Economists are not known as a gregarious bunch (save Paul Krugman, perhaps). So it might not be much of a surprise to learn that the reports (eight per year) from the Federal Reserve are known as “The Beige Book(s).” The report takes on information from the twelve district Reserve Banks concerning the previous few months and how they are to be contextualized over the previous year. The report released in early August for the summer of 2010 argues that most sectors at least held their own, and that many have shown overall growth over the past year, despite some month-to-month downturns. The key term is “modest,” which is used at least once in each of the six sections of the summary of the July Report. But though the twelve presidents of the twelve district banks might agree on the modesty of the growth, they are sharply debating amongst themselves what to do about it (if anything).
The gadfly in the group is Federal Reserve Bank of Kansas City President Thomas M. Hoenig. He is also the longest-serving president, which gives him some claim to be primus inter pares. He has stood along in the last few board meetings in that he wants to see the Fed raise interest rates now (but no more than to 1%), to move the onus of economic growth back to the private sector.
According to a report and interview on The Huffington Post, he believes that the Fed is setting itself up to be merely an enabler of banking capitalization and profits that do not much help the larger economy: “Of course the market wants zero rates to continue indefinitely. They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.” If the interest rate were to go up, banks would have to ‘risk’ lending that money to businesses, rather than back to the federal government. The risk would be higher, but the opportunity for profits would be higher too, and small- and middle-sized businesses could have access to some of that almost-free money. They would actually use the money to improve their products and services, and probably to hire more people to get that done.
Unfortunately, he argues, the Fed is pursuing policies that are talked about as if they will solve all the problems the US faces.
To Hoenig, the Fed’s policies are encouraging the kind of unsustainable practices that will lead to a cycle of perpetual booms and busts. For example, he notes that consumption had long been about 63 percent of gross domestic product. During the boom it rose to 70 percent, he said, and that needs to come back down.
Savings made for another example. Personal savings dropped from about 10 percent of disposable income in 1985 to less than 2 percent in 2007, Hoenig notes. While the current rate of about 6 percent is good, it’s still far below historical levels. Households need to repair their balance sheets, and that takes time.
The problem lies likely with the disjuncture between the scale of ‘economic time’ and the political time faced by presidents and parties, who must sell the notions of recovery and growth (or continuing recession and crisis) every couple of years. Mr. Hoenig has already expressed his fears of our allowing our political tensions to dictate our monetary policies.
The MKCREATIVE blog occasionally comments on comments, and a ‘Chicagowill’ posted a nicely concise response generally in favor of Mr. Hoenig’s arguments:
Do the math on why we are still in a rut. We have a ~$12 trillion economy. ~70% is consumption. = $8.4 trillion consumption. Savings rates went from -1% (not 2%) to 6% from 2008 to today, a change of 7%. 7%*$8.4 trillion = $588 billion in economic activity withdrawn. The stimulus was $788 billion, of which about $200 billion remains unspent = $588 billion, give or take $100 billion. Ergo, the “stimulus” bill just replaced what consumers withdrew from the economy, This does not count what corporations withdrew from the economy building up their cash reserves because they know they cannot count on the banks to lend if they want to expand.
The numbers are in the ballpark, and it seems clear that Mr. Hoenig would agree that companies are holding back some money now for fear that the banks will continue not to lend to them (the banks seeing their fortunes made in re-lending back to the Feds). The lowering of interest rates to major banks has not notably adjusted people’s credit card rates, nor has it notably spurred the housing market over the last year or so (though arguably the free-fall was ended by the policy). Please check back with us tomorrow, when we look at recent analyses of the housing market as interest rates remain non-existent for the banks, but unemployment continues to pull down the economy.