The Federal Reserve Bank president who said not to print money

Happy Lucky 13 day! Given the recent headlines, e.g., “Inflation rises 7% over the past year, highest since 1982” (CNBC), let’s look at “The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed” (Politico).

In 2010, Hoenig was president of the Federal Reserve regional bank in Kansas City. As part of his job, Hoenig had a seat on the Fed’s most powerful policy committee, and that’s where he lodged one of the longest-running string of “no” votes in the bank’s history.

Between 2008 and 2014, the Federal Reserve printed more than $3.5 trillion in new bills. To put that in perspective, it’s roughly triple the amount of money that the Fed created in its first 95 years of existence. Three centuries’ worth of growth in the money supply was crammed into a few short years. The money poured through the veins of the financial system and stoked demand for assets like stocks, corporate debt and commercial real estate bonds, driving up prices across markets. Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010. In doing so, he pitted himself against the Fed’s powerful chair at the time, Ben Bernanke, who was widely regarded as a hero for the ambitious rescue plans he designed and oversaw.

Hoenig lost his fight. Throughout 2010, the FOMC votes were routinely 11 against one, with Hoenig being the one. He retired from the Fed in late 2011, and after that, a reputation hardened around Hoenig as the man who got it wrong. He is remembered as something like a cranky Old Testament prophet who warned incessantly, and incorrectly, about one thing: the threat of coming inflation.

So… he predicted inflation but was off by about 12 years as to when it would arrive? How is that different or better than predicting a big stock market crash at some point in the future?

But this version of history isn’t true. While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

How does centrally-planned inflation work?

When the Fed kept interest rates low during the 1970s, it encouraged farmers around Kansas City to take on more cheap debt and buy more land. As cheap loans boosted demand for land, it pushed up land prices — something that might be expected to cool off demand.

But the logic of asset bubbles has the opposite effect. Rising land prices actually enticed more people to borrow money and buy yet more land because the borrowers expected the land value to only increase, producing a handsome payoff down the road. Higher prices led to more borrowing, which led to higher prices and more borrowing still. The wheel continued to spin as long as debt was cheap compared to the expected payoff of rising asset prices.

The bankers’ logic followed a similar path. The bankers saw farmland as collateral on the loans, and they believed the collateral would only rise in value. This gave bankers the confidence to keep extending loans because they believed the farmers would be able to repay them as land prices increased. This is how asset bubbles escalate in a loop that intensifies with each rotation, with the reality of today’s higher asset prices driving the value of tomorrow’s asset prices ever higher, increasing the momentum even further.

And the central planners, back in the 1980s messed up the flip side of this too, causing bank failures when farmland prices fell only 27 percent.

I recommend the article for its historical perspective. Don’t complain if you don’t find a solution to our current situation (high inflation; mediocre economic growth once adjusted for population growth). Part of this banker’s point was that there is no good way to stop printing money.

What did cars look like the last time inflation was this high? Here’s an example from a classic car gathering in our neighborhood:

9 thoughts on “The Federal Reserve Bank president who said not to print money

    • SuperMike: I don’t think that the situations are comparable. The “quantitative easing” efforts of the Fed are new, as far as I know. The years leading up to Reagan featured a big expansion of government spending (sometimes financed by borrowing) and interest rates to keep unemployment low. I think that the current situation is novel.

    • QE had not not injected any new assets in the economy unless you think that currency is somehow different from bonds. It was an exercise in futility by changing the central bank balance sheet composition. Of the CBs I know about only the Canadian CB appears to be directly monetizing its treasury to some extent (16%). Not sure why they are going that.

      The Fed Reserve is not allowed to participate in the new bond issues (yet).

      The causes of the current inflation are not easily explained by the glib ‘feds’ printing money’. The fiscal stimulus money redistribution, supply chain disruption and other coronapanic effects are better explanatory candidates,

  1. The problem with using stonks to avoid inflation is you have to get in at the bottom instead of the top. Most investors bought in after the official number was already above 5%, last year. The time to buy was when it was negative, back in 2009.

  2. Politicians respond to incentives and they learned from what happened to Jimmy Carter, who appointed Paul Volcker to the Fed. Carter got all the short-term pain, Reagan got the ensuing boom. You can bet present and future politicians won’t repeat Carter’s “mistake”.

  3. I don’t think that the current US inflation is caused by the Federal Reserve, because the US dollar is quite stable compared to other currencies. Look at the exchange rate of USD vs Euro, UK Pound, Swiss Franc, Swedish Krona, Japanese Yen, Korean Won.. there is no trend that would indicate that the US Dollar is being devalued because of money supply. Otherwise, the value of the USD compared to these currencies would fall. Also, there are raising prices all over the world.

    The only currency that is getting more expensive is the Chinese Yuan, but I assume there are other reasons for it.

    • Everyone is printing currency hard. Seems that real value to back country currency is only in China. Inflation is because more not backed by real assets currency contracts, dollars or euros, are chasing slower growing value (cars, houses, phones etc…) So currency printing and slow “growth” is the problem. EU has been at it too, did not follow others that thoroughly

    • Tim: This is a great point. Thanks for encouraging us to “think globally while paying locally”. Looking back for 12 months, the dollar is actually UP against my beloved Swedish Krona (the currency of folks who “experimented” by continuing to go to work after continuing to drop children off at school).

      Inflation in Sweden is not nearly as high as in the U.S. Only 4.1 percent and, excluding energy, 1.7 percent.

      This is making my head spin a bit. The USD is on a runaway inflation train while a person can still live in Sweden, albeit maybe not buy gasoline or natural gas for heating, on an under-mattress supply of Swedish Krona. Yet the USD goes UP against the Krona. I know that markets are rational and therefore the only possible inference is that I am stupid 🙁

  4. Price consumer index and real estate prices grew steadily during Obama years. My rare visits to supermarkets when I acted as a substitute for designated family shoppers always surprised me how basic staple goods were 30 cents hire per container or container was 10% lighter then last time.
    That was back than. Now of course inflation went into overdrive

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