It's the Money, Stupid

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, is the only significant public official on record in opposition to the easy-money, zero-interest-rate monetary policy being pursued by Fed chairman Ben Bernanke. So there were multiple layers of irony when Hoenig journeyed to Lenexa, Kansas, on September 23 to deliver a dinner speech to the Hope for America Coalition, a local affiliate of the Tea Party movement.

According to Bloomberg Business Week, a Kansas-based Tea Party leader named Steve Shute praised Hoenig for his willingness to go “toe-to-toe with Ben Bernanke and the Boston-New York-Washington-San Francisco elite axis at the Fed.” He added that most members of that day’s dinner audience “believe the Federal Reserve should be abolished,” on the ground that it is “helping to destroy the country.”

Two days earlier, at the most recent meeting in Washington of the Federal Open Market Committee (FOMC), Hoenig had cast his vote against Bernanke’s latest easy-money scheme, which sets the stage for another round of “quantitative easing,” a reflection in turn of the fact that for almost two years, the short-term interest rate target controlled by the FOMC has been as low as it could possibly be, yet the U.S. economy is still stagnant.

It was Hoenig’s sixth consecutive FOMC meeting at which he cast the only vote against Bernanke’s policy. But the December FOMC meeting will be the last of his long career. He then rotates off the FOMC and in September 2011 reaches the mandatory retirement age of 65, so Team Bernanke can expect to face even less questioning of its policy—particularly given the current complacent state of the Republican party.

At the moment, Republican leaders and policy elites are advancing exclusively fiscal solutions that address only the government response to the economic crisis and not the crisis itself. Fiscal deficits did not create the crisis, and reducing deficits won’t put our economy on a stable footing. From its inception in 2007 right up to the present, the crisis derived from the interaction between excessive investment leverage and dysfunctional interest-rate policy—in other words, a predominantly monetary phenomenon, albeit one that has had grave fiscal consequences.

As long as the GOP enjoys the luxury of being the only alternative to Barack Obama and the Democrats, the party is understandably reluctant to delve into the murky depths of monetary policy. But after November 2, the Republicans’ role will change. They could do worse than pay attention to the only public official, elected or unelected, who is speaking out against current monetary policy, telling anyone who will listen—including an increasingly impatient Tea Party movement—that the root of the crisis is monetary.

Shortly after the fifth of his six “No” votes at the FOMC meeting of August 10, Hoenig delivered a speech in Lincoln, Nebraska, that explains in considerable detail the thinking behind his stubborn and lonely dissents. He recalls being on the FOMC in the third quarter of 2003, when (with strong urging from the most influential new George W. Bush appointee, governor Ben Bernanke) the Alan Greenspan Fed cut short-term interest rates to 1 percent—during a quarter, it turned out, when the economy was growing at nearly a 7 percent annual rate. The Fed then left rates at 1 percent for several months, even after it had become evident that the economy was taking off in the wake of the 2003 Bush tax cuts. This excessive loosening, Hoenig argues, allowed credit to explode and “set the stage for one of the worst economic crises since the Great Depression.”

Hoenig also believes that a milder but similar overeasing by the Green-span FOMC triggered significant dislocation a decade earlier, in the 1990s. In his review of the ominously escalating pattern in the financial crises as well as in Fed policy responses, Hoenig raises the possibility that the worst train wreck of the dying paper-dollar system may still lie ahead. Summoning his strongest language to date, Hoenig condemns as a “dangerous gamble” the Bernanke FOMC’s decision to pursue a zero-interest-rate target for months, perhaps even years beyond its appropriate time. If zero interest rates constitute a dangerous gamble, the Fed’s ongoing public campaign for additional quantitative easing must have him terrified.

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