Hoenig The Terrible
Ugh. There are times that really try my patience. This is one. Kansas City Fed President, Thomas Hoenig, is urging the Fed to raise interest rates in order to head off inflation.
He’s an idiot.
Well, I suppose I shouldn’t throw around harsh words like that, but really. What inflation?
His analytical back-up? That he keeps being asked about inflation. Everywhere he goes, apparently, he is asked about the dangers of imminent inflation. He should get out and about a bit more often. As in get away from his hawkish friends. So, all we have to do to spook a Fed governor is talk about something an awful lot and he immediately rushes off and lobbies for a reaction.
How about this:
Unemployment. Unemployment. Unemployment. Oh my gosh! Unemployment.
Nothing. I hear nothing.
That’s the problem with tone deaf – or totally deaf, take your pick – hawks. They want inflation to be a problem. They just relish the idea of applying the big squeeze to the economy. They want to bask in that puritanical glow of having to be the harsh, stern, yet all too human paternalistic figure who put the state of the economy ahead of personal popularity or glory. Except, of course, that they secretly hope to go down in history as the person who was serious when all others were silly.
People like Hoenig have been crying wolf ever since it became clear that the private sector needed the public sector to bail it out. That hurt their sensibilities and disrupted their ever more smooth assumption that free market thinking had conquered the world. The years of quiescent inflation and steady growth were held up as witness to the success of their right wing views. The ugly mess of 2008, and the even uglier need for government intervention to stave off depression, mucked up that vision. Mucked it up so much that they all want to revert to the old ways as soon as possible in order to bury the evidence that their ideas failed.
To Hoenig and his ilk, any large scale run up in the money base will inevitably, absolutely and undeniably, cause rampant subsequent inflation. As night follows day, this is, in their minds, a regularity we cannot avoid. So QE2 and its antecedents are going to be a problem. It is just a matter of time.
So they wait. And hope. And look for any morsel that might give them hope that easy money is the world’s worst nightmare. And they wait. And wait.
Poor old Hoenig is so tired of waiting that he has simply given up looking for evidence. He just wants to get on with it. We should raise rates. Now. After all we know it’s a matter of time. Meanwhile he mutters on about debasing the currency, hyperinflation, and makes other derogatory comments to sow the seeds of discontent.
I wonder if he has ever paused to wonder whether it is his panicked tone that causes his listeners to worry about the imminence of inflation. After all he’s a Fed governor, and he ought to know. Right?
So his loose and baseless talk is contributing to the problem. He is causing the very problem he is seeking to cure. How very convenient.
What do the rest of us do?
Ignore Hoenig and those like him who see ghosts. Maybe the better analogy is that they hear voices. One things for sure, they don’t see hard evidence. There is nothing in the profile of the data that suggests we need to raise interest rates just yet. The economy is growing, but slowly. Too slowly to deal with high unemployment at anything other than a glacial pace. Global prices are rising on raw materials, food and oil. But those things do not drive long term inflation. Wages do. And, to put it politely, wages are sluggish. Turgid may be a better word to describe their progress. The long term trend in prices is up, but since non-wage prices play a relatively small role in the overall price level even a fairly rapid rise would not translate into rampant inflation.
It would take a sudden and radical shift in the labor market for inflation to explode on the scene and create the kind of long term problem worth reacting to. And that is not about to happen.
Why?
Because people like Hoenig have taken their eye off the other objective of Fed policy: maintaining full employment. In Hoenig’s muddled mind, whenever there is a trade-off between inflation and getting to full employment, the former wins hands down over the latter. Indeed, in true central banker mode, he ignores the full employment mandate anyway.
But enough of Hoenig. He’s a fool. Unfortunately he is a much quoted and influential fool. His effect is to cow Bernanke into backing away from keeping money easy until we have a recovery that is meaningful to everyday people. Up until now the benefits have gone to shareholders in the form of high profits. Everyone else is still digging out and paying the price for the binge the bankers indulged in.
Who benefits from austerity and higher interest rates? Lenders.
Who suffers the most? Workers, the poor, the elderly, and the young.
Enough said. We know where Hoenig’s priorities are.
