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Tom Hoenig and The Fed

February 16, 2010

Now, I’m not suggesting that Hoenig has a single Austrian bone in his body, and I doubt he would ever make such a claim. But, for years now, he’s been one of the few establishment economists who actually speaks some sense every now and then.

On Tuesday, he once again spoke on the true threat of inflation, and noted that maybe, just maybe, massive and crushing amounts of debt aren’t the most wonderful things in the world. Last month, he was the lone voice of dissent against the Fed’s continued policy of full-bore inflation and easy money.

Hoenig, president of the Kansas City Fed, was also probably the only high ranking Fed official who ever expressed doubts about the true state of the economy back in 2007. While Hoenig was doubting, Bernanke and company were still touting the “fundamentally sound” American economy.

I’m not trying to make Hoenig out to be some kind of hero or sage, but Hoenig’s lone dissent helps to highlight just how divorced from reality most of the Fed’s leadership is. As a central banker, Hoenig is part of the problem, but a tight money policy is certainly better than a loose money policy in an age in which there is so little capital accumulation and in which the market-rate of interest would undoubtedly be many times the artificial Fed-set rate. So, I give him some credit.

Hoenig has been around for a long time and for whatever reason, seems to be the only person associated with the Fed right now who can even remember that the world existed prior to the 1990s. In Hoenig’s Fed district, which includes Kansas, Colorado, and New Mexico, the economy took a long time to recover after the economic disasters of the 70s and 80s, so inflationary binges have hit the region hard in the past.

Yet, everyone else at the Fed seems to have completely forgotten about Volcker and the money tightening that had to be done to prevent total runaway inflation. It’s as if Greenspan created the universe, and all that came before is formless void. It’s unseemly to see old men with such bad memories, but that seems to be the norm at the Fed with all in agreement except one apparent nut from Kansas City who insists that easy money policies can just possibly lead to inflation. This should be considered common sense, but in the bizzarro world of Geithners and Paulsons and Bernankes, up is down and left is right.

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