Fed Official, Thomas Hoenig, warns against low interest rates.
Today, Kansas City Federal Reserve President, Thomas Hoenig warned against the Federal Reserve Banks maintaining extremely low (near 0%) interest rates. This is unusually sober advice from a Federal Reserve Bank official. Hoenig warns that it is a dangerous gamble to keep interest rates too low for too long. He is right. However, it might be a case of too little too late. In fact, some, like myself, say that the Federal Reserve’s policies are a major factor in causing the current poor economy.
“To be clear, I am not advocating a tight monetary policy,” Kansas City Reserve Bank President Thomas Hoenig said in the text of a speech to the Lincoln, Nebraska, Chamber of Commerce. “I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance.” – Thomas Hoenig, President of Kansas City Federal Reserve
The Dangers of Federal Reserve’s Low Interest Rate Policies
It’s good to be the Fed. The Federal Reserve Bank is an organization that prints money out of thin air, controls interest rates and has no substantial oversight or audits. It’s a safe bet most people would like to be able to do that. Wouldn’t a person look like a financial genius (at least for a while) if after every time they spent too much money they could just create some new money?
Why would our government grant this power to a bank? We are told it is to protect us. Sound familiar? We are told that we need a group of central planners to protect us from wild fluctuations in the market. Interestingly, since the inception of the The Federal Reserve Bank in 1913, there has been no decrease in market fluctuations. If anything, there has been a significant increase of economic instability. One can illustrate how the Fed is responsible for this increase and how they are responsible for sparking economic meltdowns. This includes the state of our current economy.
One of the policies of the Federal Reserve has been to keep interest rates very low; near zero percent. This is done to help increase the amount of borrow and , therefore, spending. This spending translates to our economy looking great on paper. But do people really possess the wealth or is the economy just propped up by easy money? Where is the savings? The classic example is the housing bubble bursting. People bought houses with easy credit and with money they didn’t have on the assumption that houses would always increase in value. The Fed was the engine of this economic instability.
Mr. Hoenig should be applauded for publicly warning about the dangers of artificially low interest rates. It has been demonstrated effectively how the interference of The Fed into the market harms normal market activity. The Fed’s interference sends false signals to investors. These false signals encourage unhealthy financial habits and increase moral hazard.
In essence, it is like opening up a tab at a bar. You show up and order a round for your buddies and open up a tab. You are only going to have a few drinks and then you can settle the bill . After the first round or two, you begin to feel great and enjoy how easy it is to get the next round. So, you just point a finger to the bartender and call for another one and another round appears. Before you know it you have lost track of how long you have been drinking and the bill comes due. You can’t believe how much you owe and now you are in a pinch.
This is what happens with easy money and false signals. The easy money (bar tab) made it is easy to spend money that you didn’t have. Combine that with the alcohol and you have a set of false signals that encourage things that are sure to provide poor money results.
In this scenario, the bartender is the Fed. The ease of opening a tab and the intoxication represent easy credit and low interest rates. The result is a false high. You enjoy yourself for a while, but at some point the bill comes sue and you end up with a hangover.
