Thomas Hoenig Looks Out, Sees the 1970s in Our Current Recession.

Kansas City Fed President, Noted inflation hawk and 2010 voting member of the FOMC Thomas Hoenig is leaving the Federal Reserve. Here’s an exit interview he did with the Washington Post, which lays out his two main worries about the current economy.  Worries that have solidified him as an inflation hawk amidst disinflation and high unemployment:

WP: So is that happening now? Are peoples’ inflation expectations rising in ways that are dangerous?

TH: Think about it this way: The inflation of the 1980s started in the mid-’60s. It is a slow process along the way, but if you leave policy easy, then inflation will eventually catch hold…..

WP: One place where there’s not any inflation is in wages. Can you really have an inflation problem without wages rising?

TH: Not initially. But people are losing real purchasing power, and that changes how they’re going to negotiate. People want this lost purchasing power back in time. In negotiating, they’ll say, “Prices have been rising, we deserve more.”…

Fear of the 1970s, really?

I pointed out once that, just as some neoconservatives famously said that there is no “After the Cold War,” for an inflation hawk there is no “After the Professional Air Traffic Controllers Strike Strike.”

What are the fears? Besides the fact that they are fears of things that could happen in the future, as opposed to the unemployment crisis that is definitely happening now, they are fears of the 1970s. The biggest fears are wage-push inflation that could kick in any year now, even though we aren’t projected to get to full employment for over two years and there aren’t union contracts like there were back in the 1970s.

The other is that we could have inflation 15 years from now, akin to how the mid 1960s set up the economy for peacetime inflation problems down the road.

To keep that line of thought going you need to do some pretty intense mental gymnastics. You have to find a way to think that Bernanke instituting QEII and then abandoning it with 9% unemployment is somehow akin to Arthur Burns running the Nixon reelection campaign out of the Federal Reserve. Or that Obama, instead of being a pretty straight-up economic neoliberal, is going to reinstate the 1971-1973 price controls to fight imaginary bond vigilantes and imaginary runaway core inflation.

This is about as bad of a mental framework as one can take to our current problems.  It would be great to have some other people on the FOMC who aren’t working in this paradigm.  People who could be voting if Obama was more aggressive with appointing members to the Committee.

This is important because Hoenig’s vote on the FOMC is more important for the recovery than getting your favorite infrastructure project funded through the Senate. A strong inflation hawk dissenting group can balance out fiscal policy if they want to, and we have few people trying to get different voices into that space.

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4 Responses to Thomas Hoenig Looks Out, Sees the 1970s in Our Current Recession.

  1. Tom says:

    Good riddance to someone whose time to be right came and went 30 years ago. As a former resident of Kansas City, I can tell you that Tom Hoenig has some of the most reactionary economic views around. This may be a product of hanging around, polishing the conventional wisdom with the other ultra-conservative business executives that the Kansas City MSA is noted for. The largest businesses in town are bleeding revenues, employees and opportunities (Sprint, Hallmark, H&R Block, American Century to name a few), top management is all very well paid for mediocre performance, there is no cheaper place to hire people and run a business, yet the area’s civic and business leaders cannot muster the vision or energy to move things forward. Area business leaders seem content with this race to the bottom. Everything’s up to date in Kansas City? That hasn’t been the case since at least the early 1990s.

  2. Ted K says:

    I’d like to say that although I don’t agree with all of Mr. Hoenig’s views, I don’t think you can question that Hoenig is a man of very high integrity, and probably mostly leftward leaning in his views (certainly leftward leaning by comparison to other Fed members). Mr. Hoenig has also been very outspoken against TBTF banks, and the need to lessen their size.

    Here is the crux of the problem in my maybe not so humble opinion: You have a situation where you are asking monetary policy to do the job which is much better suited and much more efficiently done by targeted fiscal policy. But because Democrats generally act like limp-wristed pussies when toughness is needed to pass legislation (example: mortgage “cramdown” legislation in the Senate, see here, http://www.forbes.com/2009/04/30/mortgages-cramdowns-senate-business-cramdown.html ) nothing gets done. So now Bernanke is expected to do Congress’ job, provide new jobs (when he can only “target” his spending to bank reserves and primary dealers) and the Fed’s usual job, contain inflation. It is an impossible task. Instead of whining about Fed policy to do an impossible job, lefties should be griping and voting, that their legislators/Congressman lack the testicles to pass needed legislation. IN FACT Congressman Alan Grayson of Florida was a guy who “went balls to the wall” for Democrats and the “average joe” on main street. Grayson’s “thank you” was, the people he helped thought it was way to much effort to drive a couple blocks and check his name on the ballot. I don’t blame Hoenig or Bernanke for that.

  3. Ted K says:

    I got my HTML tags wrong somehow in the above, so too much bold, but it ends up looking about right anyway.

  4. Pingback: Discussing Rick Perry and the Federal Reserve on Last Word | Rortybomb

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