Hoenig on being the Fed’s lone dissenter: ‘I hope I’m wrong’Thomas Hoenig
(The Kansas City Star) – Tom Hoenig waged the biggest battle of his career with the financial security of most Americans hanging in the balance.
Last year the longtime Kansas City figure stepped reluctantly into a national spotlight that few Midwesterners find. He broke with others on the powerful Federal Reserve committee in Washington that sets interest rates to trumpet the populist voice of his region.
Reinforced by lessons from 36 years at the Federal Reserve Bank of Kansas City, 19 of them as president, Hoenig spent all of 2010 fighting the Fed’s persistent easy-money policies.
His case was this: The Fed’s response to the subprime mortgage debacle and financial crisis was necessary but had gone on far too long.
“Experience tells me and economics tells me … you may end up making things more difficult later on,” he said in a recent interview.
If he is wrong, and the Fed restores a healthy economy, Hoenig likely becomes a footnote to these trying times.
But if he’s right, we may be in for another boom-and-bust cycle like the one that nearly crippled America’s economy and left its job market in ruins.
Each time the Fed committee met last year, Hoenig voted against the policy its members agreed on.
Unable to persuade any other voting members to join him, Hoenig’s eight consecutive dissents put him further out on a limb than any member of that exclusive group had gone alone.
“I hope I’m wrong. I hope they’re right, but I don’t think so,” said Hoenig, whose tenure is the longest among current Fed policymakers.
Along with his unflinching policy dissents, Hoenig has spent nearly two years criticizing how the Fed helped bail out banks and other financial institutions deemed “too big to fail” by merging them into even larger financial behemoths.
But time is beginning to run out for the Kansas City resident. His Fed career ends Oct. 1, when he’ll have reached mandatory retirement age. It will be the 20th anniversary of the day he became president of the Federal Reserve Bank of Kansas City.
All of it makes an unlikely capstone for a Fed lifer who still staunchly defends the institution whose decisions he has so publicly opposed.
“He would welcome anyone else taking this ring. But he has a sense of duty and can’t let it go,” said Lu
Cordova, deputy chair of the Kansas City Fed’s board.
Hoenig’s life inside and outside the Fed helps explain why his career culminated in a year of reluctant dissent.
At 64, Hoenig is a hands-on Fed president.
He’s involved in supervising banks across seven states, operating the nationwide system that delivers payments between businesses and consumers, and gauging economic conditions.
Kansas City’s Fed employs 1,200 people at its headquarters and network of branches.
Thanks to his longevity, Hoenig is among the highest-paid Fed bank presidents, earning $374,400 in 2009. It’s a substantial sum but, by staying so long, Hoenig has given up millions he could have taken home as CEO of a corporation.
Hoenig maintains a brutal speaking schedule.
One week in April 2009 he kicked off a Money Smart KC program in Kansas City on Monday. He spent
Tuesday morning delivering congressional testimony in Washington and Tuesday evening kicking off
Denver’s Money Smart program. On Wednesday he provided regulatory updates to a Denver banking group.
The job has turned Hoenig into a globetrotter — Germany, Peru, Brazil, South Africa, Australia,
Singapore, Argentina, Mexico, Abu Dhabi and more — but he also accepted invitations to speak in
Decorah, Iowa; Durango, Colo.; and Norfolk, Neb.
Those domestic trips are commercial flights, too. Southwest Airlines. No first-class.
Friends describe him as devoted to his family. A grandkid’s toys were spotted under the couch in
Hoenig’s 14th-floor Fed office.
But he’s never far from the job.
Last year Hoenig and his wife, Cynthia, celebrated their 40th wedding anniversary at the Broadmoor, a spa and resort in Colorado Springs, Colo. In a moment alone, Hoenig was listening to live jazz in the lobby but pulled out his laptop computer and composed an op-ed column that wound up in The New York Times.
Hoenig’s Midwestern upbringing in Fort Madison, Iowa, instilled more than a strong work ethic. It exposed him to much of the region’s economy.
His grandfather farmed, which Hoenig said taught him about markets. His father owned a small plumbing business, where a 9-year-old Tom helped with inventory and grew up to learn about “the harmful effects of inflation.”
As Fed president, Hoenig keeps in his office a framed 500,000-mark note issued during the hyperinflation that struck Germany between the World Wars. It was a gift from a neighbor who told Hoenig the bill would buy a house at one point but only a loaf a bread a couple of years later.
A Catholic, Hoenig attended Benedictine College in Atchison, Kan., when it was called St. Benedict’s.
One summer he found work at the Sheaffer Pen factory in Fort Madison. To this day, Hoenig carries only
Sheaffer pens, though they’re no longer made in his hometown.
The Santa Fe Railway offered Hoenig a better deal, stringing communication lines as a signalman first in
Chicago, then in Garden City, Kan.
“I rode the train back and forth to Fort Madison on the weekends,” he said. “We stayed in a bunk car. I loved it.”
Drafted into the Army, Hoenig spent what he called a maturing year in Vietnam where he rose to the rank of specialist directing artillery fire.
There, he befriended John McKeon from Connecticut. McKeon said that when he had no money to go on leave, Hoenig lent him a month’s pay “on a handshake.”
Back home completing a doctorate in economics at Iowa State University, he seemed more reserved than fellow students, said Daniel Tilley, now a professor at Oklahoma State University.
“Quiet, but when he spoke you wanted to be listening,” Tilley said.
Hoenig’s strong suit was macroeconomics — the big picture of how national economies function and the focal point of the Fed.
“Tom tutored a bunch of us” through the macroeconomics exam, Tilley said. “I thought he’d get an academic position.”
Instead, Hoenig joined the Kansas City Federal Reserve Bank in 1973.
And the job didn’t even focus on the broad economy. Hoenig supervised banks, tending to the activities of individual businesses — microeconomics.
It put him front and center during a wave of mostly farm-bank failures during the 1980s. He helped deal with the colossal 1982 collapse of Penn Square Bank, whose peddling of oil loans from a small Oklahoma
City shopping center helped topple the nation’s seventh-largest bank at the time, Continental Illinois.
It was first-hand experience with the impact of Fed policy. And that distinguishes his voice on the Fed’s committee, which Hoenig joined when he became president of the Kansas City Fed in 1991.
“He’s very attuned to the potential effects of monetary policy in causing problems in financial markets,” said former Fed Governor Lyle Gramley. “Low interest rates do tend to create more risk-taking and therefore contribute to the kinds of problems Tom has been concerned about.”
There are a dozen Fed presidents in the nation, selected locally in the regions they represent.
The idea at the outset of the Federal Reserve system was to bring regional voices into monetary policy debates.
As a group, the regional chiefs outnumber the Federal Reserve’s seven governors, including Fed
Chairman Ben Bernanke, who are appointed by the president.
Combined, these 19 voices form the Federal Open Market Committee. They discuss, debate and decide the nation’s monetary policy — usually setting levels of short-term interest rates at eight regular meetings a year.
The committee next meets Tuesday.
Hoenig has served in 162 policy sessions and 47 conference calls when events wouldn’t wait for the next scheduled meeting.
Though everyone engages in the debate, voting power on the committee is tilted in favor of the Fed governors. Each governor casts a vote on the policy directive that the discussion produced. New York’s
Fed president also always votes, as that bank carries out policy.
The other 11 Fed presidents share four votes in a three-year rotation.
Hoenig has been a voting member for seven of his 20 years on the committee and does not vote this year. His stint on the committee included much of Alan Greenspan’s tenure as Fed chairman. Hoenig regularly supported the committee’s policy stands with his votes, dissenting just once, in 1995.
His second dissent didn’t come until 2001.
The Fed’s interest rate stood at 6.5 percent. Hoenig supported most of the 11 rate cuts the Fed made that year, spurred first by recession and later by the terrorist attacks of Sept. 11. He voted against cuts in May and December.
Transcripts of other sessions show he also objected to rate cuts in June and November but voted for them anyway.
Lacking a vote in 2002, Hoenig still pressed to turn policy away from ease.
In words that seem prescient now after the housing bubble burst, he told his colleagues that low interest rates posed “risks of inflation and also some financial excess,” and would lead consumers to borrow more, “increasing their fragility for the future.”
Still, he accepted a June 2003 cut to 1 percent as “a reasonable insurance policy.”
In a recent interview, Hoenig said a slowdown in the economy and uncertainties surrounding the Iraq war softened his objections.
Hoenig also had not yet lived through the subprime mortgage meltdown, the housing market collapse, the credit market crisis and the financial institution failures that he is now convinced the Fed’s lingering 1 percent policy helped produce.
“It’s a little different than when you have the bubble, where you’ve just experienced the crisis,” he said.
As that financial crisis unfolded in 2007 and 2008, Hoenig supported interest rate cuts and efforts to pump money into locked-up credit markets.
By September 2009, however, he spoke publicly about beginning to reverse Fed policy that had reduced rates to near zero.
His warnings drew criticism from those who wanted the Fed to be more aggressive in supporting the weak economy.
To New York Times columnist and Nobel Memorial Prize-winning economist Paul Krugman, Hoenig was another Fed president “obsessed with the fear of 1970s-style inflation, which they see lurking around every bend, even though there’s not a hint of it in the actual data.”
Hoenig drew more attention as he began the long string of dissenting votes last year.
Persistent high joblessness led Dirk Van Dijk, with Zacks Investment Research in Chicago, to tell
Bloomberg Businessweek that Hoenig’s position was “just friggin’ nuts.”
Others questioned whether he was grandstanding as he approached retirement or had become stuck on his position.
A determined Hoenig voted against all eight of the Fed’s policy statements in 2010, including its
November decision to spend $600 billion on government bonds to help lower long-term interest rates. The repetition reinforced his message but also made his dissents predictable and less noteworthy in financial markets.
Hoenig defends his stand by telling audiences that the Fed’s tools are the wrong ones to help unemployment at this point.
He reminds them that the jobless rate was 6.5 percent eight years ago when the Fed drove interest rates down to 1 percent. But the consequences — the housing bubble and financial collapse — drove unemployment higher still.
Friends call his public posture genuine.
“Tom is a direct person, blunt, Midwestern,” said Mike Haverty, CEO of Kansas City Southern and a fellow Benedictine graduate. “He may not be winning the day, but what he’s saying is what he believes.”
They also say Hoenig isn’t given to bouts of ego. His name says as much.
His name is pronounced Hawn-ig. Often, however, he’s mis-introduced as Tom Hoe-nig, with a long O sound. Yet he doesn’t correct the mistaken speaker.
Hoenig said his predecessor as Fed president, Roger Guffey, said it wrong. But Hoenig never took him aside to get it right.
“Tom doesn’t have an ego,” said Dan Garrity, an Atchison, Kan., furnishings retailer who came to know
Hoenig through the close friendship of their wives. “He doesn’t act as if he has the job that he does.”
Hoenig’s other battle with the Fed focuses on how it bailed out banks and other financial institutions deemed too big to fail during the financial crisis. Nearly all were merged into other large rivals, making them even bigger.
He believed instead that the failing banks’ management and owners should be wiped out and their lenders lose part of their investments.
“He did not want to be public about it,” said Cordova, on the Kansas City Fed’s board. “He agonized about speaking out.”
She said board members encouraged Hoenig for months until he finally delivered his March 2009 “Too
Big Has Failed” speech in Omaha, Neb.: “Why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of ‘toxic’ assets they created.”
As scores of community banks failed, Hoenig’s attacks on the big bailouts struck a populist and popular tone at home but drew uncomfortable national attention.
“He’s never given any speech in his past that had this political edge to it. That was very difficult for him to do,” Cordova said.
Public opposition to Fed policy became more difficult for Hoenig when some in Congress began to challenge the central bank and legislation surfaced to curb its powers.
He answered by expanding the message. Though he disagreed with Fed policy, the process of getting there was sound and his dissents were the proof.
Other Fed policy-makers knew his side and heard him argue it.
That was the point he hoped to make to a largely anti-Fed group in Lenexa last fall.
Steve Shute, executive director of Hope for America, invited Hoenig to address the session where a banner for the Kansas City Tea Party hung from one table. After answering questions for an hour, Hoenig had gained their respect.
“The guy’s a good salesman. At the end of the day we were very impressed with his demeanor,” Shute said.
As retirement looms, Hoenig insists he won’t look for a new vocation until he leaves office.
Still, he ses himself perhaps as CEO of a corporation or member of its board of directors. He’s open to an appointed government position, but it would have to be in Kansas City or Washington.
His two sons live in those cities. One is a lawyer, and the other appraises commercial real estate. If
Kansas City has an edge it’s because his two grandchildren are there.
A scholarly role works for him, too, writing on economic issues for other policymakers. Think think tank.
“I could do special projects for this region or Kansas City in terms of leading initiatives that could make us a stronger city,” Hoenig said.
Several friends would like to see Hoenig in public office, but he would have to be drafted.
“He’s not political. He’s not going to get up and campaign,” Haverty said.
Tilley sees Hoenig as an excellent candidate to teach, which he did not only in graduate school but also at the University of Missouri-Kansas City.
Wilbur Billington, who hired Hoenig at the Kansas City Fed and mentored him into its presidency, sees a new calling for Hoenig.
“The Fed needs a champion,” Billington said. “He’s got the credentials. He’s got the strength. He’s got the vision.”