The Fed’s Dissenting Hawk

BusinessWeek has a great profile of Tom Hoenig, the president of the Federal Reserve Bank of Kansas City. Through the sluggish recovery, the other members of the Federal Open Market Committee have repeatedly voted to keep interest rates at scratch for an “extended period.” But not Hoenig. For the past six meetings, he has been the lone dissenter, arguing that the recovery is underway and the Fed’s loose monetary policy is setting the country up for yet another asset bubble.

The story notes that this is, well, an unpopular position.

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.

The article notes that while the economic establishment might knit their eyebrows at Hoenig’s ultra-hawkish stance, it has made him something of a folk hero in Midwest:

All of this—the prairie populism, foreboding about bubbles, and glass-half-full economic perspective—has made Hoenig a hero in the seven-state Kansas City Federal Reserve District (Kansas, Colorado, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico, and the western third of Missouri). “Tom has seen the good, the bad, and the ugly, so people listen to him out here,” says Terry Moore, the president of the Omaha Federation of Labor of the AFL-CIO and a member of Hoenig’s board of directors at the Kansas City Fed. Moore acknowledges that unions generally have pushed for a degree of monetary stimulus that Hoenig resists. But the AFL-CIO leader trusts the banker: “We feel like Tom represents a heartland view of the economy you don’t necessarily get from New York or Washington. He’s an old farm boy from Iowa, and we like that.”

And it sheds some light on why Hoenig wants to raise interest rates: Because he believes that the Fed’s policy of lending to big banks for close to nothing, letting them rake in billions on the margin, advantages Wall Street institutions over Main Street institutions.

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.” When community banks stumble, he adds, they are allowed to fail. When Wall Street collapsed, it got a heroic rescue.

In the piece, Hoenig criticizes the Fed for being too close to and caring too much about Wall Street. But the article never does explain why Hoenig cares more about inequality among banking institutions than the 9.6 percent unemployment rate and the jobs crisis the Fed has a mandate to try to ease.

“It seems odd to me that with 200 economists at the Federal Reserve in Washington, that Tom Hoenig has discovered some wisdom that escaped all of those people,” says Lou Barnes, a veteran banker who tracks the Fed for Premier Mortgage Group in Boulder, Colo. “There’s something undignified about all the dissenting and the questions it raises….It makes you wonder whether he’s grandstanding.”