Thomas Hoenig: Yes, they are. I thought that with the steps that were taken early on in providing liquidity and with the actions around monetary policy and even the fiscal tax rebate that would help staunch the crisis. I think the deleveraging was more severe than people anticipated. It was more severe than I had anticipated and that did make it come a little bit more quickly than I thought it would. In fact, the fact that we have the recession now is a little bit more than what I had anticipated early on in my remarks.

SG:As you step back and look back at the past couple of months, did you ever expect the economy would move downward so quickly?

TH: Well I didn't expect it would. I was watching the consumer and business spending part of this and the consumer, when you look at the slowdown and the fact that the consumer is conserving so much out of uncertainty and fear, that is almost like another shock to the economy and I think that part of it has played importantly because when you look across the GDP numbers, the consumer is down sharply, businesses investment is down modestly, government spending is still up obviously and our exports are still contributing in the third quarter but that is slowing as well. So the consumer factor was a major part of the strong slowdown and the actual entering into the recession..

SG:Mr. Hoenig, Some people say that this could be the worst recession in the post-war period. Do you think it's going to be that bad?

TH:It isn't yet and it doesn't have to be and that will depend on how the psychology of the marketplace works. We have a new administration coming in, what it does. I think the fact that we have a very accommodative policy is a factor offsetting the slowdown to some degree and we then we know under discussion are some important fiscal stimulus discussions. What those are, how they come out I think will also define just how serious this recession is or isn't going forward.

SG: As you said, the Fed has cut interest rates. It's pumped a lot of money into the banking system and still banks aren't lending money. What's the problem and what can you do to urge them to lend?

TH: Well you know the fact is that the banks are lending. There was an article this morning that talked about that a little bit because these banks had backup lines of credit out and they are having to fund those backup lines so that part of it is going on. The deleveraging process against the broader capital markets I think is really a major factor in slowing the credit growth in the US economy. The banks are still there, they are lending, they have requirements under their backup lines of credit that they have to make and then the broader market where the capital markets were growing and you have these securitization efforts going on. That part of the financial market has really dried up and that's where the very serious contraction is. That's affecting the banks because as they have to fill these promised credit lines, their ability to then to make other loans is weakened and that's a hard fact that we have to deal with.

SG: Do you think that the Fed has done all that it can do and now it's up to fiscal policy to fix the economy from here?

TH: I think the Fed has done about as much as it can do. Interest rates are extremely low. Excess reserves, that is we might put it out there but banks are not able to, given their own capital constraints, able to lend as aggressively so there's a lot of excess reserves building so we've done about as much as we can and I think we'll see what the fiscal side wants to do to try and stimulate. And part of it is working through the deleveraging. People ask me this and I tell them, when you are an economy as we were, with a great deal of debt, significant imbalances, we have a very large current account deficit, which is debt. I don't know of any way that's painless to rebalance your economy, you have to go through this adjustment and we will get through it but it's not going to be without consequence and that's what we're feeling and seeing today. I wish there was an easy way but there is no easy way.

SG: One thing that's troubling many people is the direction of the government's financial rescue plan. We're told now that the original plan isn't operational and it doesn't look like there's a new one. What do you say to people who say that the Federal Reserve and Treasury are confused and they don't have a plan?

TH: First of all, there is this plan but it is changing and I think that causes some of the confusion. But the fact that they still have the TARP in terms of the capital injections to the banking industry, that's still in place, I think they're still tweaking that based on advice so there is a plan and there is capital being placed into these banking institutions that will help them to be able to lend and of course any proposal that is put together in a week as the $700 billion bailout was is going to have to have to be adjusted as you get into it and that's part of what's going on. So it's not that there is no plan, it's a plan that is evolving and unfortunately that does cause come confusion out there and I think that has to be addressed and my sense is that they're trying to do that now. You know crisis by its very nature brings with it confusion. If you could have a crisis and have everything just mapped out, take the actions that would very, very nice. But it isn't reality. I don't care what the situation is, a crisis is a moment of very tumultuous events occurring simultaneously that has confusion as part of it, that's why you have the crisis. So that's a reality and I don't know of any organizations in history in crisis that have had a very "here's what we'll do and it's going to work out just fine." The question is are you being as deliberative as you can in making decisions that are geared toward a solution and can you justify those decisions as you move through them. Now in hindsight you're gonna say I wish I had done this differently and instill confidence and that's really the challenge we have and I know that's a challenge right now given the fact that the economy even as you do this is slipping away, has slipped into a recession and I think that's something that we do have to address.

SG: Now the Fed has lent a lot of money to a lot of banks and non-banks, like AIG. Do you have any concerns about lending more money to non-banks?

TH: Yes. I think the broader that you make the safety net and lend to non-banks the greater you create the moral hazard issues around that and the more need you have to bring supervision into those institutions and the more you interfere with the natural incentives of the market and so I do have concern about that and I'm very concerned, I think there should be a bright line between banking and commerce so that you don't extend that to an ever larger group of institutions that will bring forward then increased interference into the market, I think a very strong temptation towards credit allocation into the economy and those are all dangers that we want to avoid. We take them on because we have this crisis and you want to keep it from spilling over into the larger but you do so at some risk.

SG:Do you think it would be OK to lend money to General Motors or to bail it out?

TH: I personally think that's more of a fiscal, that's something for the government to decide to do for a corporation that is not a financial institution in the payment system and the things that we are I think created to support..

SG: In this financial crisis, a lot has been done to bailout the banks. Have we done enough for the consumer? Have we done enough for the homeowner?

TH: We've done a lot for the homeowners. Now whether it's been enough? The issue there is like so many issues. I've talked with many homeowners who have said "well, if they're gonna do this plan, I think maybe I'll stop my payments because then I can get into the plan." So you have moral hazard issues there as well. So how you sort out those who are legitimately in need and can afford a house? I mean one of the issues, as sad as it is and as wrenching as it is, people were sold homes and given mortgages that really could not afford it so we have to care for those people and get them back in a rental situation, I would think. Now there are those who can afford a home if you get the credit conditions or terms worked out and those are the ones that we have to focus on and we are, I think "we" being the larger "we", the FDIC, The Federal Reserve and even some of the financial institutions. I think that's the critical link, getting it done and getting it done right for those who can afford to own a home. There have been important steps taken to help the consumer, in terms of renegotiating the debt to make it possible for those who can afford a home to have a home. We're involved with Hope Now. Our bank has helped millions around our region working with these groups to get people lined up for resolution and renegotiated credit, where it makes sense, and to get out of the home and into a better situation, should they need it, and that, I think, is very important and very significant. I don't think it suggests that people have been standing around saying the consumer is on their own. Lot of care for the consumer on everyone's mind, ours, certainly the Federal Reserve's, I think many within the banking industry or financial industry and a lot of other groups trying to help the homeowner out. So there's a lot been done. Whether it's enough? It's never enough, whether you're the bank looking for help or the consumer looking for help.

SG: The problems in the housing market triggered this whole financial crisis. How much longer before housing turns around we being to see the light at the end of the tunnel?

TH: That's a good question I don't have the answer to. Housing, because it was funded so generously there is an enormous excess supply of housing. The last numbers I saw was 10 to 11 months inventory. It's going to take quite a while -- a year, 18 months, 24 months before you being to work that inventory down. And it's only when the inventory is worked down, like any supply and demand situation, that the housing market will begin to turn around so I think we have a struggle ahead of us with the housing still.

SG: And how long is it going to be before the economy turns around?

TH: Well you don't need the housing market just by itself for the economy. As a direct percent of GDP it's around 6 percent, the secondary effects are much larger or course. But we do have, I think, business investment, which I'm focusing on, the consumer's confidence is a big factor, these employment numbers are very important. Those are the things I'm focusing on. The global. People beginning to restrict trade to protect, that would be a horrible outcome, it would make things worse. So we need to focus on what moves an economy forward and business investment is important to that. The consumer's confidence will come back at that point and then I think the economy will broadly improve.

SG: Gasoline prices have been coming down and fortunately that's been putting money into pockets. Do you see a stimulus effect from lower gasoline prices or all these job losses we've been hearing about cancelling that out and making the economy weaker?

TH: Certainly there is the trade-off between the two. Yes, gasoline prices coming down like they have has been a very significant addition to disposable income for consumers who have jobs, who are employed or who are receiving help in some other way. So yes, that's very positive for the economy. The loss of jobs, it has a couple of effects. For those who are directly impacted, their incomes go down. Even where we have a safety net, their income are less. And secondly, it creates fear. When you see these job numbers coming up and even if you're employed, you're saying "could that happen to me? I think I'll be more conservative," and that of course means they'll back off spending and that slows the economy so the consumer is very important and the consumer I think right now is uncertain and there is fear there and that has to settle out, that has to begin to stabilize.

SG: Mr. Hoeing. A pleasure talking to you.

TH: Thank you. Thank you very much.