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JakilaTheHun (99.93)

Thomas Hoenig on the Potential Diaster of Excessive Gov't Spending

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February 18, 2010 – Comments (8)

Thomas Hoenig is the President of the Kansas City Fed.  He has been very vocal about the need to break up the large banks and to balance the budget.  If I had my way, we'd oust that worthless slime, Timothy Geithner, from the Treasury and replace him with Hoenig. 

Hoenig wrote an article that appeared today in the NY Post on the US debt problem:

"The Feds on Course of Doom"

 

[I would've pasted the whole article, but TMF might've simply taken it down.]

 

Hoenig is absolutely right and I'd much rather have him manning the Treasury Dept than Geithner. We're going to have to have more people pressuring the government to balance the budget to get it done, because the politicians from both parties never want to cut spending.  We need to start cutting military spending.  We need to find a way to reform Medicare/Medicaid payments.  And most importantly, we need to phase out Social Security, which was always a terribly designed program and will drain the lifeblood out of this country if we don't eliminate it.  

 

While we're on the subject of the Fed, however, this goes back to why the Federal Reserve Bank is such a valuable entity to us.  Conspiracy theorists on this site will have you believe that it's the cause of all evil.  In reality, the Federal Reserve is about the only roadblock to hyperinflation. The Fed's mission is to maintain price stability, keep inflation in check, and maximize economic potential. It is manned by a handful of very respected economists. 

Congress, on the other hand, has no mission except the ambitions of its individual members, which normally means pleasing lobbyists, getting as much money for their own districts as possible, and occasionally handing out tax breaks.  If there's any body in our country more worthless than Congress, than I'm not sure what it is.  

If we did as the central bank haters wished and "abolished the Fed", the end result would be that Congress would have complete control of our monetary policy.  That's right --- Congress --- the entity most responsible for creating the current mess and for racking up a national debt of over $12 trillion!!!  If you want a recipe for hyperinflation, then by all means, abolish the Fed.  The Fed is the only roadblock to hyperinflation, because their agenda (price stability) is directly at odds with that of Congress (spend, spend, spend).  

8 Comments – Post Your Own

#1) On February 18, 2010 at 2:39 PM, Option1307 (29.77) wrote:

Great read, I've been a fan of Hoenig for some time and wrote about him last fall. It's nice to see that their is someone with power, albeit small, that is still on our side.

Good post, thanks for sharing!

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#2) On February 18, 2010 at 10:24 PM, Tastylunch (29.33) wrote:

That's right --- Congress --- the entity most responsible for creating the current mess and for racking up a national debt of over $12 trillion!!!  If you want a recipe for hyperinflation, then by all means, abolish the Fed. 

I dunno Jakila, normally the two act againts each other, but lately both seem more than happy to flood the economy with paper.

Not really sure I buy into the Fed is our savior from inflation, it hasn't been the same since Volcker left.

I mean it is the Fed who engage in QE and it was the Fed who lowered rates to insane levels in 2002.....

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#3) On February 18, 2010 at 10:24 PM, Tastylunch (29.33) wrote:

FWIW I do hate congressmen more since they are unaplogetically on the take.

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#4) On February 19, 2010 at 8:15 AM, JakilaTheHun (99.93) wrote:

I strongly disagree, Tasty.  The belief that the Fed is trying to inflate away our debt is nothing but a conspiracy theory propagated by people who are ideologically opposed to central banks.  There is absolutely no evidence to support this view. 

You mention Volcker, but the truth of the matter is that we have not had continuous high double-digit inflation since Volcker left the Fed; hence, there has been no reason for any other Fed chairs to raise interest rates to exboritant levels to combat inflation since that time. 

If anything, the evidence suggests that the Fed is too timid about creating inflation.  The current Fed is still fighting the previous war, the stagflation of the '70s and early '80s.  As a result, they are obsessed with keeping inflation at around 1% -2%, rather then aiming for a more ideal target of 3% - 4%.  But there are a few problems with that in that (a) low interest rates are more likely to give fuel to bubbles and low interest rates prevail with 1% inflation, (b) once there is a crash, you have little room to manuever, and (c) 3% -4% inflation is a more ideal range that tends to bring real GDP closer to potential GDP.  

 

I detest Alan Greenspan and think he made a lot of poor decisions as Fed Chairman, but people blaming him for the crisis are pointing their finger at the wrong guy.  The Fed is a scapegoat and an easy one because most people who don't have a Master's level degree in Finance or Economics don't understand it.  

If I had to quantify who was responsible for the crash, I'd go with:

5% Federal Reserve

50% Federal and state politicians

45% Bankers and other financial institutions via securization and excess leverage

 

Clinton, Bush II, and both parties in Congress are much more to blame for this mess than the Fed.  The Fed merely *reacts*.  Greenspan lowered rates too low in 2002, butto suggest that was the primary cause of this mess is simply inaccurate. What fueled the bubble even more was record deficit spending by the Bush Administration (which hardly anyone ever mentions), reckless lending policies, and Congressional favoritism/subsidies towards homebuying.

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#5) On February 19, 2010 at 8:39 AM, russiangambit (29.33) wrote:

> The Fed is a scapegoat and an easy one because most people who don't have a Master's level degree in Finance or Economics don't understand it.  

I have it and I am still not sure I understand it all. I din't rmember us being taught specifically on how FED operates. We talked about monetary policy and about risk free rate and such buit never discussed really why it this way and not the other.

I agree that FED is reactionary, but they still ahve freedom to react as they chose, if theya re truly independent. But the real truth is that they want to micromanage the economy and they don't ahve the tools to do that. I don't think anybody does, the economy is too comples and there are many unintended consequences when you start interfering.

Still, it would be good for a FED to grow a spine once and admit that 0% interest rates are not normal and they are punishing savers in this country while benefiting the banks and big corporations and irresponsible borrowers.

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#6) On February 19, 2010 at 8:52 AM, PolicyDaddy (< 20) wrote:

You can view video of his recent remarks on the subject that he gave before the Peterson-Pew Commission on Budget Reform at http://www.youtube.com/watch?v=-Wvnc6t2LsY

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#7) On February 19, 2010 at 9:11 AM, whereaminow (23.71) wrote:

You can't brush away criticisms of the Fed simply by saying that you need a certain level degree to understand it.  First, it's incredibly arrogant.  Second, it confers to the owner of the degree a level of genius that may not correspond with his actual stature. Finally, it confers upon the degree itself a level of importance that may not match reality.

David in Qatar

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#8) On February 19, 2010 at 8:59 PM, Tastylunch (29.33) wrote:

JakilaTheHun

I don't think we differ in substance, just more degree

The belief that the Fed is trying to inflate away our debt is nothing but a conspiracy theory propagated by people who are ideologically opposed to central banks

I don't think they are trying to inflate the debt away, I think they are trying to keep credit flowing. But I don't see how QE and chopping interest rates can be considered anything other than inflationary action. You may think it's not enough, but it seems to me that is pretty clear cut loosening action.

but the truth of the matter is that we have not had continuous high double-digit inflation since Volcker left the Fed

I'm not so sure it's that clear cut, I don't have a lot of faith in the gov't produced CPI. Too many essential products like education and healthcare have been running in the double digit increases for what seems eons...

But I'm not an expert statistician.

I do know this much since 12/08, We've had more price decreases than increases in our merchandise repurcahsing.

but people blaming him for the crisis are pointing their finger at the wrong guy.

While I wouldn't give him archvillian status his attitudes sure enabled a lot of reckless behavior and overconfidence.

To be honest , I'm not really interested in a witchhunt. The problem is so big that try to pin it on individual actors seems pointless. I think it's safe to say it's become systemic and is going to be extremely difficult to correct and prevent from reoccurring.

Clinton, Bush II, and both parties in Congress are much more to blame for this mess than the Fed. 

That's indisputable. Hard to really know when to start saying congress went off the rails (or really if it ever was on them to begin with, it's not like it functioned well in the 1850's either). The S&L mess was pretty awful.

What fueled the bubble even more was record deficit spending by the Bush Administration (which hardly anyone ever mentions)...

You don't hang around me much then. :) One of the biggest crocks I've ever heard is that republicans still claim "fiscal conservatism " as one of their qualities. They have wholly betrayed any pretense of following that ideology. I may not be crazy about tax and spend ways of the democrats, but at least they seem interested in where the funding for their expenses are coming from.

Here in Columbus the democrats actually balance the budget every year and we maintain our AAA credit rating (the only remaining city in the US to still have that to my knowledge). I don't really care for how they do it, but they do do it. And I know plenty of other places where it's the inverse.

Perhaps the term ought to be rebranded "fiscally responsible" as it's clearly not related to either party.

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