The Fed's Dissenter: Saying No to Easy Money

With the economy growing fitfully and jobs still scarce, the high priests of the Federal Reserve want to keep the country's cash spigots wide open — all except Thomas Hoenig. If he's right, he may become the prophet for a new age of American austerity

By David Von Drehle Sunday, Feb. 20, 2011
    • Photograph by Marco Grob for TIME

    Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, Mo.

    Late in January, the high priests and priestesses of the U.S. economy gathered inside their Washington sanctum for the regularly scheduled ritual known as the Federal Open Market Committee (FOMC). This is the group that decides the value of money, measured by interest rates, which it controls by easing or tightening the money supply. Of course, there are other forces that influence the value of money — a great global whirlwind of forces — but most don't hold orderly meetings in a grand conference room on Constitution Avenue.

    The FOMC's mission is to steer a course between the shoals of high unemployment and high inflation, putting enough dough into circulation to keep the economy well fed and growing — but not so much that money begins to plummet in value. The priesthood meets eight times per year, reporting its decisions in oracular statements of Olympian voice. This year, when the committee spoke, Fed watchers noted something striking: for the first time since 2009, the members were unanimous. All supported the chosen policy of adding $600 billion to the banking system by purchasing that amount of Treasury bills from big banks — a strategy known as quantitative easing.

    And here's the reason they were finally unanimous: Thomas Hoenig couldn't vote. Throughout 2010, this tall Iowan with thin white hair and cuff links like gold coins was a voting member of the priesthood. He sized up the data, then cast his lonely ballot against the indefinite reign of easy money. Eight meetings, eight no votes — a rare unblemished record of recalcitrance that made him a hero to inflation hawks and a pariah to the many economists who believe that, with unemployment above 9%, the engine of the economy needs further priming.

    Hoenig would still be issuing dissents if his one-year term as a voting member had not expired (non — New York regional Fed presidents share votes on a rotating basis). With his mandatory retirement at 65 as president of the Federal Reserve's 10th District looming in October, he will never get another chance, though he plans to continue his critique of government policy as a think tanker, consultant or author. When I paid him a visit a couple of days after the FOMC's unanimous vote, Hoenig (pronounced Hawn-ig) was happy to explain his unyielding point of view, one that has become ever more relevant now that rising commodity prices have put inflation worries back on the economic radar screen.

    Amber Waves of Grain

    Hoenig's views start, quite literally, with his view. His corner office sits atop a buff-colored tower on a hill overlooking downtown Kansas City, Mo., with the gently rolling hills of Missouri and Kansas stretching into the distance. "I'm not sure people in New York and D.C. are thinking about agricultural land prices and mineral rights the way I am," Hoenig ventures safely. What he sees through his soaring windows are the signs of an economy that supposedly doesn't exist in the U.S. anymore, a well-balanced one that resists both booms and busts. Hoenig can see a resilient and promising manufacturing sector — notice the big GM plant in the middle distance, where the carmaker is investing $136 million to prepare for production of the redesigned 2012 Chevy Malibu. The high-rises of downtown are home to some of the soundest regional banks in the country. Slicing through the foreground is a freight train hauling the heavy commodities mined and grown in the nation's midsection. The horizon contains some of the most productive farmland on earth, and beyond lie rich reserves of oil and gas. Since the start of the financial crisis, the unemployment rate in the 10th District has been about 2 percentage points lower than the national rate.

    In other words, for all the headlines over the past quarter-century about the death of American manufacturing and the twilight of community banks and the vanishing farmer, those humble building blocks of a sound economy still figure significantly in Hoenig's perspective. The way to strengthen them, he believes, is not by pumping money into a financial system that encourages megabanks to engage in high-risk speculation. You build them up by encouraging savings, which form capital for investment, which builds stronger businesses, which hire workers and pay dividends — which leads to more savings and more investment.

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