The New Broken Wing Hawk on the Fed

Kansas City Federal Reserve President Thomas Hoenig is now serving as a voting member of the Federal Open Market Committee. For Fed regional presidents, outside of the NY Fed which is always a voting member of the FOMC, the voting position is a rotating position.

Along with the move to the a voting seat, Hoening has stepped up his warnings about the looming debt crisis. Allan Rappaport at FT reports:

The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.

Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.

“Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.

He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.

On Tuesday he said that the worst option for the US was a scenario where the government “knocks on the central bank’s door” and asks it to print more money. Instead, the administration must find ways to cut spending and generate revenue. He called for a “reallocation of resources”and noted that the process would be painful and politically inconvenient.

The US budget deficit is projected to be $8,000bn (€5,800bn, £5,000bn) in the next decade. Barack Obama, US president, recently lifted the government’s borrowing authority to $14,300bn.

I'm really sick and tired of these guys being called "hawks". Yeah, sure, he is a "hawk" about the debt, but this in no way means he is a hawk in a sense that would be of much more significance, i.e. as an anti-big government hawk.

Notice he warns about the dangers of the growing debt, which is a problem, but then when he mentions solutions, he states, "the administration must find ways to cut spending and generate revenue."

The problem here is his "generate revenue" comment. Generate revenue means one thing, higher taxes. If he thinks higher taxes is any kind of solution to an exploding government, the man is very dangerous. Taxes suffocate economies. They pull money from the productive class and pass it on to the politically powerful, e.g. Goldman Sachs. It further creates disincentives for the productive to work and create. That Hoenig doesn't warn about the dangers of higher taxation suggests he is just another big government advocate, attacking the free markets with some rear guard action.

As if to emphasise this point, he also, "called for a 'reallocation of resources' and noted that the process would be painful and politically inconvenient." This is micro-managing of the macro-economy talk. It has know chance of success. It violates every concept that Mises and Hayek taught us about the impossibility of managing the economy in detail at the macro level. It smacks of the old 10 year plans the Soviet Union use to regularly draw up to "reallocate resources", until its collapse from the absurdity of it all.

Further, I seriously doubt Hoenig gets the subtleties of interest rate policy and monetary policy. He seems to think interest rates are too low, now.

Although the Fed shouldn't be in the interest rate manipulation game at all, given that the money supply is not growing and the effective funds rate is below the interest paid on excess reserves, there is little chance the money supply is going to grow under these circumstances. This will change if the Fed Funds rate climbs, but is not the case now. Thus, Hoenig by popping of about current rates suggests he is missing the important subtleties.

In short, Hoenig is a deficit hawk but that is the only positive. After that, he is clueless and dangerous. He offers impossible solutions, with a bent toward government planning of the economy, and doesn't get interest rate and monetary policy. This is one damaged bird.