October 23, 2017

Concerns Over China Push Stocks Lower

Stocks on Wall Street closed slightly higher Friday following a slew of mixed earnings reports, and despite fears that an overhaul of China’s industry could slow down the world’s second-largest economy.

By the end of trading the Standard Poor’s 500-share index and the Dow Jones industrial average were up less than 1 percent, and the Nasdaq composite was 0.2 percent higher.

Amazon.com reported a loss for the second quarter, but shares rose 2.9 percent.

Beijing has ordered companies to close factories in 19 industries where overproduction has led to price-cutting wars, affirming its determination to push ahead with a painful makeover of the economy. That move followed weak manufacturing data on Wednesday. China’s Shanghai Composite dropped 0.5 percent to 2,010.85.

In Europe, Britain’s FTSE 100 index ended the day down 0.5 percent to 6,554.79 points, while Germany’s DAX fell 0.7 percent to 8,244.91.

France’s CAC 40 bucked the trend, rising 0.3 percent to 3,968.84. It was bolstered by a 3.6 percent rise in the shares of LVMH, the luxury goods maker, after it reported higher earnings. Meanwhile, shares in French media company Vivendi were up 0.6 percent after it agreed to sell most of its majority stake in video games maker Activision.

Over all, trading has been quiet in recent days as a lot of people wait for next week’s meeting of the Federal Open Market Committee in the for guidance on when the central bank will start reducing its monetary stimulus.

Since late last year, the Fed has been buying $85 billion in Treasury and mortgage bonds a month — a move that has kept long-term rates near record lows and supported economic recovery.

In Asia, Japan’s Nikkei 225 index fared worst on Friday, closing 3 percent lower at 14,129.98, due to a big rise in the yen, which risks making the country’s exports less competitive on international markets.

Japan on Friday said consumer prices rose in June for the first time in more than a year, an early sign that the government’s stimulus policies are working. While that is a promising sign in the long-term, the signs of inflation suggest interest rates could eventually increase — higher rates tend to strengthen a national currency. The dollar was down 0.9 percent against the yen, at 98.34 yen.

Elsewhere in the region, Hong Kong’s Hang Seng gained 0.3 percent and Australia’s SP/ASX 200 rose 0.1 percent.

In energy trading, benchmark crude was down 79 cents at $104.70 a barrel in electronic trading on the New York Mercantile Exchange.

Article source: http://www.nytimes.com/2013/07/27/business/daily-stock-market-activity.html?partner=rss&emc=rss

Uncertainty at Fed Over Its Stimulus Plans and Its Leadership

President Obama suggested late Monday that he was likely to nominate a new Fed chairman this year, saying that Mr. Bernanke had “already stayed a lot longer than he wanted or he was supposed to.” Mr. Obama added that Mr. Bernanke, whose second four-year term in office ends in January, has done an “outstanding job.”

The comments bounced around Washington on Tuesday even as Mr. Bernanke convened a regularly scheduled meeting of the Fed’s policy-making committee to debate how much longer the Fed will continue its current efforts to stimulate the economy. The Fed is not expected to announce any immediate changes on Wednesday, at the close of the meeting, but investors are watching for signs that the Fed is considering scaling back later this year.

The central bank is buying $85 billion a month in mortgage-backed securities and Treasury securities, in addition to holding short-term interest rates near zero. Both measures are intended to encourage job creation by easing financial conditions, and the Fed pledged to press the campaign until it saw “sustained improvement” in the outlook for the labor market.

But that message has been muddled recently by conflicting pronouncements about the duration of the asset purchases from several of the 19 Fed officials who help make policy. Mr. Bernanke contributed to the confusion by telling Congress last month that the Fed might begin to reduce the pace of its purchases this year — but might not — while avoiding any clear account of how the central bank would make such a decision.

Uncertainty about the Fed’s plans and its leadership has focused attention on the news conference that Mr. Bernanke plans to hold on Wednesday afternoon after the Federal Open Market Committee releases a policy statement. The Fed also will release economic projections by the 19 officials, which could help to explain the apparent momentum toward doing less by showing how quickly they expect the economy to grow and unemployment to decline.

“Federal Reserve officials believe that clear communication about policy intentions can help manage market expectations and so increase the effectiveness of monetary policy,” Kevin Logan, chief United States economist at HSBC, wrote to clients on Monday. “Lately, however, the policy makers appear to have muddled the message and so have created confusion rather than clarity on the policy outlook.” The news conference, he said, is a chance “to clarify.”

The confusion is costly. A recent survey of the 21 companies authorized to trade securities with the Federal Reserve Bank of New York, a list that includes most of the nation’s largest financial companies, found widespread agreement that uncertainty about the Fed’s plans was effectively tightening financial conditions. Interest rates on 10-year Treasuries, a benchmark for the Fed’s efforts to reduce borrowing costs, rose to 2.20 percent on Tuesday from a low of 1.66 percent at the start of May.

Some analysts argue that the Fed still intends to press ahead with asset purchases at least through the end of the year. They note that Mr. Bernanke has allowed dissenters to command the public stage even as they exercise relatively little influence over the course of Fed policy. Some also see the cacophony as an intentional damper on the ebullience of investors, carving out time for the benefits of low interest rates to spread through the economy.

The unemployment rate has fallen only slightly since the Fed began its latest round of bond buying, to 7.6 percent in May from 7.8 percent in September. And even that decline happened mostly because people stopped looking for work. The share of American adults with jobs has not increased in three years. The Fed’s preferred measure of inflation has sagged to 1.05 percent, the lowest level in more than 50 years and markedly below the 2 percent annual pace the Fed considers healthy.

“In our view it would be risky to deliver a hawkish monetary policy message at a time when growth remains sluggish, inflation continues to trend down and market inflation expectations are dropping sharply,” Goldman Sachs economists wrote in a note to clients last week.

Other analysts, however, see mounting evidence that Mr. Bernanke and his allies would like to buy fewer bonds, although most still do not expect the Fed to reduce the pace of its asset purchases before September at the earliest. Fed officials have described the asset purchases as an experiment with uncertain consequences, particularly the potential disruption of financial markets, and warned that those risks might increase with the size of the Fed’s holdings.

While the pace of growth has increased only modestly, the worst-case possibility, in which mismanaged fiscal policy sends the economy sliding back into recession, has faded. “The asset purchases may have been simply insurance against a fiscal disaster that did not materialize,” wrote Tim Duy, an economist at the University of Oregon.

Moreover, some Fed officials have concluded that large job gains are beyond reach. Economists at the Federal Reserve Bank of Cleveland wrote recently that the Fed should be satisfied if the economy adds 150,000 jobs a month — well below the monthly average of 176,000 so far this year. Economists at the Federal Reserve Bank of Chicago set the bar even lower, at 80,000 jobs a month. Both estimates are based on the assumption that many of the people who stopped looking for work in recent years will never return, allowing the unemployment rate to return closer to its normal levels during an economic expansion even without a rebound in employment.

Some of these decisions will most likely be made after Mr. Bernanke leaves office. Mr. Obama, in an interview with the journalist Charlie Rose on PBS, avoided answering a direct question about reappointing Mr. Bernanke. He said instead that Mr. Bernanke “has been an outstanding partner along with the White House, in helping us recover much stronger than, for example, our European partners, from what could have been an economic crisis of epic proportions.”

The interview, taken together with earlier comments by Mr. Bernanke, reinforces a growing expectation that the administration plans to nominate a new Fed chairman this year. The position requires Senate confirmation. Only three people have held the Fed chairmanship in the last 30 years, and the Obama administration has an opportunity to put a Democrat atop the central bank for the first time since the resignation of Paul Volcker in the late 1980s.

Janet L. Yellen, the Fed’s vice chairwoman, is widely regarded as a leading candidate. She would become the first woman to head the Fed or any other major central bank. Other possible candidates include Timothy F. Geithner and Lawrence H. Summers, both former Obama advisers, and Roger W. Ferguson Jr., a former Fed vice chairman.

Article source: http://www.nytimes.com/2013/06/19/business/economy/uncertainty-at-fed-over-its-stimulus-plans-and-its-leadership.html?partner=rss&emc=rss

Economix Blog: The Gorilla and the Maginot Line

Janet Yellen, vice chairwoman of the Federal Reserve, shown at a conference in March, knows her way around a metaphor.Gary Cameron/Reuters Janet Yellen, vice chairwoman of the Federal Reserve, shown at a conference in March, knows her way around a metaphor.

Janet Yellen likes metaphors. This is a common trait among central bankers, at least the ones who see value in trying to explain their work.

In 2007, she compared problems in the housing market to a 600-pound gorilla lurking in the corner of the Federal Reserve’s meeting room.

In 2010, she described the state of financial regulation before the crisis as “a financial Maginot Line that we believed couldn’t be breached.”

We all know what happened next: The gorilla broke through the Maginot Line.

She is not the most colorful of the current crop of Fed officials. That honor surely belongs to Richard Fisher, president of the Federal Reserve Bank of Dallas, whose most recent speech was titled “Oil and Gas, Blondes and Over-Accessorized Brunettes, and Ruthless, Hard-Drinking Cowboys.”

Nor has she ever produced anything quite as enduringly memorable as former Fed chairman William McChesney Martin’s famous description of central banking. The job, he said, is “to take away the punch bowl just as the party gets going.”

But Ms. Yellen, whom I profiled Thursday as a logical successor to Ben S. Bernanke, the Fed chairman, can paint a picture. Consider her description at the September 2007 meeting of the Fed’s policy-making group, the Federal Open Market Committee, of “the earthquake that began roiling financial markets in mid-July.  Our contacts located at the epicenter — those, for example, in the private equity and mortgage markets — report utter devastation.  Anecdotal reports from those nearby — for example, our contacts in banking, housing construction, and housing-related businesses — suggest significant damage from the temblor.”

In 1995, concerned that the Fed was keeping interest rates too high, she compared the effects to “a termites in the basement problem,” suggesting that the high rates would gradually weaken and undermine the vitality of the economy.

“A ‘termites in the basement’ problem is a nagging, chronic little problem that can eventually cause a lot of grief if it is not attended to,” Ms. Yellen said at the Fed’s September meeting, according to the Fed’s transcript. “Termites nibble away slowly so the problem just creeps up and there is no great sense of urgency that one absolutely has to deal with it on one day as opposed to the next.”

Other members of the committee then picked up on the metaphor, invoking termites to make their own case for lower interest rates.

And then there is my personal favorite. Earlier in 1995, the Fed was debating whether to endorse Congressional legislation directing the Fed to make price stability its sole objective, replacing the “dual mandate” that instructs the central bank to minimize both unemployment and inflation.

Ms. Yellen was one of the strongest voices in opposition, arguing repeatedly that the people wanted the central bank to mitigate economic downturns in addition to minimizing inflation, and that the central bank had the ability and therefore the responsibility to do so.

Even the German central bank, famous for its commitment to suppress inflation, sought to mitigate economic downturns, she said.

“Who would be prepared to believe that the F.O.M.C. is single-mindedly going to pursue an inflation target regardless of real economic performance, if not even the Bundesbank is prepared to go that far?” she said. “So, that means that the targets are going to be perceived as a hoax.”

And then, to drive the point home, she added, “They are not going to be any more believable than I would be if I told my child that I was going to cut off his hand if he put it in the candy drawer.”

Article source: http://economix.blogs.nytimes.com/2013/04/25/the-gorilla-and-the-maginot-line/?partner=rss&emc=rss

Fed Maintains Rates and Strategy

WASHINGTON — The Federal Reserve produced no surprises on Wednesday, affirming that it would plow ahead with its efforts to stimulate the economy even as it hailed “a return to moderate economic growth following a pause late last year.”

The Fed under its chairman, Ben S. Bernanke, has made clear that it regards its program of low interest rates and large asset purchases as necessary for the economy to keep growing fast enough to return unemployment to normal levels.

In a statement issued after a two-day meeting of its policy-making committee, the Fed reiterated that it would continue to hold short-term interest rates near zero at least until the unemployment rate falls below 6.5 percent, which forecasters expect no sooner than 2015. The February unemployment rate was 7.7 percent.

To hasten that process, the central bank said it also would keep to buy $85 billion a month in Treasury and mortgage-backed securities.

While spending by consumers and businesses has increased recently, the Fed noted that fiscal policy “has become somewhat more restrictive.”

“The committee continues to see downside risks to the economic outlook,” the statement said.

The decision was supported by 11 members of the Federal Open Market Committee. Esther George, the president of the Federal Reserve Bank of Kansas City, recorded the only dissent, as she did in January, again citing her concerns that the Fed’s efforts could destabilize markets and seed future inflation.

The Fed separately released economic forecasts by 19 of its senior officials showing a slight strengthening in the consensus view that the central bank will need to suppress short-term interest rates for several more years. While a majority of the officials continued to predict that the Fed would begin to raise its benchmark interest rate by the end of 2015, the average predicted rate declined slightly as a number of officials shifted forecasts downward.

In keeping with that shift, the officials’ expectations for the economy soured slightly. They predicted that the economy would expand between 2.3 and 2.8 percent this year, down from their December forecast of growth between 2.3 and 3 percent. The consensus forecast for 2014 also fell. Officials now expect growth between 2.9 and 3.4 percent in 2014, compared to a December forecast of growth between 3 and 3.5 percent.

Concerns about inflation remained in abeyance. Fed officials do not expect inflation above 2 percent over the next three years, well below their self-imposed ceiling of 2.5 percent inflation. They forecast slightly less inflation during the current year and slightly more by 2015, as compared with their December projections.

At the same time, officials were modestly more optimistic about job growth. They predicted that the unemployment rate would rest between 6.7 and 7 percent at the end of 2014. In December they had predicted that the rate would sit between 6.8 and 7.3 percent at the end of 2014.

The unusual rigidity of the Fed’s basic course has diminished the importance of the regular meetings of its policy-making committee. Unless economic circumstances change dramatically, the year could pass without significant action.

Dissenters on the policy-making committee – most of whom are not voting members this year — have increased the volume of their protestations in recent months. Increasingly, the focus of their concerns has shifted from the specter of future inflation to the possibility that asset purchases and low interest rates will destabilize financial markets.

Historically, such divisions often presaged a turn, or at least a moderation, in the thrust of Fed policy. But analysts who follow the central bank see little evidence of a shift in the current debate. They say that Mr. Bernanke and his allies remain firmly in control and do not seem inclined to take further steps to appease the concerns of the minority.

“The hawks are nothing more than an irritant,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, wrote in a note to clients ahead of Wednesday’s announcement. “The chairman will be unmoved by their protestations, not least because their fears that QE would spark rampant inflation have been so wide of the mark,” he wrote, referring to the Fed’s quantitative easing.

In the absence of major business, the committee has turned its attention to fine-tuning its current efforts. It is considering changes to improve the clarity of its public communications and in the details of its plan to unwind its huge investment portfolio. More details about those discussions are likely to emerge in three weeks, when the Fed publishes an account of its meetings Tuesday and Wednesday.

Article source: http://www.nytimes.com/2013/03/21/business/economy/fed-maintains-rates-and-strategy.html?partner=rss&emc=rss

Fed Likely to Sustain Bond-Buying Program to Stimulate Growth

WASHINGTON — The Federal Reserve is widely expected to announce on Wednesday that it will continue buying Treasury securities to stimulate growth in the new year.

The Fed’s public declaration in September that it would buy bonds until the outlook for the labor market “improved substantially” has cleared away much of the uncertainty and controversy that usually precedes such announcements.

The economic recovery remains lackluster and millions are looking for work. But while some analysts question the central bank’s ability to improve the situation, few doubt that the Fed, under its chairman, Ben S. Bernanke, is determined to keep trying.

Indeed, while Fed officials continue to warn that a failure to avert scheduled tax increases and spending cuts next year would overwhelm their efforts and plunge the economy back into recession, they have also said that even if Congress and the White House negotiate a compromise, the Fed’s efforts would continue.

“I am not prepared to say we are remotely close to substantial improvement on the employment front,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a recent speech. “I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time, even if fiscal cliff issues are properly addressed.”

The remarks were particularly significant because Mr. Lockhart is among the moderate members of the Federal Open Market Committee whose support Mr. Bernanke invested months in winning before starting the new policy.

With the direction of policy clearly set, debate has turned to the details. The Fed, whose policy-making committee is meeting on Tuesday and Wednesday, still must determine what to buy and how much to spend, and officials continue to debate the best way to describe when the agency is likely to stop buying.

In making those decisions, the Fed must balance its conviction that buying bonds reduces borrowing costs for businesses and consumers against concerns the purchases might disrupt financial markets or inhibit its control of inflation.

Analysts say the immediate answer is likely to be more of the same. The Fed currently buys $40 billion of mortgage-backed securities and $45 billion of Treasury securities a month. Officials highlighted that $85 billion figure in September, and have indicated since that it remained their rough target.

“It would be odd for them to disappoint the expectations that they have created themselves,” Kris Dawsey of Goldman Sachs wrote in a note to clients predicting that the Fed would maintain both the dollar amount and the division. Other analysts have suggested the Fed might slightly decrease the total amount of purchases, to $80 billion, or increase the share of mortgage securities.

The Fed is unlikely to announce a new timetable this week, analysts said. The committee has said that it does not plan to raise interest rates before the middle of 2015, and that it will stop buying bonds before it starts raising rates.

Many officials on the 12-member committee — perhaps even the majority — would prefer to substitute economic objectives for guidance set by the calendar. The Fed’s ability to reduce borrowing costs derives in part from persuading investors that interest rates will remain low. Telling investors how the economic situation must change in order to warrant a change in policy could be more convincing, and therefore more potent, than simply publishing an estimated endpoint, these officials say.

But an account of the committee’s previous meeting, in late October, showed that officials remained divided about which economic objectives to use.

The most vocal proponent of focusing on economic goals, Charles L. Evans, president of the Federal Reserve Bank of Chicago, said last month that the Fed should declare its intent to keep short-term interest rates near zero until the unemployment rate fell below 6.5 percent, provided that the rate of inflation did not exceed 2.5 percent.

“I believe we have the ability to go even further in reassuring financial markets and the general public that policy will stay appropriately accommodative,” Mr. Evans said in advocating the change during a speech in Toronto.

Other officials have misgivings about placing such emphasis on any single economic indicator, or on the unemployment rate in particular.

The discussions are moving slowly, in part because it is not clear the changes being contemplated would have significant benefits. The targets the Fed is considering closely resemble its own past practice, meaning the new thresholds would tend to reinforce rather than shift expectations.

Lou Crandall, chief economist at the research firm Wrightson ICAP, noted in a recent analysis that the unemployment rate exceeded 7 percent in the mid-1980s and again in the early 1990s, and in both cases the Fed waited until the rate fell well into the 6 percent range before it began to raise interest rates.

The relative complacency of Fed officials also reflects their judgment that the mortgage-bond purchases announced in September are working. Average interest rates on 30-year mortgages are at the lowest levels on record, averaging 3.35 percent in November, according to Freddie Mac’s regular survey.

“This is solid evidence that our policy has been and continues to be effective — though it is certainly not all-powerful in current circumstances,” William C. Dudley, president of the Federal Reserve Bank of New York, said last week.

To continue the companion purchases of Treasury securities, the Fed will need to change its approach. It is now buying long-term securities with proceeds from the sale of short-term securities, but it is running out of inventory to sell.

The most likely alternative is to create money by crediting the accounts of banks that sell bonds to the Fed, the same method now being used to buy mortgage bonds and also to finance earlier rounds of the Fed’s so-called quantitative easing.

The Fed has repeatedly overestimated the health of the economy and the impact of its efforts. This time, officials have promised to maintain their efforts even as the economy shows signs of improvement. But they are once again sounding notes of cautious optimism about the coming year — if Washington does not interfere.

A budget deal reducing deficits in the long term, Mr. Bernanke said in November, “could help make the new year a very good one for the American economy.”

Article source: http://www.nytimes.com/2012/12/10/business/economy/fed-likely-to-sustain-bond-buying-program-to-stimulate-growth.html?partner=rss&emc=rss

Fed Takes No Action, Citing Signs of Moderate Growth

The Fed said that recent improvements in the economy came despite the deterioration of global conditions, and it noted the continuing risk that a European meltdown could undermine the nascent American recovery.

“The economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed’s policy-making committee said in a statement announcing its decision. It noted an increase in household spending and some decline in unemployment as signs of progress.

The decision was supported by nine of 10 members of the Federal Open Market Committee. Charles Evans, president of the Federal Reserve Bank of Chicago, once again dissented from the decision, arguing that the Fed should take new measures to stimulate the economy. Mr. Evans has said that the central bank is not showing sufficient concern about the plight of millions of Americans who cannot find jobs.

The December meeting marked the third anniversary of the Fed’s decision to hold short-term interest rates near zero, a policy it has already said it plans to continue through at least the middle of 2013 and possibly longer.

The Fed also said it will continue its ongoing campaign to cut borrowing costs for businesses and consumers by investing in long-term Treasury securities, funded by proceeds from the sale of its existing holdings of short-term securities.

The news of greatest interest from Tuesday’s meeting may come when the committee releases an account of its deliberations, which it will do in early January.

Mr. Bernanke wants to improve public understanding of the Fed’s goals and methods, to increase the impact of its policies and to disarm its critics. The committee planned to discuss Tuesday a number of possible changes, including the publication of regular predictions of its own future policy decisions.

But any decisions will not be announced before the committee’s next meeting, in January. Mr. Bernanke will hold a press conference after that meeting, where he could explain the new policies. And the Fed already is scheduled to publish its regular forecast of other economic data, providing a convenient vehicle.

Fed officials say the changes could provide a modest economic boost, reducing borrowing costs for businesses and consumers, by convincing investors that the central bank will keep short-term interest rates near zero for longer than expected.

The changes also could help the Fed to justify any new efforts to stimulate growth. But such efforts, viewed as inevitable by many Fed watchers earlier this year, have come to seem less likely as the economy shows signs of improving health.

The Fed already is nervous about the cost of additional measures, such as a proposal to buy mortgage-backed securities to boost the housing market. Officials also doubt the benefits of such actions, arguing that Congress has much more power to boost the economy through changes in fiscal policy. Some 25 million Americans still cannot find full-time work, and the housing market remains deeply depressed, but evidence of economic improvement makes it easier for the Fed to stand still.

At the same time, Mr. Bernanke and his lieutenants have given no indication that they are ready to resume the discussions, suspended earlier this year, about when and how the central bank should begin to retreat from its existing efforts to stimulate growth. The two pillars of this campaign are the three-year-old vow to keep short-term interest rates near zero and the Fed’s portfolio of about $2.5 trillion in Treasuries and mortgage securities acquired to push down long-term rates.

The December meeting closes another roller-coaster year for the central bank, which once again spent the winter months trying to spur a recovery, the spring months declaring that the economy was on the mend – and the summer months wondering what went wrong and looking for new ways to try again.

The Fed said in August that it planned to hold interest rates near zero through at least the middle of 2013. Investors seek compensation based on their expectations about the future level of short-term interest rates. The Fed’s announcement was intended to reduce the cost of borrowing for businesses and consumers by declaring that any expectation of an earlier rate increase was likely misguided.

In September, the Fed announced a new round of asset purchases to further reduce long-term interest rates. Rather than increasing its investment portfolio, the central bank said that it would sell short-term securities and use the money to buy an equivalent volume of securities with longer terms.

The Fed’s most recent change in policy, taken at an unscheduled meeting of the committee last month, was focused on Europe rather than the United States. It agreed to lend dollars at little cost to foreign banks, easing the terms of an existing program. The initial response was enthusiastic. European banks borrowed more than $50 billion in the first week after the changes were announced.

Article source: http://feeds.nytimes.com/click.phdo?i=58dd1744e5c703e33d6ed56930955296

Fair Game: Conventional Fed Wisdom, Defied

The Fed has spent several years trying to kick-start the economy with low rates and other policies, with little success. Which raises this question: Will more of the same help now?

Among the doubters is Thomas M. Hoenig, the soon-to-be former president of the Federal Reserve Bank of Kansas City. Mr. Hoenig, at the helm of the Kansas City Fed for the last 20 years, has thought long and seriously about the problems facing the central bank, and he spoke with me about them last week after attending his final meeting of the policy-making Federal Open Market Committee. He will turn 65 next month, the mandatory retirement age for a Fed bank president.

Mr. Hoenig has been pretty much alone among Fed presidents in publicly calling to break up large banks that are too big to succeed.

“Extremely powerful institutions, both financially and politically, undermine the long-term strength of our system and make us look like a financial oligarchy,” he told me. This view, of course, receives little applause in Washington and on Wall Street.

Mr. Hoenig has espoused this view for more than a decade, and he has grown accustomed to being ignored or criticized for it. Back in 1996, in a speech at the World Economic Forum in Davos, Switzerland, he presciently warned about the dangers of expanding the federal safety net to cover financial institutions trading complex derivatives and structured finance vehicles.

Pushing for a new regulatory regime that would deny a safety net to institutions engaged in risky activities, he told the attendees: “The threat of failure keeps a bank honest and inhibits it and the industry from trending toward excessive risks. Without this market discipline provided by creditors willing to withdraw their funds when they suspect a bank of being unsafe, banks have an incentive to take excessive risks.”

Mr. Hoenig’s prescription was to bar institutions that engage in risky business from offering government-backed deposits and to minimize their access to emergency Fed loans. Although he has been vindicated in this view, big bankers howled and regulators yawned at the time.

“I was trying to point out that these kinds of activities are beyond management’s control,” he recalled, “and that if you want to do this, you cannot have the taxpayers subsidizing it.”

He added: “It was controversial. It was not well received by some.”

In 1999, as Congress was finally doing in the Glass-Steagall rules that had separated investment banking from old-fashioned commercial banking, Mr. Hoenig made another public warning about big, interconnected financial companies. “In a world dominated by megafinancial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system,” he told an audience at the European Banking and Financial Forum in Prague. “To the extent these institutions become ‘too big to fail,’ and where uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious.”

We sure found that out.

More recently, in the aftermath of the 2008 crisis, Mr. Hoenig has continued to counter the conventional wisdom in Washington. “The Dodd-Frank legislation, for all its 2,300 pages, does not fix the fundamental problem of too-big-to-fail banks,” Mr. Hoenig said last week. “I think the post-Depression response was the answer — you break them up. If you are going to have access to the safety net, you are going to limit your activities.”

Last year, when he was a voting member of the open market committee, Mr. Hoenig dissented on monetary policy decisions at every meeting. Because he is no longer a voting member of that committee, his current views on the Fed’s most recent policy decision were not reflected in the dissents registered last week by three other regional Fed bank presidents, Richard W. Fisher of Dallas, Narayan Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.

“My objections have been based on the fact that the central bank has to think about what its policies mean for the long term,” Mr. Hoenig said. “We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.”

Creating jobs and finding ways to keep American businesses from fleeing abroad is not exactly the domain of the Fed, Mr. Hoenig conceded. But neither should the Fed’s actions work against the goals of generating a more productive economy, he said.

“The central bank has to be, in a way, a neutral player, and yet we find ourselves trying to stimulate, and the effect is further leveraging,” he said. “If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy.”

He continued, “In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences.” Those consequences included the nation’s mortgage feast, followed by its current economic famine.

Another important theme for Mr. Hoenig concerns the mistrust that has arisen as regulators provide favors to powerful institutions while asking other industries, and ordinary Americans, to accept less.

Ask farmers to accept fewer federal subsidies, or the housing industry to live without the mortgage tax deduction, or ordinary Americans to contemplate changes to Social Security, and they all push back, he says.

And many of these people say the same thing: “Why should I compromise when the largest institutions get bailed out and continue to get their bonuses?” he says.

POINT taken. If there were a sense that everyone, big and small, powerful and weak, would be asked to sacrifice, we might be able to agree on a way forward for the economy, Mr. Hoenig said.

“We have to bring a greater sense of equitable treatment,” he said. “When we do that Americans will say, ‘Yes, we are all in this together.’ ”

Mr. Hoenig does not yet know what he will do after leaving the Fed, but he aims to stay in public service. Let’s hope he lands in a job where some of his ideas can be put into action.

Article source: http://www.nytimes.com/2011/08/14/business/kansas-city-fed-president-defies-conventional-wisdom.html?partner=rss&emc=rss