(Another great report from Bloomberg)
Thomas M. Hoenig [...] 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?”
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.
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.”
Part of Hoenig’s pain comes from being typecast as a heartless inflation hawk, indifferent to the common man who can’t find work. 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.
While persisting in this lonely campaign for the end to ultra-easy credit, 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 under a Democratic President and a Treasury Secretary from Goldman Sachs under a Republican President. The outcomes were not good,” Hoenig says while being driven to a luncheon talk at an affordable housing conference in Topeka, Kan.
As popular as he is in the region, there are plenty who disagree. “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.”
Under the leadership of then-Chairman Alan Greenspan, the Fed drove rates down in response to the dot-com crash of 2000 and the recession that followed. Hoenig had a turn as a voting member of the FOMC in 2001 and dissented twice that year from rate-lowering moves, even after the September 11 terrorist attacks exacerbated the economic slowdown. 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.
Hoenig harbors powerful misgivings over not dissenting more often and more forcefully during the Greenspan years. “He regrets going along with the votes when Alan Greenspan was chairman to get rates so low and keeping them so low so long,” says his friend Fisher. In an interview, Greenspan says: “He’s a person with an independent point of view.” He declined to comment on Hoenig’s regret about his votes. Bernanke declined to comment for this article.
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 Inc., JPMorgan Chase, and Bank of America Corp. “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.