Kansas City Federal Reserve Bank President Thomas Hoenig on the Economy
Monday, November 17, 2008SUSIE GHARIB: A top Federal Reserve official said today the U.S. economy is deteriorating faster than expected and the recession is more severe than anticipated. In an exclusive interview with NIGHTLY BUSINESS REPORT, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City told me that even though Americans are benefiting from lower gasoline prices, they are not spending because of quote, uncertainty and fear. When I sat down with Hoenig earlier today, I asked him if he thought the Fed had done all that it can do to fix the economy.
THOMAS HOENIG, PRES., FED RESERVE BANK OF KANSAS CITY: I think the Fed had done about as much as it can do. Interest rates are extremely low. Excess reserves, that is we may put it out there but banks are not able to given their own capital constraints, able to lend as aggressively. So there is 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.
GHARIB: 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 is a new one. And so what do you say to people who say that the Federal Reserve and the Treasury are confused and they don't have a plan?
HOENIG: It's not that there is no plan. It's the plan that is evolving. And unfortunately, that does cause some confusion out there. I don't know of any organizations in history in crisis that have had a very, here's what we will do and it's going to work out just fine. The question is, are you being as deliberate as you can and making decisions that are geared towards a solution. And can you justify those decisions as you move through them? Now in hindsight you are going to say I wish I had done this differently and I know that is a challenge right now, given the fact that the economy, even as you do this is slipping away, has slipped into a recession.
GHARIB: Now the Fed has lent money to a lot of banks and non-banks like AIG. Do you have any concerns about lending more money to non-banks?
HOENIG: Yes. I think the broader that you make the safety net and lend to non-banks, the greater you create a 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 concerns 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 and 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 you have this crisis and you want to keep it from spilling over into the larger economy, but you do so at some risk.
GHARIB: Do you think it would be OK to lend money to General Motors or to bail it out?
HOENIG: 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 involved in the payment system and the things that we are, I think created to support.
GHARIB: In this financial crisis, a lot has been done to bail out the banks. Have we done enough for the consumer? Have we done enough for the homeowner?
HOENIG: 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, a lot of care for the consumer, I think on everyone's mind or 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 is a lot been done. Whether it's enough, it's never enough and whether you are the bank looking for help or the consumer looking for help.
GHARIB: The problems in the housing market triggered this whole financial crisis. How much longer before housing turns around and we begin to see the light at the end of the tunnel?
HOENIG: There is an enormous excess supply of housing. The last numbers I saw were 10 to 11 months inventory. It's going to take quite awhile, a year, 18 months, 24 months before you begin 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 housing markets still.
GHARIB: Are things getting worse in the economy faster than you expected?
HOENIG: I think the de-leveraging was more severe than people accepted. 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.
GHARIB: Mr. Hoenig, some people say that this could be the worst recession in the postwar period. Do you think it's going to be that bad?
HOENIG: 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 then we know under discussion are some important fiscal stimulus discussions. And what those are and how they come out I think will also define just how serious this recession is or isn't going forward.
GHARIB: Mr. Hoenig, thank you very much for your time.
HOENIG: Thank you for having me. Enjoyed it.
