City energy lender. Its executives pleaded for a bailout. "It's not salvageable," Hoenig, then an assistant vice-president, recalls telling his bosses. They let Penn Square go under. The Oklahoma City contagion spread to numerous larger banks that had purchased Penn Square's loans. The debacle contributed to the collapse two years later of giant Continental Illinois in Chicago, the largest bank failure in U.S. history until the crisis of 2008.

"What I took from that," says Hoenig, "was that it followed a period of very easy credit. It followed a period when people felt prices could only go up." Feel-good rates, in other words, led to excessive leverage and crisis. "I find it very interesting today," Hoenig continues, "how many people don't remember the late 1970s-early 1980s."

Parker2112
09-25-2010, 05:39 AM
Greenspan and Bernanke, who assumed the Fed chairmanship in 2006, have insisted that easy-credit policies during the early 2000s didn't contribute to the housing bubble and Wall Street crisis. Hoenig disagrees. "The low rates in that era accommodated too much borrowing, too much leverage, too much risk-taking," he says.

Parker2112
09-25-2010, 05:42 AM
Here's a theory:



The crisis of 2008 required extraordinary actions from the Fed to head off a global depression, Hoenig acknowledges. These included bank bailouts, huge asset purchases to boost liquidity, and severe interest-rate cuts meant to stimulate hiring and growth. Beginning in the third quarter of 2009, however, he started urging his Fed colleagues at their periodic meetings in Washington to send a signal that they would "renormalize" by slowly moving rates up. In 2010, Hoenig was empowered with his once-every-three-years turn to vote—and decided to use it.

His argument, in brief: Despite continuing high unemployment, a modest recovery is actually under way. Personal income and expenditures are up in 2010, if only slightly. Businesses are slowly adding back jobs, more than 700,000 so far this year. But the Fed has consistently maintained that near-zero interest rates are here indefinitely. "In trying to use policy as a cure-all," he said in a speech to the Chamber of Commerce in Lincoln, Neb., on Aug. 13, "we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long."

This is a minority view within the economics fraternity. Most experts are fixated on persistently high unemployment and the danger of the country slipping back into recession. In a column in The New York Times on Aug. 12 entitled "Paralysis at the Fed," Krugman asserted that Bernanke "is being political, unwilling to engage in open confrontation with other Fed officials—especially those regional Fed presidents who fear inflation, even with deflation the clear and present danger."

Parker2112
09-25-2010, 05:46 AM
Another reason Hoenig wants to end super-low interest rates is that Wall Street banks and large corporations are currently able to borrow for almost nothing and either hoard cash, make acquisitions, or invest in long-term Treasuries for a guaranteed profit. Retirees and other bank depositors effectively subsidize this borrowing and earn almost nothing on their savings. "It's a distortion, and it favors the large institutions over the smaller ones and Wall Street over the saver," Hoenig says in an interview. "I just don't like it. It's not fair."

Parker2112
09-25-2010, 05:49 AM
When community banks stumble, he adds, they are allowed to fail. When Wall Street collapsed, it got a heroic rescue. "I would break them up," Hoenig says of Citigroup (C (http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=C)), JPMorgan Chase (JPM (http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=JPM)), and Bank of America (BAC (http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=BAC)). "They're too big. They have too much political influence. When they get in trouble again, the temptation to rescue them because they are 'too big to fail' will be very strong." The financial reform legislation enacted in July wasn't tough enough; he would have liked to see the Glass-Steagall Act's separation of commercial and investment banking revived, along with the imposition of strict capital requirements on the banks by Congress.

Despite his dissent on monetary policy, Hoenig argues that a strong central bank is vital. At the Tea Party dinner in Lenexa, he says: "I know many of you believe in 'End the Fed.' " That's your prerogative, he continues. But "you better have something else in mind" as a replacement. He gives a quick and chilling history lesson of U.S. financial panics before the Fed system was created in 1913.

Some in the audience are not convinced. A bearded man approaches Hoenig after the talk and suggests that the Fed is part of a conspiracy "to collapse the United States" and establish a "one-world financial system."

Hoenig wearily shakes his head. This is his third public event of the day, and it is 9 p.m. "Sir, I know times are tough," the central banker says, "but why in the world would we do that?"

Parker2112
09-25-2010, 05:50 AM
one man's financial collapse = bargains for ready buyers?

Winehole23
09-25-2010, 06:10 AM
That's the way it's supposed to work, Parker. Whoever has ready money to buy has the advantage, and whoever bought into the asset bubble (i.e., artificially inflated assets) has to let it go for pennies on the dollar or eat shit.

How else does bad debt unwind and asset values begin to approximate reality again?

Parker2112
09-25-2010, 06:16 AM
A bearded man approaches Hoenig after the talk and suggests that the Fed is part of a conspiracy "to collapse the United States" and establish a "one-world financial system."

Hoenig wearily shakes his head. This is his third public event of the day, and it is 9 p.m. "Sir, I know times are tough," the central banker says, "but why in the world would we do that?"


one man's financial collapse = bargains for ready buyers?


That's the way it's supposed to work, Parker.

So you buy then?

Parker2112
09-25-2010, 06:19 AM
infiltrate our wheelhouse, steer the ship onto the rocks, then pick up the pieces with ready cash and carry them back home across the sea?

Winehole23
09-25-2010, 06:26 AM
So you buy then?Me? Hell no. Got no money.

Winehole23
09-25-2010, 06:27 AM
infiltrate our wheelhouse, steer the ship onto the rocks, then pick up the pieces with ready cash and carry them back home across the sea?To whom, do you suppose?

The Queen of England? The Rothschilds?

Winehole23
09-25-2010, 06:29 AM
The political moment is in the USA is oligarchic, no doubt about it. But it could still fall apart.

boutons_deux
09-25-2010, 08:52 AM
one man's financial collapse = bargains for ready buyers?

That's the bankers have operated like that for 100s of years. Anybody ever heard of Shylock?

Amass money, lend out money with a tiny reserve, provoke a economic crisis, then foreclose on distressed borrowers and grab the assets at low prices. And buy anything else from non-borrowing owners in the distressed economy. Bankers certainly qualify as partially behind the claim "Behind every great fortune lies a great crime".

There was an example last night on history or NG channel about the Real Old West. This episode was about the gold/silver boom in Virginia City NV.

Bank of California sent over a very aggressive banker who started making lots of loans, 2%/month (APR 24%) to dirt diggers.

"A branch was opened in Gold Hill, Nevada, near Virginia City, on September 4, 1864.[2] William Sharon was long the bank's Nevada agent."

"lent money to mine owners in circumstances that would inevitably lead to default and repossession."

http://en.wikipedia.org/wiki/Bank_of_california