The Fed's Monetary Dissident (Thomas Hoenig)

Wall Street Journal ^ | May 15, 2010 | MARY ANASTASIA O'GRADY

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In the aftermath of the 2008 financial panic centered on Wall Street, it's easy to forget that this part of America has its own bitter history of wild speculation that ended in disaster. But Kansas City Federal Reserve Bank President Thomas Hoenig remembers the 1970s all too well. It was a lesson that still shapes his thinking about the role of the Fed's monetary policy in creating asset bubbles.

Mr. Hoenig is [...] a voting member of the [FOMC], which sets U.S. monetary policy. In recent months he's been the committee's sole dissident on the Fed's promise to keep interest rates "at exceptionally low levels" for "an extended period of time." At April's FOMC meeting, Mr. Hoenig objected to that language for the third meeting in a row, warning that those words are inviting a kind of trouble we've seen before.

"I've been in the Federal Reserve for many years, since 1973, and I started out in bank supervision here at the Federal Reserve Bank of Kansas City," Mr. Hoenig tells me in an interview in his office. "During the '70s, we went through a time where interest rates were low" and "through that period I saw banks and others invest [based on inflated] asset values—including farm land, including commercial real estate, including the movement in energy prices ..."

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Mr. Hoenig stresses that the idea is not to make a tight policy, "but to begin to move it back to a more neutral policy." He's particularly concerned that, in the current interest rate environment, "the saver in America is in a sense subsidizing the borrower in America." That's not a good long-term environment for markets. "We need a more normal set of circumstances so we can have an extended recovery and a more stable economy in the long run."

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The Fed and this ZIRP policy is destroying small business, the middle class and seniors who have saved at the expense of the large conglomerates and Wall Street bankers.

There will be blood.

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