Federal reserve banker calls for end to zero-interest loans in Steamboat talk
Thomas Hoenig, of the Kansas City branch, said the practice could lead to unsound practices
Steamboat Springs — Thomas Hoenig brought his crusade against zero-interest loans among banks to Steamboat Springs on Wednesday and managed to charm an audience of more than 100 local business leaders while sticking to his guns.
Hoenig has earned a national reputation as the only one of 12 presidents of regional Federal Reserve banks around the country to vote against national monetary policy that allows banks to loan each other money at no interest. For that reason, the national media has sometimes portrayed him as an antagonist of Federal Reserve Chairman Ben Bernanke.
Hoenig, president and CEO of the Federal Reserve Bank of Kansas City, said he thinks current economic policy walks the fine line between supporting the recovery of a struggling financial system and planting the seeds of the next disastrous bubble to burst in the U.S. economy.
“We all know zero percent interest doesn’t make sense,” Hoenig said.
The Federal Reserve, independently of Congress, makes decisions intended to influence the supply of money and credit to encourage price stability and maximize economic growth. Most recently, the Fed’s Open Market Committee decided on April 27 to keep the target range for the federal funds rate between zero and .25 percent.
The federal fund rate applies most directly to overnight loans among banks and the Fed to keep them in compliance with reserve requirements. But the rate also has implications for the cost of money throughout the economy.
Hoenig worries that the artificially low rates inevitably lead to unsound investing practices.
The nation’s economic crisis and the need to make headway on improving the jobs outlook have captured policymaking, Hoenig told his Steamboat audience.
“Now you are measuring short-term needs against long-term needs, and there are no formulas.”
The trick, he said, is in deciding when to change policy to allow the economy to stand on its own. Act too soon, he said, and you risk plunging the nation back into a fiscal crisis.
“If you wait too long, you create bubbles that undermine the long-term ability of our economy to create jobs,” Hoenig said.
Hoenig’s bank is one of 12 created as part of the federal banking system to ensure that the follow-through on federal monetary policy reflects regional conditions and that policy is buffered from politics. He works for a board of directors comprising business leaders from seven states, including Kansas, Nebraska, Wyoming, Oklahoma and New Mexico.
Federal Reserve Bank of Kansas City officials met with their board at the Steamboat Grand on Tuesday night as part of a policy to reach out to communities across the district.
Hoenig, who is retiring in October, sometimes sounds like he’s at least as interested in supporting small-city manufacturing as he is in complex monetary policy. He touts Sheaffer pens, originally manufactured in the small Iowa town he grew up in. And he spoke enthusiastically of the tour he was given Tuesday of the Moots bicycle manufacturing facility by Production Manager Mike Sanders.
“It was especially a pleasure for me because I’ve traveled the world, and I’ve always observed anecdotally that countries that make things and make themselves fresh are the countries that prosper,” Hoenig said.
Hoenig said he remains a staunch defender of the Federal Reserve banking system, and he continues to be impressed with the resiliency of the different sectors of the American economy as they work to overcome unprecedented overhanging debt.
Inevitably, he thinks, the United States must reduce its balance sheet and, with forewarning to the markets, move off zero percent interest.
“The longer we wait, the more fragile the equilibrium we’ve temporarily enjoyed becomes,” Hoenig said.
— To reach Tom Ross, call 970-871-4205 or email tross@SteamboatToday.com
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