Hoover Institution fellow Jon Hartley and former FDIC Vice Chair Thomas Hoenig discuss Tom’s career as an economist, as Vice Chair of the FDIC, President of the Kansas City Fed, topics including the global financial crisis, banking regulation, Glass-Steagall, Too Big To Fail, moral hazard, lender of last resort powers, Basel III, the Dodd-Frank Act, capital requirements, deposit insurance after the Silicon Valley Bank regional banking crisis, and quantitative easing.
Recorded on June 10, 2025.
ABOUT THE SERIES:
Each episode of Capitalism and Freedom in the 21st Century, a video podcast series and the official podcast of the Hoover Economic Policy Working Group, focuses on getting into the weeds of economics, finance, and public policy on important current topics through one-on-one interviews. Host Jon Hartley asks guests about their main ideas and contributions to academic research and policy. The podcast is titled after Milton Friedman‘s famous 1962 bestselling book Capitalism and Freedom, which after 60 years, remains prescient from its focus on various topics which are now at the forefront of economic debates, such as monetary policy and inflation, fiscal policy, occupational licensing, education vouchers, income share agreements, the distribution of income, and negative income taxes, among many other topics.
For more information about the podcast, visit: https://www.hoover.org/podcast/capitalism-and-freedom?utm_source=podbean&utm_medium=description&utm_campaign=cf21_podcast
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm Jon Hartley, your host today.
My guest is Thomas Hoenig, who is a PhDeconomist, a Distinguished Senior Fellow
at the Mercatus Center, and the formerVice Chair of the FDIC during 2010.
(00:29):
And the President of the Kansas City Fedfor about 20 years from 1991 to 2011.
Welcome, Tom.
So great to have you here.
>> Thomas Hoenig (00:37):
Well, thank you.
It's good to be with you andI look forward to our conversation.
>> Jon Hartley (00:41):
Start by gaining your early life.
You were born in Iowa.
You did your undergrad atBenedictine in Kansas.
You did your PhD at Iowa State.
There's a close connectionbetween Iowa State and
Chicago that I think somepeople might not be aware of.
Theodore Schultz and De Gal Johnson,agricultural economists who are both
(01:01):
at Iowa State andwent to Chicago won the Nobel Prize.
I'm just curious,how did you first get into economics and
financial regulationgrowing up in the Midwest?
>> Thomas Hoenig (01:12):
Well, first of all, my dad had a small business,
so I had trips to the bank with him.
I knew that they were around,put it that way.
But actually I got mostinterested when I was in college.
I took a course, an elective coursein economics in my freshman year and
(01:34):
just thoroughly enjoyed it.
It was microeconomics, but it was very,I thought, useful and challenging.
And soI decided that was what I was going to do.
Although I did morph into money andbanking as I graduated and
then got into graduate school.
So I spent a lot of time ineconomics thinking about economics.
(01:57):
And when I left the when I graduatedout of my graduate program,
I went to the Federal Reservebank of Kansas City.
And I had my specialty was money andbanking.
And so when I went to the Kansas City Fed,they had
during the period where there werea lot of mergers among banks going on.
And soI went into the banking supervision and
(02:18):
structure division of that bank ratherthan the monetary research division.
And in that I learned a great dealbecause wasn't too long after I
joined that we had the asset boom ofthe 70s and then the Paul Volcker era.
And I was in supervision andliterally watched with disappointment,
(02:40):
I guess I'll use that term in the hundredsof bank failures that were going on
just in our region and across the country.
And that got me interested theneven more in what the causes were
monetary policy factors in that,trying to deal with inflation.
And so I was pretty well preparedwhen they asked me to step
(03:01):
into the role of president of the bank andjoin the FOMC,
the Federal Open Market Committee,and its policy role.
And so I had both kind of bankingknowledge and the monetary knowledge.
And I found it very, that combinationvery helpful to me in my career.
>> Jon Hartley (03:23):
Well, it's terrific.
You were there duringthe gold financial crisis.
You were the president ofKansas City Fed when that happened,
when those events transpired.
And I feel like the financial crisiswas both a defining moment for
financial regulation andfor monetary policy.
It was really then whenquantitative easing was starting.
(03:47):
I'm curious what went wrong inthe financial crisis as you sort of see it
in terms of underlying causes.
What went wrong withthe banks in your mind?
Housing central to that wasgovernment subsidies important.
There was lack of saybank capital an issue.
(04:08):
Was complexity ofthe financial system an issue?
I'm curious.
You gave a speech in 2009, you gavea speech titled Too Big Has Failed which
was pretty critical I think ofthe approach taken until that time.
How do you define the events ofthe financial crisis and its causes?
>> Thomas Hoenig (04:28):
Well, I will tell you, first of all,
I think most financial crisis postWorld War II, let's leave it.
And I'll also kind of mark out Covid but
most financial crisisare actually policy related,
usually excessive monetary policy.
And that's one thing I learned as I dealtwith banks and doing the crisis and that.
(04:51):
And for example in the 70s whathappened was the Fed not wanting
to have a slowdown in the economy,repeatedly lowered rates.
And then as inflation picked up,they lowered them again, but
they never really got an equilibrium.
And over that time inflation,as you well know,
(05:13):
went from modest 2.5% to14% by the 1979 period.
And what happened in that baits the banks,in other words,
low interest rates, asset prices.
They began to land moreon collateral value and
the expectation that the value wouldonly increase because of inflation and
they're willing to make higher loanto value loans, take on more risk.
(05:37):
And so then when you raise interestrate and those values plummeted,
these banks were ill preparedto deal with it and they
didn't have enough capital given the sizeof the adjustment that had to take place.
So that happened in the 80s,70s, and 80s, and
then we actually repeated it after the,in beginning of the decade of 2000,
(05:57):
where I was a member of the FOMC then I,did object, but not enough.
And we saw interest rates declineto as low as 1% even when
the economy was growing in 2003.
And what that did is it brought forwardthe speculative elements in the economy
because of very low interest rates.
(06:18):
You could borrow a lot of money at,say, 2%, buy a company,
finance it with debt, strip outthe equity, take the cash, move on, but
creating increasing amounts of instabilityuntil finally inflation took off.
They raised rates.
And we had an enormous financial crisisaround housing because people have been
(06:40):
taking equity out of their homes andspending it.
More leverage, more downside risk.
And when it finally hit,we had a major problem again.
Following Covid, the Federal Reserve,extended its loose monetary policy,
accommodated monetary policywell past the COVID crisis.
(07:02):
It held onto that $120 billiona month injection of new
reserves into the system forover 18 months.
And we had a breakout of inflation.
It exceeded 9% at one point.
And then they had to raise interest rates.
And, of course,asset values in the banks plummeted.
(07:23):
We had the Silicon Valley bank failure andthen a bank run on many banks, and
that because no one knew forsure how they were affected.
So those are the sorts of things youhave to think about in monetary policy.
What is your policy gonna do tothe institutions when you adjust it?
And I think that was lost ineach of those occasions, and
why we had a worse crisis as a result.
(07:44):
When I talk about too big to fail, theother side of that was some banks were,
shall we say, protected,while other banks were not.
And it created an instability and
uncertainty in the system that I thinkwas very harmful to the economy.
You know, prior to the great financialrecession, when Solomon failed, it failed.
(08:08):
We didn't bail it out, and we didn'tbail out the banks lending to it.
But when we got to the great financialcrisis and banks were under pressure,
especially the large banks, Citibank,you name it, the, the Fed said, no, no,
we can't have that.
So they actually provided enough enormousamounts of liquidity into the system that
the treasury helped provide capital,something they wouldn't do for
(08:31):
a regional bank or smaller bank.
And so we, we set up an expectationthat the largest banks would be
bailed out at whatever cost.
And that discriminated againstall the other banks and
made our bank andour economic system less efficient.
And so I had real objections to that aswell, John, and still do to this day.
>> Jon Hartley (08:53):
Well, I guess there's this famous question about should Paulson and
Bernanke have saved Lehman?
And I guess there's thisquestion of what does a run on,
I guess the shadowbanking system look like?
And this is a traditional runwhere I guess you have depositors
(09:14):
lined up at a commercial banktrying to get deposits out, but
really you have investors,money market funds getting tons
of redemptions,people are worried that there's exposure
to Lehman commercial paper andthat that triggers this,
(09:34):
all these redemptions which sort offorces further selling and so forth.
I guess the argument, I mean,it seems like, during that period, I mean,
there were a series ofthese distressed firms,
whether it's Bear Stearns eventuallygetting bought up by JPMorgan or
Merrill Lynch getting bought upby Bank of America and so forth.
(09:56):
You have some assistance fromthe Fed in some of these cases, but
there are some people thatargued that Bernanke and
Paulson should have actedmore to save Lehman.
And there was a deal lined up withBarclays, I think, to buy Lehman, but
I think the UK prevent it from happening.
It's kind of the Paulsonstory that he tells,
(10:18):
that that was, I guess,a central challenge.
But other I think Randy Quarles,for example, might say countrywide
was kind of, I guess the moment thatthings were getting really bad.
I'm curious what your sort of diagnosesare of, of that period of time and
all these bailouts and, and what shouldhave been done differently, if anything.
>> Thomas Hoenig (10:43):
Well, my complaint was to begin with, when they decided for
whatever reason to bail out Bear Stearns.
It was not the largestinstitution in the world, but
they were afraid of contagion effects orwhatever the reason was.
(11:05):
I thought that set the expectation.
And when you, once you setthe expectation, then you live with it.
And the expectation was, anything thatlarge or larger is going to be bailed out.
It even set the expectations forLehman itself.
Had they let that fail,it would have required,
it would have caused, I should say,a whole different, I think,
(11:29):
set of responses in the banking industryand in the investment banking industry.
And it would have said, wait, I better bethinking about how much capital I have.
I better be thinking about thedistribution of my assets on my balance
sheet and the quality of my assets andwhether I should build liquidity.
This was in March of 2008, and
(11:51):
then you had, basically, the GSEs.
And you put them into conservatorship,but in fact you bailed out the creditors.
Not that, not the investors,but the creditors big time.
And so you set the expectation.
So then when you give them the LehmanBrothers, you've set the expectations.
(12:12):
To change direction at that timeis to invite a crisis is to.
Because now you're saying, wait a minute,those were the expectations, but they, but
they're not living up to them.
I better run and I better not take anychances because I don't know how other
banks like Citi or so forth,how they prepared for it,
because we know Lehman's didn't preparefor a further liquidity squeeze at all.
(12:37):
And therefore you created this monster.
So the mistake was startingout by bailing out.
Once you start down a path,you can't change during that crisis.
And they tried to do that,which was a serious error at that point.
>> Jon Hartley (12:53):
I'm curious how you think of, I guess, some of these arguments
around Glass-Steagall andGramm-Leach-Bliley and Glass-Steagall.
And a large part that people talk a lotabout is separating commercial banking
from investment banking.
And Glass-Steagall and Gramm-Leach-Blileyand other legislation around
(13:15):
that time in the 90s, Glass-Steagall'ssomething passed in the 1930s.
Gramm-Leach-Bliley, in the sortaderegulatory period in the 90s,
allowed for a lot of consolidationin the part of the banking system.
Some people will say,like Elizabeth Warren will say,
Warren will say breaking up the big bankswould be a good thing at some level.
(13:41):
I think it would makethe financial system less
stable in the sense that these largerbanks that we now have as a result of this
consolidation sort of benefitfrom being more diversified.
They have both commercial banks andinvestment banks under one umbrella.
And if you look at the performanceof the larger banks, the JPMorgans,
the Citis, the banks,Bank of America and Wells Fargo, I mean,
(14:03):
they were generally safeduring the financial crisis.
And it was, generally speaking,those that didn't
have diversified businessescombined that were struggling.
This is an argument I've heardfrom Bernanke and others or
others have mentioned before.
I'm curious what your thoughtsare I guess on consolidation.
I mean, now we're also seeinga non-banking sector sort of emerge that's
(14:28):
growing a lot, non-bank lending,think the Rocket Mortgages of the world.
I'm curious how you see sort of I guessthe financial system evolving and
how consolidations played a role in that.
>> Thomas Hoenig (14:43):
Well, let me go back to the first part and that is,
you know, Ramleach Bliley,I oppose that at the time and, and
the reason was though not that Inecessarily anything against mergers but
the fact was the commercial bankingindustry was the only one that
was heavily subsidized inthe sense of deposit insurance.
(15:07):
And we knew from other experiences,
continental Illinois that they wouldlikely be bailed out if there's a private.
And so now you're taking thiscommercial banking and you're saying,
we're gonna allow commercial banks andinvestment banks to merge.
Well that sounds great exceptyou're also then indirectly and
sometimes very directly extendingthe safety net from just
(15:29):
the commercial banking industry tothe investment banking industry,
especially when it's under the umbrellaof a single bank holding company
that owns both because as a policymakerthat if either one of them get in trouble,
both of them get in trouble becausepeople, they don't distinguish,
(15:49):
they can't be sure howmuch overlap is there.
And I gave a speech in 1999 asthis thing was being passed,
saying, you will now havesystemic risk For sure,
you've invited systemic risk intothe financial system and that
actually entrenches to be to fail becausenow everything is implicitly insured.
(16:15):
And that's exactly what happened.
They say, well, J.P. morgan,
the others were satisfactorycapitalizing the great financial crisis.
That's not actually true [COUGH]Because the US government through TARP,
put up in place a $600 billion bailout forthe industry.
(16:39):
And Citibank,which was clearly on the ropes to failure,
had equity injected preferred stock.
They gave him enough capital andthen if you look at the data,
the Federal Reserve made enormous loansto these institutions during that period.
They, they were, they were providedall the liquidity they need.
(17:04):
And that was so called QE1, butit primarily was a liquidity vehicle.
I did not object to that because they didhave, most of them did have good assets.
And when the treasury was done puttingequity in them, they all had sufficient
capital, but they were bailedout in every sense of the word.
And they had to be because nowyou had merged banking and
(17:26):
investment banking together, these,they were much larger at the time
of the 2008 crisis than they were in 1999or 2000 when Grammarly Spotty was passed.
So you invited this systemic effect andyou got it and we have it today.
There's no way you could allow anyof those institutions to fail today.
(17:49):
And that's going to continueon into the future.
And it gives them a hugecompetitive advantage.
And it isn't, it actually isencouraging the consolidation for
the consolidation of the industry.
I recently was talking to a organizationthat merged and they said,
(18:11):
Tom, we didn't have a choice.
For example, they said when Silicon Valleyhit, we had, we were well capitalized, but
we had a run on our bank.
And they ran to the New York banks, to thetoo big to fail banks or into Treasuries.
And so we had to over and overemphasize we were very well capitalized
(18:32):
with very good assets,stay with us and they survived.
But they said we're not sure we cansurvive the next time that happens.
So we've created our own future processof bailouts that are unavoidable and
very much entrenched intoour financial system today.
Which brings me to the shadow banks orthe private equity groups.
(18:56):
If you think ahead and you,you think about private equity and so
forth, they're large enough thatI think the liquidity provisions
of the Fed will flow through to themif any one of any significant size
gets into trouble because they'llbe afraid of a systemic fix.
And one of the Primary lendersto these private equity,
(19:18):
besides how they raisemoney are commercial banks.
So it fall back on them, sowe broaden the range of trouble.
Also, I think there's stronglikelihood we'll pass this so
called genius act,which is a law that would, shall we say,
put a sanction throughregulation on unstable coins.
(19:43):
That is basically money markets thathave government securities as backup and
they can also engage in payments.
And when you do that, I think it's fineto have them if that's what they want and
if that's what people want to invest.
[COUGH] But once they become subjectto government regulation and
(20:04):
oversight and people then think they'reprotected when a crisis happens,
the government will step in andbail them out.
And if you don't believe me,think about the money markets.
In the great financial crisis.
The money markets were supposedlybacked by very safe assets,
the most liquid assets.
(20:24):
And yet one of the money markets brokethe buck and they were all bailed out.
So we're moving awayfrom a market economy.
We're moving away from a government willbail out certain large institutions and
certain kinds of institutions.
And I think that makes it in the long run.
(20:46):
In the short run,everyone wants to be bailed out.
And if I had money in a bank thatwas there, I'd want my money.
However, in the long run we'reweakening the system overall.
>> Jon Hartley (20:57):
So I suppose in the aftermath, the golden finish,
we adopted these Basel3 capital standards for
gibs globally systematicallyimportant banks.
We've got sort of this regimeof two types of capital ratios.
We've got the, the risk neutral one,which is the supplementary leverage ratio.
We got the risk weightedone tier one common equity.
(21:21):
And we've also got, you know,a regime of bank stress tests,
you know, CCAR dfast, these thingsthat the Federal Reserve does.
And they sort of have these opaquescenarios that bank balance
sheets are supposed to be able towithstand in these simulations.
(21:44):
And if they don't hold up to mustard,
they can't issue dividends,they can't return to cash to shareholders.
That's kind of the systemthat we've lived in.
I think there's some good evidencethat we're in a much safer
place now than we were before.
Now bank capital ratios are much higher.
I think bank CDS spreads havegenerally been lower and
(22:08):
bank volatility has been lower.
And if you look too just in the recentcrises periods at some level
I think banks held up pretty well during,during COVID and
then even duringthe regional banking crisis.
I think it was largely one bank,Silicon Valley bank, that had some serious
(22:32):
problems in terms of managingthe duration of their balance sheet.
And then you also had that combinedwith the uninsured deposits issue,
having lots of uninsured deposits.
I think that was a one off kind of issue.
Sure, there were Signature bank andsome credit crypto and
Credit Suisse was sort of teetering forquite a while but
(22:53):
I think by and large I thinkthings are safer and better now.
I mean, tell me, is that right orwrong in your mind?
>> Thomas Hoenig (23:01):
Well, it's relative.
I don't agree with you totally,but it is relatively safer.
But here's what I would tell you.
First of all,the banks are not that well capitalized.
They are when you look atthe risk weighted capital and
you look the amount of risk weightedassets to total assets is about 50%.
(23:27):
So that process weights mortgagesat 50% of their book value.
It weights other assets at 20 to 30%.
And it weights governmentTreasuries at almost nothing.
And so you have these very high 13 rates.
But when you look at the leverage ratio,
how much capital do I have relative to mytotal assets available to absorb loss?
(23:52):
That's the leverage ratio andit's 7%, 7 cents on a dollar.
And in the great financial crisis we lost.
The banks lost even the largest,about 6 cents.
So you know,there's not that much capital.
When you say gold plated,I think that's a word that's been
(24:14):
used to convince people to believethem because it isn't true.
They're capitalized better because at thegreat financial crisis because of the risk
weighted system they were about 4%.
But there was a time when you hadcapital ratios of 10 and 11%.
And for regional banks they are, theyare capitalized leverage ratio of 10%.
(24:39):
So it's, it's a relative thing.
It's better, but it's not,they're not well capitalized.
And I would tell you,we talked about Silicon Valley and
the banks got through it in the economy,but the Fed preemptively pumped
hundreds of billions of dollars intothe system to provide it the liquidity,
the access to, to,to enable companies, municipal com,
(25:02):
municipalities to stay solvent,not have a liquidity breakdown.
It did preemptively because you had to runon the banks when Silicon Valley failed.
Because when you looked at the balancesheets of the banks at that time,
there was about $600 billion ofunrealized losses on those in
(25:26):
those balance sheets thatwere not recorded because of
the accounting rules allowing youto not have to charge those off.
So were we really, could we reallyabsorb $600 billion of losses?
Well, the idea is, well,they'll basically,
you let them amortize untilinterest rates come back up.
(25:47):
Well interest rates were zero forabout 15 years.
So then they shot up and you had the shockand you have the effects of that.
There wasn't enough capital toabsorb that without the Fed.
So now the other thing that's happened,John,
is that the banks,the Federal Reserve's balance sheet,
(26:08):
which was once less than a trilliondollars, grew to $9 trillion.
But here's the important point.
Its footprint in the market,
in the government securitiesmarket has become enormous.
It calls the shots.
And soyou don't really have a market there.
You have the Fed and one of the, you know,they, they say that the dual mandate for
(26:31):
the Federal Reserve is maximum employment.
Right.
And.
>> Jon Hartley (26:39):
Price stability.
>> Thomas Hoenig (26:40):
Well, I was going to say interest rates or something, price
stability but they define the Fed definesit as low inflation, not price stability.
And I like to make that distinction there.
But here's the main point.
They have an unstated absolute mandate.
Keep the, keep the securities,
(27:01):
federal securities market stable andable to issue debt.
That's, that's their mission andthat is a primary mission,
their operating proceduresare around that.
They have a standing repofacility that's around that goal.
There didn't used to be that youhad the discount window if you
(27:22):
need a temporary liquidity andyou have the assets to declare, but
now just call them up, it's yours.
So we've become,
the Fed's become a much more importantplayer in the securities market generally.
And the bond vigilantes will only comeinto play if the Fed sticks to its
(27:43):
guns on its quantitative tightening,which it is just about done with,
I think, andthen we'll see what happens from there.
>> Jon Hartley (27:52):
So I guess to speak clearly, so
you're diagnosing the banks as notbeing as safe enough potentially to
withstand another globalfinancial crisis today.
And, and I guess would yourpolicy prescription be we need
even tighter capital ratios for,for the banks.
Would that be your.
>> Thomas Hoenig (28:13):
Well, my, here's here, I've said this for years.
The banking industry,the largest banks included,
the banking industry is over regulated.
I mean that's why you have the shadowbanks and everything else going on.
It's over regulated.
And my view was keep the capital high andthe rules minimum and simple.
(28:35):
Because when the industry was not,didn't have the safety net of the Fed and
didn't have the safety net of the FDIC anddidn't have the safety net of
the government putting equity incapital ratios were 20 and 30%.
Now I'm not advocating forthat, but I am advocating for
10 to 15% then and I would get rid of,I mean, stress tests.
(28:58):
Come on, I mean they haven'tfailed a stress test in 10 years.
That's process, expensive process.
The risk weighted capital measure whichthe banks favor and the government favors
is costs hundreds of millions of dollars,billions of dollars wasted when a simple
leverage ratio does the same thing ina much more effective way because it tells
(29:20):
you transparently how much can thisbank lose before it's insolvent.
It puts discipline out there.
So I would have the capital ratios high,give people confidence and
get those rules minimized.
And I think you would see more businesscome into the banking industry than
leaving.
And you'd have a, you still have a,you can always have a crisis.
(29:42):
But right now the largest banks under therisk weighted system are homogenized and
into a single bank there's nodifferences because the risk weights
on the assets definewhere you put your money.
>> Jon Hartley (29:54):
Right? Well, I guess,
wouldn't that be a criticismof the simple leverage ratio,
supplementary leverage ratiotoo in the sense that.
Well, you could do to respond tothat is just by you could still
keep the same overall level of risk foryour equity by just
investing the assets in muchriskier securities or investments.
(30:17):
Think buying 3X levered ETFs or
whatever have you to compensate for that.
>> Thomas Hoenig (30:26):
Yes, I know the argument.
But here's what I tell people.
If you didn't have too big to fail andcapital was as it's supposed to be.
So I want to have a bank, I gather capitalnow I have to, I'm the management.
I'm not the government.
I'm the management.
And I have to decide how much do I havein riskier loan assets for return.
(30:48):
How much do I have in governments to geta return but provide some liquidity.
How much do I have in consumer.
Okay, so I know there's risk there,but there's a good return.
I have to make those decisions andI have to make them for
the long run benefit of mystockholders and my survivability.
But now I know I'm too big to fail.
(31:08):
Or creditors know thatbanks are going to be,
they're going to get bailed outeven though they invested my lose.
So they don't mind putting money into highrisk organization because they may get,
they're, they're sure they'regoing to get their money back.
You've distorted the market process and,and, and you're proud of it.
And I'm saying no, I'm not proud of it,
(31:28):
the market gives us in the longrun the most effective outcomes.
Look at us today.
The leverage, excuse me,
the risk weighted capital measure istilted to encourage banks to invest in
government debt because you havea ton of government debt to issue.
Well, that's not a reason tohave a risk weighted system.
(31:49):
And now there's a proposal.
The Secretary of the Treasury and
each of the agencies have underconsideration a proposal to
exempt government securitiesfrom any capital standard.
That's, that's saying, okay,no cost of capital, go ahead and
invest in all the government that you,
that you want because it's notgoing to cost you anything.
(32:13):
It's just gravy, isn't it?
>> Jon Hartley (32:15):
Just for Treasuries, though, excluding.
>> Thomas Hoenig (32:17):
Just for Treasuries.
But, that's what I mean.
So the government, sothe government has a Treasury auction.
I'm the bank I lendthe government the money.
I take the government's securities,the government takes the cash,
(32:37):
it spins that money, it circulates backto the bank, so it has the Treasuries.
But now it's circulated backbecause the government spent.
It goes back into the banking system,much of it, not all of it.
And I buy another trancheof new government debt.
As long as the government has to issuenew debt, I'm there to do it and
there's no cost to capital.
Well, now you've taken any disciplinefrom the government away to print money.
(33:01):
Even the Fed is out of the picture there.
I mean,we're going down a road that I'm not sure
you ever get back fromwithout a major crisis.
>> Jon Hartley (33:13):
Just speaking of, I guess, recent crises.
So we did have this Silicon Valleybank regional banking crisis, 2023.
And I'm curious what you thinkabout deposit insurance,
because I think we're inan interesting place there.
So, we had, again, you had a few banks,a lot of uninsured deposits,
forgot how to manage interest rate risk.
FDIC came in, resolved the banks, but
(33:35):
there's still this weirdkind of thing which is well,
we kind of have this implicit unlimitedde facto deposit insurance now.
And of course, before you had $250,000 forevery bank account.
And in theory you could go to everybank in the United States and
that would give you hundreds of millionsof dollars of deposit insurance.
(33:56):
I mean, I don't think inpractice anyone's done that.
Maybe, I don't know, butyou could in principle.
And now we sort of have unlimitedde facto deposit insurance.
I'm curious, do you think that's, I mean,
there's lots of, I guess more hazardissues that some people raise.
Do you think that this is a problem wherewe're at with deposit insurance and
(34:17):
what do you think things should be?
>> Thomas Hoenig (34:19):
I think we're past that point.
I mean, the moral hazard issue, if youtake into account the too big to fail
banks and you take into account thereasonably sized regional banks, you may
let the investors in the regional banksfail, but you will not let the creditors.
We know that from Silicon valley.
So, about 70% or more of depositsare directly or implicitly insured now.
(34:45):
So we're only talkingabout a small percentage,
which are primarily the community banks,
as we learned that their depositors arenot 100% insured, they're the only ones.
So I think you have an argument for just100% deposit insurance because the moral
hazard issue off that is goingto be that much larger and
it's more fair because you've gonedown that road and you say fair.
(35:07):
What's fair?
Well, if you're going to have a bankingindustry under the same rules,
you better have a bankingindustry under the same rules.
Otherwise you bifurcated it andyou've treated some differently and
it actually accelerates the consolidationprocess as you go down the road.
So I think it was a very bad mistake.
I also wonder to myself inthe Silicon Valley situation I
(35:32):
cannot understand as a formervice chair of the FDIC,
to how you made, you couldn't have made
the least cost test forbailing out depositors.
It was a systemic crisis testonly because a lot of depositors,
very large, influential depositors,
(35:54):
would have lost money,maybe 20% of their deposit in the end.
And so, you've changed the game.
You once again changed the game,and I think that's unfortunate.
So, yeah, we have the moral hazardproblem, and adding another 20% or
30% to it isn't going to be that muchmore expensive, given where we are today.
Now you have to worryabout who's entering it.
(36:16):
But look what you havegoing on at the moment.
You have a whole new systemof stablecoin emerging.
We have many,many issues ahead of us that will focus
the debate about moralhazard going forward.
>> Jon Hartley (36:34):
Well, I'm curious, so let's talk about monetary policy for
a minute here, because this is, I think,
a somewhat related topic coming outof the global financial crisis.
The Fed did its first sort of quantitativeeasing rounds where they were buying up
(36:54):
a lot of these toxic assets and they werehelping to resolve bank balance sheets.
And so that was, I guess, the sort ofinitial foray, maybe QE1, I think,
is what people call it.
But then if you've asked forit a couple years later,
start getting this new process,starting with, I think, QE2,
(37:16):
which is the Fed going out, buyingtreasury bonds and issuing reserves,
paying interest on those reserves, andalso buying not just treasury bonds,
but mortgage bonds too,GSE backed mortgage bonds,
buying those,expanding the size of the balance sheet.
And this goes on forquite a period of time.
(37:38):
And then in more recent years,the Fed's tried to unwind some of
this Quantitative tighteningis what some people call it.
And we've had some hiccups along the way.
For example, the repo crisis of 2019.
The banking system has sortof adapted to this new world.
(38:00):
And I'm curious, you've been a longtime critic of quantitative easing.
What are your criticisms ofquantitative easing in this system?
Well, first of all, QE1,which was in the crisis itself.
>> Thomas Hoenig (38:14):
I voted for it, but it wasn't even called QE.
It was a liquidity facility giventhe circumstances of the moment and
the size of the freeze up in the market.
>> Jon Hartley (38:26):
Okay, Judicial lender of last resort, lender.
>> Thomas Hoenig (38:29):
Of last resort, liquidity provider of last resort.
And the idea was that's kind of the theoryof central banking for banks that
are sound and I won't get into the onesthat weren't sound and were bailed out.
That we've already talked about butthat was fine.
But what I found objectionable was QE2,3 and
4 all the way through post Covid,because there
(38:54):
was this view thatunemployment was still high.
But in the third quarter of 2009,
even before QE2 started,the US economy was in recovery.
Industrial production was picking up,employment was picking up.
But there was a view among some that,well, employment was still close to
(39:17):
10% too high and we might be able tobring it down faster if we do QE2.
And I said, it doesn't work that way.
I mean,bringing people back in takes time.
We have a recovery underway.
Let's look at the recovery.
Let's be patient because ifwe go down that road, I said,
you won't be able to get out of it.
(39:39):
I said in QE1, the whole idea was we'regoing to do it and then we'll pull back.
And instead we're not pulling back,we're going forward with even more,
hundreds of billions of dollars more.
And I said, what you're going todo is you're going to set a new
equilibrium around zero interest rates andhigh reserve balances.
(40:01):
And they say, well,we're not printing money.
Yes, you are printing money,you're printing high powered money and
you're keeping interest rates fromgoing negative by having reverse repos.
So you're putting it in over here andyou're pulling it over there.
I said, why would you do that?
Because it provides enormous liquidityinto the market to take care of things.
(40:22):
But what were the other effects?
Because you had thischeap borrowing capacity.
You went in andyou encouraged speculation.
You encourage hedge funds to go in andbuy companies,
borrow the money to buy them, strip outthe equity and then move them offshore.
That's number one.
(40:43):
Number two, they said, well yeah, butthey'll take, the investors will take that
money and they'll invest it inother things like the stock market.
Well, the only thing you did with thestock market, that's not new investment,
that's not plant and equipment, that'sraising the price to earnings ratio.
And that's what they did.
(41:04):
So how much more productive did we become?
Well, that decade was a low productivedecade and a low real increase in wages.
So you accomplish nothing butto distort the allocation of resources,
find yourself unable to pullback without having a crisis.
(41:24):
You know, the paper tantrum and
all that stuff that followed andwe're still suffering from it today.
And we go, we go past the COVID period andwe're bailing, we're,
I understand we put the money in and Iwould have been for it from March of 2020
to August of 2020, but they continuedquantitative easing for another 18 months.
(41:48):
And what they did is theyincrease asset value.
So we had further just redistribution ofwealth, relatively speaking, because if
you held assets, you were richer,if you didn't, you didn't gain much.
And, and what do you, what,what else did you sow?
Societal unrest because peoplewere saying, wait a minute,
(42:10):
this isn't fair, I want mine, I want mine.
And so now we have a governmentspending $6 trillion a year,
issuing new debt of $2 trillionbecause everyone wants theirs and
it's not going to end well.
>> Jon Hartley (42:28):
Well, I'm curious about like I've heard those same
arguments from QE critics in the past.
And I’m curious, what about this fora different argument that
QE largely awash, in the sense that,sure, the Fed goes out,
buys some 10-year longer-dated Treasuries,
(42:52):
maybe they decrease the yieldson those by 20 basis points,
30, 40 basis points,I've done event studies myself.
Other people have done eventStudies that find some small but
meaningful effects to that extent.
They issue some reserves andjust paint bearing reserves.
(43:14):
At some level they're taking intreasuries and long term maturities,
issuing essentially very shortterm maturities or reserves.
And it's kind of just swappingone hand for the other.
I'm curious what you thinkabout that at some level too.
I think that there is someconflation in my mind.
(43:36):
I don't buy the argument thatquantitative easing is responsible for
the run up in US equities inthe past decade and a half or so.
Because I think you look atthe US compared to say Europe,
Canada, Japan, a lot of these,Europe, UK, Japan,
they've had just as much quantitativeeasing as a fraction of GDP.
(44:01):
And those places have had stockmarkets that are essentially flat for
the past 15 years or sothat haven't seen almost any return.
Their GDP per capita hasbeen extremely flat as well.
I think the difference between the US andthose places are largely the US has this
massive tech sector that's very vibrantand we can debate why it has that, but
(44:22):
it has it and these other countries andregions don't.
And if you were to strep outthe earnings and the productivity from
the tech companies in the US,you probably would see something.
You see a US economy that lookspretty similar to Europe,
UK, Japan and maybe Canada.
I'm just curious what yourthoughts are on that.
(44:44):
That like the inequality thing mightnot necessarily be what's going on.
I buy the whole, once we're in this thing,it's very hard to get out.
And if you were to get out of it,you'd need a Fed chair and
an FOMC that is extremelylaser focused on doing it.
Even if it did upset investors,
they'd have to communicateextremely transparently.
(45:05):
But yeah, the whole inequality thing,QE I've never really bought.
>> Thomas Hoenig (45:10):
Well, first of all, we'll have to see how the, how,
how it all plays out in the end.
But number one, I would say, you know,frankly, Europe, Japan, Canada,
they all did quantitative easing,you're right.
And a good part of that was strengthenedthe dollar as they invested in our tech.
(45:30):
So the money did move, it moved in it.
But the other part of it is okay, soyou want to argue about it didn't,
it didn't matter relative to equities,housing, other assets, both here and
in Europe and Canada, inflation,they all have experienced that.
And that didn't happen because we reducethe amount of money in the economy,
(45:56):
the nominal GDP numbersare all up nominal-wise,
even though sometimes productivityisn't as high and so forth.
So I mean your marketsignals have been distorted,
the relative cost of capitalhas been distorted and
the effects have been, I think forthe most part damaging.
(46:19):
And if you didn't have the QE andyou still had the technology,
yes, they may not carrythe values price to 200 to 1,
price to earnings orprice to book, whichever, but
they would still be verysuccessful companies.
(46:41):
You didn't need the money printingthe QE to make them successful.
That's not why they were successful.
And therefore that doesn't excuse the factthat we've expanded the wealth difference
in this country across the board, notjust in stocks but in every asset held.
(47:04):
I don't see any good outcome from that.
>> Jon Hartley (47:07):
I guess on the inflation point, I've always associated the 2020s,
early 2020s inflation more so with,I guess, the fiscal policy and
transfers that hit all thesepeople's bank accounts,
whether it's the economic impact paymentsin the US or PPP loans and so forth.
(47:28):
I guess, looking at how the Fedperformed during that period of time,
do you think that the Fed madea critical mistake by not raising rates
early enough when it was very apparent,say by October 2021,
that the inflation story wasn’tpurely about used car prices jumping,
and that it was very broad-based andinvolved housing rents?
(47:53):
I'm curious what you think about how thePowell Fed has performed in recent years,
how they responded not only tothe great inflation, but also to COVID.
I mean,how would you rate them in that sense?
>> Thomas Hoenig (48:08):
Well, in terms of the response to Covid,
they did more than they needed to do,but I wouldn't criticize them.
I mean, in a crisis like that,you do what you have to do.
I'm not going to criticize them.
I think after August,when we knew that recovery was underway,
then it was clear that theyshould been they didn't have to,
(48:30):
they didn't have to shock the economy.
They just, instead of 120billion of new reserves a month,
weaned the economy off that gradually.
Rates didn't have tobe zero after a while.
I mean, they didn't have to be five anda quarter percent either, but
they could have been higher and you wouldhave had a transition that I think would
have been more successful ratherthan a shock that we had to take.
(48:53):
Now I think they also made a mistake usingthe word transitory as long as they did.
And, everyone tends to agree with that,even them.
So I think had they made theirmoves more modestly sooner,
we could have had a smoothertransition than we had.
But at least they moved this timeas opposed to after the great
(49:14):
financial crisis, andI give them credit for that.
>> Jon Hartley (49:20):
Yeah, no, it's amazing and
interesting to see just how much haschanged just in the past few years.
I mean, do you think that the Fedmaybe under the next Fed chair,
whether it's Chair Kevin Warsh ora Chair Scott Besant or someone else?
I mean,do you think that we will ever in our
(49:42):
lives get back toa reserve neutral system or
a world where we don't havea QE balance sheet any longer?
Do you think that that will ever happen or
do you think that the politicaleconomy problems are just too big?
I mean, there is this problem whichis when you're at the Fed and
you're tightening sometimes that when youcause disruptions in financial markets,
(50:07):
my sense is that there's always thistemptation to ease and turn around,
just like the Fed did in 2019in response to the repo crisis.
I'm curious what you think in, through thelong run, whether we'll ever get there or
whether we'll be able to solve ourtoo big to fail issues as well.
>> Thomas Hoenig (50:23):
I think we're on a path that it will take enormous leadership,
not just at the Fed, butenormous leadership in this country
to bring us back to a moreneutral kind of policy era.
For example,I do agree in 2019 that was a bailout for
(50:46):
certain groups, if you will.
I think it's very hard not to Bailout when you're under that pressure.
And let's, let's think about the Future.
So the US government has to fund$2 trillion of debt every year or
more going forward.
So where is the money going tocome from to fund that debt?
(51:09):
Well, because of our tariffs,war potential war or
war, whichever way you think of it,foreign entities
aren't going to be as forthe least, for what I can see,
as anxious to fund that debt tohave those government securities.
(51:32):
I hear Europe talking about portfolioof reserve currencies and so forth,
I have other.
So there's less demand there.
The bank industry isloading up on them now.
Who's going to buy it?
Who can print money to buy it?
Only one institution that I know of,maybe two,
(51:52):
given that there's no capitalrequirements and no reserve requirements.
And that would be the banking industry andthe Fed.
The Fed can print the money orby buying and
recycling the treasury money,it, it can be the shadow central,
what I call the shadow central bank andprint the money as it multiplies up.
(52:15):
That's the future.
And what follows that?
Well, either a crisis that brings it undercontrol or inflation which has another
form of crisis that brings iteventually forces it under control.
That's not an outlook I really want atall, but I don't see it any other way
unless the leadership says, yes, we'regoing to, we're going to scale this back.
(52:42):
Yes, we're not going to print money fora while.
We're going to go through that transition.
But in the long run, I think we'll havehigher productivity and we can maybe,
maybe bring our debt under control.
It's pretty hard to bring under controlnow because the amount of interest
we're paying on the debt and so forth.
(53:03):
So it's going to take a lot ofwillpower and a lot of leadership.
Or we'll wait and have a crisis.
Tell us what to do.
That's my, that's my thinking.
>> Jon Hartley (53:13):
Fascinating.
Tom, I really want to thank you forcoming on.
It's been a really amazing conversation.
>> Thomas Hoenig (53:18):
Well, I enjoyed it, and great questions.
I wish I had perfect answers for all ofthem, but it was a great conversation.
Thank you.
>> Jon Hartley (53:26):
This is the Capitalism and Freedom in the 21st century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm John Hartley, your host.
Thanks so much for joining us.
[MUSIC]
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm Jon Hartley, your host today.
My guest is Thomas Hoenig, who is a PhDeconomist, a Distinguished Senior Fellow
at the Mercatus Center, and the formerVice Chair of the FDIC during 2010.
(00:29):
And the President of the Kansas City Fedfor about 20 years from 1991 to 2011.
Welcome, Tom.
So great to have you here.
>> Thomas Hoenig (00:37):
Well, thank you.
It's good to be with you andI look forward to our conversation.
>> Jon Hartley (00:41):
Start by gaining your early life.
You were born in Iowa.
You did your undergrad atBenedictine in Kansas.
You did your PhD at Iowa State.
There's a close connectionbetween Iowa State and
Chicago that I think somepeople might not be aware of.
Theodore Schultz and De Gal Johnson,agricultural economists who are both
(01:01):
at Iowa State andwent to Chicago won the Nobel Prize.
I'm just curious,how did you first get into economics and
financial regulationgrowing up in the Midwest?
>> Thomas Hoenig (01:12):
Well, first of all, my dad had a small business,
so I had trips to the bank with him.
I knew that they were around,put it that way.
But actually I got mostinterested when I was in college.
I took a course, an elective coursein economics in my freshman year and
(01:34):
just thoroughly enjoyed it.
It was microeconomics, but it was very,I thought, useful and challenging.
And soI decided that was what I was going to do.
Although I did morph into money andbanking as I graduated and
then got into graduate school.
So I spent a lot of time ineconomics thinking about economics.
(01:57):
And when I left the when I graduatedout of my graduate program,
I went to the Federal Reservebank of Kansas City.
And I had my specialty was money andbanking.
And so when I went to the Kansas City Fed,they had
during the period where there werea lot of mergers among banks going on.
And soI went into the banking supervision and
(02:18):
structure division of that bank ratherthan the monetary research division.
And in that I learned a great dealbecause wasn't too long after I
joined that we had the asset boom ofthe 70s and then the Paul Volcker era.
And I was in supervision andliterally watched with disappointment,
(02:40):
I guess I'll use that term in the hundredsof bank failures that were going on
just in our region and across the country.
And that got me interested theneven more in what the causes were
monetary policy factors in that,trying to deal with inflation.
And so I was pretty well preparedwhen they asked me to step
(03:01):
into the role of president of the bank andjoin the FOMC,
the Federal Open Market Committee,and its policy role.
And so I had both kind of bankingknowledge and the monetary knowledge.
And I found it very, that combinationvery helpful to me in my career.
>> Jon Hartley (03:23):
Well, it's terrific.
You were there duringthe gold financial crisis.
You were the president ofKansas City Fed when that happened,
when those events transpired.
And I feel like the financial crisiswas both a defining moment for
financial regulation andfor monetary policy.
It was really then whenquantitative easing was starting.
(03:47):
I'm curious what went wrong inthe financial crisis as you sort of see it
in terms of underlying causes.
What went wrong withthe banks in your mind?
Housing central to that wasgovernment subsidies important.
There was lack of saybank capital an issue.
(04:08):
Was complexity ofthe financial system an issue?
I'm curious.
You gave a speech in 2009, you gavea speech titled Too Big Has Failed which
was pretty critical I think ofthe approach taken until that time.
How do you define the events ofthe financial crisis and its causes?
>> Thomas Hoenig (04:28):
Well, I will tell you, first of all,
I think most financial crisis postWorld War II, let's leave it.
And I'll also kind of mark out Covid but
most financial crisisare actually policy related,
usually excessive monetary policy.
And that's one thing I learned as I dealtwith banks and doing the crisis and that.
(04:51):
And for example in the 70s whathappened was the Fed not wanting
to have a slowdown in the economy,repeatedly lowered rates.
And then as inflation picked up,they lowered them again, but
they never really got an equilibrium.
And over that time inflation,as you well know,
(05:13):
went from modest 2.5% to14% by the 1979 period.
And what happened in that baits the banks,in other words,
low interest rates, asset prices.
They began to land moreon collateral value and
the expectation that the value wouldonly increase because of inflation and
they're willing to make higher loanto value loans, take on more risk.
(05:37):
And so then when you raise interestrate and those values plummeted,
these banks were ill preparedto deal with it and they
didn't have enough capital given the sizeof the adjustment that had to take place.
So that happened in the 80s,70s, and 80s, and
then we actually repeated it after the,in beginning of the decade of 2000,
(05:57):
where I was a member of the FOMC then I,did object, but not enough.
And we saw interest rates declineto as low as 1% even when
the economy was growing in 2003.
And what that did is it brought forwardthe speculative elements in the economy
because of very low interest rates.
(06:18):
You could borrow a lot of money at,say, 2%, buy a company,
finance it with debt, strip outthe equity, take the cash, move on, but
creating increasing amounts of instabilityuntil finally inflation took off.
They raised rates.
And we had an enormous financial crisisaround housing because people have been
(06:40):
taking equity out of their homes andspending it.
More leverage, more downside risk.
And when it finally hit,we had a major problem again.
Following Covid, the Federal Reserve,extended its loose monetary policy,
accommodated monetary policywell past the COVID crisis.
(07:02):
It held onto that $120 billiona month injection of new
reserves into the system forover 18 months.
And we had a breakout of inflation.
It exceeded 9% at one point.
And then they had to raise interest rates.
And, of course,asset values in the banks plummeted.
(07:23):
We had the Silicon Valley bank failure andthen a bank run on many banks, and
that because no one knew forsure how they were affected.
So those are the sorts of things youhave to think about in monetary policy.
What is your policy gonna do tothe institutions when you adjust it?
And I think that was lost ineach of those occasions, and
why we had a worse crisis as a result.
(07:44):
When I talk about too big to fail, theother side of that was some banks were,
shall we say, protected,while other banks were not.
And it created an instability and
uncertainty in the system that I thinkwas very harmful to the economy.
You know, prior to the great financialrecession, when Solomon failed, it failed.
(08:08):
We didn't bail it out, and we didn'tbail out the banks lending to it.
But when we got to the great financialcrisis and banks were under pressure,
especially the large banks, Citibank,you name it, the, the Fed said, no, no,
we can't have that.
So they actually provided enough enormousamounts of liquidity into the system that
the treasury helped provide capital,something they wouldn't do for
(08:31):
a regional bank or smaller bank.
And so we, we set up an expectationthat the largest banks would be
bailed out at whatever cost.
And that discriminated againstall the other banks and
made our bank andour economic system less efficient.
And so I had real objections to that aswell, John, and still do to this day.
>> Jon Hartley (08:53):
Well, I guess there's this famous question about should Paulson and
Bernanke have saved Lehman?
And I guess there's thisquestion of what does a run on,
I guess the shadowbanking system look like?
And this is a traditional runwhere I guess you have depositors
(09:14):
lined up at a commercial banktrying to get deposits out, but
really you have investors,money market funds getting tons
of redemptions,people are worried that there's exposure
to Lehman commercial paper andthat that triggers this,
(09:34):
all these redemptions which sort offorces further selling and so forth.
I guess the argument, I mean,it seems like, during that period, I mean,
there were a series ofthese distressed firms,
whether it's Bear Stearns eventuallygetting bought up by JPMorgan or
Merrill Lynch getting bought upby Bank of America and so forth.
(09:56):
You have some assistance fromthe Fed in some of these cases, but
there are some people thatargued that Bernanke and
Paulson should have actedmore to save Lehman.
And there was a deal lined up withBarclays, I think, to buy Lehman, but
I think the UK prevent it from happening.
It's kind of the Paulsonstory that he tells,
(10:18):
that that was, I guess,a central challenge.
But other I think Randy Quarles,for example, might say countrywide
was kind of, I guess the moment thatthings were getting really bad.
I'm curious what your sort of diagnosesare of, of that period of time and
all these bailouts and, and what shouldhave been done differently, if anything.
>> Thomas Hoenig (10:43):
Well, my complaint was to begin with, when they decided for
whatever reason to bail out Bear Stearns.
It was not the largestinstitution in the world, but
they were afraid of contagion effects orwhatever the reason was.
(11:05):
I thought that set the expectation.
And when you, once you setthe expectation, then you live with it.
And the expectation was, anything thatlarge or larger is going to be bailed out.
It even set the expectations forLehman itself.
Had they let that fail,it would have required,
it would have caused, I should say,a whole different, I think,
(11:29):
set of responses in the banking industryand in the investment banking industry.
And it would have said, wait, I better bethinking about how much capital I have.
I better be thinking about thedistribution of my assets on my balance
sheet and the quality of my assets andwhether I should build liquidity.
This was in March of 2008, and
(11:51):
then you had, basically, the GSEs.
And you put them into conservatorship,but in fact you bailed out the creditors.
Not that, not the investors,but the creditors big time.
And so you set the expectation.
So then when you give them the LehmanBrothers, you've set the expectations.
(12:12):
To change direction at that timeis to invite a crisis is to.
Because now you're saying, wait a minute,those were the expectations, but they, but
they're not living up to them.
I better run and I better not take anychances because I don't know how other
banks like Citi or so forth,how they prepared for it,
because we know Lehman's didn't preparefor a further liquidity squeeze at all.
(12:37):
And therefore you created this monster.
So the mistake was startingout by bailing out.
Once you start down a path,you can't change during that crisis.
And they tried to do that,which was a serious error at that point.
>> Jon Hartley (12:53):
I'm curious how you think of, I guess, some of these arguments
around Glass-Steagall andGramm-Leach-Bliley and Glass-Steagall.
And a large part that people talk a lotabout is separating commercial banking
from investment banking.
And Glass-Steagall and Gramm-Leach-Blileyand other legislation around
(13:15):
that time in the 90s, Glass-Steagall'ssomething passed in the 1930s.
Gramm-Leach-Bliley, in the sortaderegulatory period in the 90s,
allowed for a lot of consolidationin the part of the banking system.
Some people will say,like Elizabeth Warren will say,
Warren will say breaking up the big bankswould be a good thing at some level.
(13:41):
I think it would makethe financial system less
stable in the sense that these largerbanks that we now have as a result of this
consolidation sort of benefitfrom being more diversified.
They have both commercial banks andinvestment banks under one umbrella.
And if you look at the performanceof the larger banks, the JPMorgans,
the Citis, the banks,Bank of America and Wells Fargo, I mean,
(14:03):
they were generally safeduring the financial crisis.
And it was, generally speaking,those that didn't
have diversified businessescombined that were struggling.
This is an argument I've heardfrom Bernanke and others or
others have mentioned before.
I'm curious what your thoughtsare I guess on consolidation.
I mean, now we're also seeinga non-banking sector sort of emerge that's
(14:28):
growing a lot, non-bank lending,think the Rocket Mortgages of the world.
I'm curious how you see sort of I guessthe financial system evolving and
how consolidations played a role in that.
>> Thomas Hoenig (14:43):
Well, let me go back to the first part and that is,
you know, Ramleach Bliley,I oppose that at the time and, and
the reason was though not that Inecessarily anything against mergers but
the fact was the commercial bankingindustry was the only one that
was heavily subsidized inthe sense of deposit insurance.
(15:07):
And we knew from other experiences,
continental Illinois that they wouldlikely be bailed out if there's a private.
And so now you're taking thiscommercial banking and you're saying,
we're gonna allow commercial banks andinvestment banks to merge.
Well that sounds great exceptyou're also then indirectly and
sometimes very directly extendingthe safety net from just
(15:29):
the commercial banking industry tothe investment banking industry,
especially when it's under the umbrellaof a single bank holding company
that owns both because as a policymakerthat if either one of them get in trouble,
both of them get in trouble becausepeople, they don't distinguish,
(15:49):
they can't be sure howmuch overlap is there.
And I gave a speech in 1999 asthis thing was being passed,
saying, you will now havesystemic risk For sure,
you've invited systemic risk intothe financial system and that
actually entrenches to be to fail becausenow everything is implicitly insured.
(16:15):
And that's exactly what happened.
They say, well, J.P. morgan,
the others were satisfactorycapitalizing the great financial crisis.
That's not actually true [COUGH]Because the US government through TARP,
put up in place a $600 billion bailout forthe industry.
(16:39):
And Citibank,which was clearly on the ropes to failure,
had equity injected preferred stock.
They gave him enough capital andthen if you look at the data,
the Federal Reserve made enormous loansto these institutions during that period.
They, they were, they were providedall the liquidity they need.
(17:04):
And that was so called QE1, butit primarily was a liquidity vehicle.
I did not object to that because they didhave, most of them did have good assets.
And when the treasury was done puttingequity in them, they all had sufficient
capital, but they were bailedout in every sense of the word.
And they had to be because nowyou had merged banking and
(17:26):
investment banking together, these,they were much larger at the time
of the 2008 crisis than they were in 1999or 2000 when Grammarly Spotty was passed.
So you invited this systemic effect andyou got it and we have it today.
There's no way you could allow anyof those institutions to fail today.
(17:49):
And that's going to continueon into the future.
And it gives them a hugecompetitive advantage.
And it isn't, it actually isencouraging the consolidation for
the consolidation of the industry.
I recently was talking to a organizationthat merged and they said,
(18:11):
Tom, we didn't have a choice.
For example, they said when Silicon Valleyhit, we had, we were well capitalized, but
we had a run on our bank.
And they ran to the New York banks, to thetoo big to fail banks or into Treasuries.
And so we had to over and overemphasize we were very well capitalized
(18:32):
with very good assets,stay with us and they survived.
But they said we're not sure we cansurvive the next time that happens.
So we've created our own future processof bailouts that are unavoidable and
very much entrenched intoour financial system today.
Which brings me to the shadow banks orthe private equity groups.
(18:56):
If you think ahead and you,you think about private equity and so
forth, they're large enough thatI think the liquidity provisions
of the Fed will flow through to themif any one of any significant size
gets into trouble because they'llbe afraid of a systemic fix.
And one of the Primary lendersto these private equity,
(19:18):
besides how they raisemoney are commercial banks.
So it fall back on them, sowe broaden the range of trouble.
Also, I think there's stronglikelihood we'll pass this so
called genius act,which is a law that would, shall we say,
put a sanction throughregulation on unstable coins.
(19:43):
That is basically money markets thathave government securities as backup and
they can also engage in payments.
And when you do that, I think it's fineto have them if that's what they want and
if that's what people want to invest.
[COUGH] But once they become subjectto government regulation and
(20:04):
oversight and people then think they'reprotected when a crisis happens,
the government will step in andbail them out.
And if you don't believe me,think about the money markets.
In the great financial crisis.
The money markets were supposedlybacked by very safe assets,
the most liquid assets.
(20:24):
And yet one of the money markets brokethe buck and they were all bailed out.
So we're moving awayfrom a market economy.
We're moving away from a government willbail out certain large institutions and
certain kinds of institutions.
And I think that makes it in the long run.
(20:46):
In the short run,everyone wants to be bailed out.
And if I had money in a bank thatwas there, I'd want my money.
However, in the long run we'reweakening the system overall.
>> Jon Hartley (20:57):
So I suppose in the aftermath, the golden finish,
we adopted these Basel3 capital standards for
gibs globally systematicallyimportant banks.
We've got sort of this regimeof two types of capital ratios.
We've got the, the risk neutral one,which is the supplementary leverage ratio.
We got the risk weightedone tier one common equity.
(21:21):
And we've also got, you know,a regime of bank stress tests,
you know, CCAR dfast, these thingsthat the Federal Reserve does.
And they sort of have these opaquescenarios that bank balance
sheets are supposed to be able towithstand in these simulations.
(21:44):
And if they don't hold up to mustard,
they can't issue dividends,they can't return to cash to shareholders.
That's kind of the systemthat we've lived in.
I think there's some good evidencethat we're in a much safer
place now than we were before.
Now bank capital ratios are much higher.
I think bank CDS spreads havegenerally been lower and
(22:08):
bank volatility has been lower.
And if you look too just in the recentcrises periods at some level
I think banks held up pretty well during,during COVID and
then even duringthe regional banking crisis.
I think it was largely one bank,Silicon Valley bank, that had some serious
(22:32):
problems in terms of managingthe duration of their balance sheet.
And then you also had that combinedwith the uninsured deposits issue,
having lots of uninsured deposits.
I think that was a one off kind of issue.
Sure, there were Signature bank andsome credit crypto and
Credit Suisse was sort of teetering forquite a while but
(22:53):
I think by and large I thinkthings are safer and better now.
I mean, tell me, is that right orwrong in your mind?
>> Thomas Hoenig (23:01):
Well, it's relative.
I don't agree with you totally,but it is relatively safer.
But here's what I would tell you.
First of all,the banks are not that well capitalized.
They are when you look atthe risk weighted capital and
you look the amount of risk weightedassets to total assets is about 50%.
(23:27):
So that process weights mortgagesat 50% of their book value.
It weights other assets at 20 to 30%.
And it weights governmentTreasuries at almost nothing.
And so you have these very high 13 rates.
But when you look at the leverage ratio,
how much capital do I have relative to mytotal assets available to absorb loss?
(23:52):
That's the leverage ratio andit's 7%, 7 cents on a dollar.
And in the great financial crisis we lost.
The banks lost even the largest,about 6 cents.
So you know,there's not that much capital.
When you say gold plated,I think that's a word that's been
(24:14):
used to convince people to believethem because it isn't true.
They're capitalized better because at thegreat financial crisis because of the risk
weighted system they were about 4%.
But there was a time when you hadcapital ratios of 10 and 11%.
And for regional banks they are, theyare capitalized leverage ratio of 10%.
(24:39):
So it's, it's a relative thing.
It's better, but it's not,they're not well capitalized.
And I would tell you,we talked about Silicon Valley and
the banks got through it in the economy,but the Fed preemptively pumped
hundreds of billions of dollars intothe system to provide it the liquidity,
the access to, to,to enable companies, municipal com,
(25:02):
municipalities to stay solvent,not have a liquidity breakdown.
It did preemptively because you had to runon the banks when Silicon Valley failed.
Because when you looked at the balancesheets of the banks at that time,
there was about $600 billion ofunrealized losses on those in
(25:26):
those balance sheets thatwere not recorded because of
the accounting rules allowing youto not have to charge those off.
So were we really, could we reallyabsorb $600 billion of losses?
Well, the idea is, well,they'll basically,
you let them amortize untilinterest rates come back up.
(25:47):
Well interest rates were zero forabout 15 years.
So then they shot up and you had the shockand you have the effects of that.
There wasn't enough capital toabsorb that without the Fed.
So now the other thing that's happened,John,
is that the banks,the Federal Reserve's balance sheet,
(26:08):
which was once less than a trilliondollars, grew to $9 trillion.
But here's the important point.
Its footprint in the market,
in the government securitiesmarket has become enormous.
It calls the shots.
And soyou don't really have a market there.
You have the Fed and one of the, you know,they, they say that the dual mandate for
(26:31):
the Federal Reserve is maximum employment.
Right.
And.
>> Jon Hartley (26:39):
Price stability.
>> Thomas Hoenig (26:40):
Well, I was going to say interest rates or something, price
stability but they define the Fed definesit as low inflation, not price stability.
And I like to make that distinction there.
But here's the main point.
They have an unstated absolute mandate.
Keep the, keep the securities,
(27:01):
federal securities market stable andable to issue debt.
That's, that's their mission andthat is a primary mission,
their operating proceduresare around that.
They have a standing repofacility that's around that goal.
There didn't used to be that youhad the discount window if you
(27:22):
need a temporary liquidity andyou have the assets to declare, but
now just call them up, it's yours.
So we've become,
the Fed's become a much more importantplayer in the securities market generally.
And the bond vigilantes will only comeinto play if the Fed sticks to its
(27:43):
guns on its quantitative tightening,which it is just about done with,
I think, andthen we'll see what happens from there.
>> Jon Hartley (27:52):
So I guess to speak clearly, so
you're diagnosing the banks as notbeing as safe enough potentially to
withstand another globalfinancial crisis today.
And, and I guess would yourpolicy prescription be we need
even tighter capital ratios for,for the banks.
Would that be your.
>> Thomas Hoenig (28:13):
Well, my, here's here, I've said this for years.
The banking industry,the largest banks included,
the banking industry is over regulated.
I mean that's why you have the shadowbanks and everything else going on.
It's over regulated.
And my view was keep the capital high andthe rules minimum and simple.
(28:35):
Because when the industry was not,didn't have the safety net of the Fed and
didn't have the safety net of the FDIC anddidn't have the safety net of
the government putting equity incapital ratios were 20 and 30%.
Now I'm not advocating forthat, but I am advocating for
10 to 15% then and I would get rid of,I mean, stress tests.
(28:58):
Come on, I mean they haven'tfailed a stress test in 10 years.
That's process, expensive process.
The risk weighted capital measure whichthe banks favor and the government favors
is costs hundreds of millions of dollars,billions of dollars wasted when a simple
leverage ratio does the same thing ina much more effective way because it tells
(29:20):
you transparently how much can thisbank lose before it's insolvent.
It puts discipline out there.
So I would have the capital ratios high,give people confidence and
get those rules minimized.
And I think you would see more businesscome into the banking industry than
leaving.
And you'd have a, you still have a,you can always have a crisis.
(29:42):
But right now the largest banks under therisk weighted system are homogenized and
into a single bank there's nodifferences because the risk weights
on the assets definewhere you put your money.
>> Jon Hartley (29:54):
Right? Well, I guess,
wouldn't that be a criticismof the simple leverage ratio,
supplementary leverage ratiotoo in the sense that.
Well, you could do to respond tothat is just by you could still
keep the same overall level of risk foryour equity by just
investing the assets in muchriskier securities or investments.
(30:17):
Think buying 3X levered ETFs or
whatever have you to compensate for that.
>> Thomas Hoenig (30:26):
Yes, I know the argument.
But here's what I tell people.
If you didn't have too big to fail andcapital was as it's supposed to be.
So I want to have a bank, I gather capitalnow I have to, I'm the management.
I'm not the government.
I'm the management.
And I have to decide how much do I havein riskier loan assets for return.
(30:48):
How much do I have in governments to geta return but provide some liquidity.
How much do I have in consumer.
Okay, so I know there's risk there,but there's a good return.
I have to make those decisions andI have to make them for
the long run benefit of mystockholders and my survivability.
But now I know I'm too big to fail.
(31:08):
Or creditors know thatbanks are going to be,
they're going to get bailed outeven though they invested my lose.
So they don't mind putting money into highrisk organization because they may get,
they're, they're sure they'regoing to get their money back.
You've distorted the market process and,and, and you're proud of it.
And I'm saying no, I'm not proud of it,
(31:28):
the market gives us in the longrun the most effective outcomes.
Look at us today.
The leverage, excuse me,
the risk weighted capital measure istilted to encourage banks to invest in
government debt because you havea ton of government debt to issue.
Well, that's not a reason tohave a risk weighted system.
(31:49):
And now there's a proposal.
The Secretary of the Treasury and
each of the agencies have underconsideration a proposal to
exempt government securitiesfrom any capital standard.
That's, that's saying, okay,no cost of capital, go ahead and
invest in all the government that you,
that you want because it's notgoing to cost you anything.
(32:13):
It's just gravy, isn't it?
>> Jon Hartley (32:15):
Just for Treasuries, though, excluding.
>> Thomas Hoenig (32:17):
Just for Treasuries.
But, that's what I mean.
So the government, sothe government has a Treasury auction.
I'm the bank I lendthe government the money.
I take the government's securities,the government takes the cash,
(32:37):
it spins that money, it circulates backto the bank, so it has the Treasuries.
But now it's circulated backbecause the government spent.
It goes back into the banking system,much of it, not all of it.
And I buy another trancheof new government debt.
As long as the government has to issuenew debt, I'm there to do it and
there's no cost to capital.
Well, now you've taken any disciplinefrom the government away to print money.
(33:01):
Even the Fed is out of the picture there.
I mean,we're going down a road that I'm not sure
you ever get back fromwithout a major crisis.
>> Jon Hartley (33:13):
Just speaking of, I guess, recent crises.
So we did have this Silicon Valleybank regional banking crisis, 2023.
And I'm curious what you thinkabout deposit insurance,
because I think we're inan interesting place there.
So, we had, again, you had a few banks,a lot of uninsured deposits,
forgot how to manage interest rate risk.
FDIC came in, resolved the banks, but
(33:35):
there's still this weirdkind of thing which is well,
we kind of have this implicit unlimitedde facto deposit insurance now.
And of course, before you had $250,000 forevery bank account.
And in theory you could go to everybank in the United States and
that would give you hundreds of millionsof dollars of deposit insurance.
(33:56):
I mean, I don't think inpractice anyone's done that.
Maybe, I don't know, butyou could in principle.
And now we sort of have unlimitedde facto deposit insurance.
I'm curious, do you think that's, I mean,
there's lots of, I guess more hazardissues that some people raise.
Do you think that this is a problem wherewe're at with deposit insurance and
(34:17):
what do you think things should be?
>> Thomas Hoenig (34:19):
I think we're past that point.
I mean, the moral hazard issue, if youtake into account the too big to fail
banks and you take into account thereasonably sized regional banks, you may
let the investors in the regional banksfail, but you will not let the creditors.
We know that from Silicon valley.
So, about 70% or more of depositsare directly or implicitly insured now.
(34:45):
So we're only talkingabout a small percentage,
which are primarily the community banks,
as we learned that their depositors arenot 100% insured, they're the only ones.
So I think you have an argument for just100% deposit insurance because the moral
hazard issue off that is goingto be that much larger and
it's more fair because you've gonedown that road and you say fair.
(35:07):
What's fair?
Well, if you're going to have a bankingindustry under the same rules,
you better have a bankingindustry under the same rules.
Otherwise you bifurcated it andyou've treated some differently and
it actually accelerates the consolidationprocess as you go down the road.
So I think it was a very bad mistake.
I also wonder to myself inthe Silicon Valley situation I
(35:32):
cannot understand as a formervice chair of the FDIC,
to how you made, you couldn't have made
the least cost test forbailing out depositors.
It was a systemic crisis testonly because a lot of depositors,
very large, influential depositors,
(35:54):
would have lost money,maybe 20% of their deposit in the end.
And so, you've changed the game.
You once again changed the game,and I think that's unfortunate.
So, yeah, we have the moral hazardproblem, and adding another 20% or
30% to it isn't going to be that muchmore expensive, given where we are today.
Now you have to worryabout who's entering it.
(36:16):
But look what you havegoing on at the moment.
You have a whole new systemof stablecoin emerging.
We have many,many issues ahead of us that will focus
the debate about moralhazard going forward.
>> Jon Hartley (36:34):
Well, I'm curious, so let's talk about monetary policy for
a minute here, because this is, I think,
a somewhat related topic coming outof the global financial crisis.
The Fed did its first sort of quantitativeeasing rounds where they were buying up
(36:54):
a lot of these toxic assets and they werehelping to resolve bank balance sheets.
And so that was, I guess, the sort ofinitial foray, maybe QE1, I think,
is what people call it.
But then if you've asked forit a couple years later,
start getting this new process,starting with, I think, QE2,
(37:16):
which is the Fed going out, buyingtreasury bonds and issuing reserves,
paying interest on those reserves, andalso buying not just treasury bonds,
but mortgage bonds too,GSE backed mortgage bonds,
buying those,expanding the size of the balance sheet.
And this goes on forquite a period of time.
(37:38):
And then in more recent years,the Fed's tried to unwind some of
this Quantitative tighteningis what some people call it.
And we've had some hiccups along the way.
For example, the repo crisis of 2019.
The banking system has sortof adapted to this new world.
(38:00):
And I'm curious, you've been a longtime critic of quantitative easing.
What are your criticisms ofquantitative easing in this system?
Well, first of all, QE1,which was in the crisis itself.
>> Thomas Hoenig (38:14):
I voted for it, but it wasn't even called QE.
It was a liquidity facility giventhe circumstances of the moment and
the size of the freeze up in the market.
>> Jon Hartley (38:26):
Okay, Judicial lender of last resort, lender.
>> Thomas Hoenig (38:29):
Of last resort, liquidity provider of last resort.
And the idea was that's kind of the theoryof central banking for banks that
are sound and I won't get into the onesthat weren't sound and were bailed out.
That we've already talked about butthat was fine.
But what I found objectionable was QE2,3 and
4 all the way through post Covid,because there
(38:54):
was this view thatunemployment was still high.
But in the third quarter of 2009,
even before QE2 started,the US economy was in recovery.
Industrial production was picking up,employment was picking up.
But there was a view among some that,well, employment was still close to
(39:17):
10% too high and we might be able tobring it down faster if we do QE2.
And I said, it doesn't work that way.
I mean,bringing people back in takes time.
We have a recovery underway.
Let's look at the recovery.
Let's be patient because ifwe go down that road, I said,
you won't be able to get out of it.
(39:39):
I said in QE1, the whole idea was we'regoing to do it and then we'll pull back.
And instead we're not pulling back,we're going forward with even more,
hundreds of billions of dollars more.
And I said, what you're going todo is you're going to set a new
equilibrium around zero interest rates andhigh reserve balances.
(40:01):
And they say, well,we're not printing money.
Yes, you are printing money,you're printing high powered money and
you're keeping interest rates fromgoing negative by having reverse repos.
So you're putting it in over here andyou're pulling it over there.
I said, why would you do that?
Because it provides enormous liquidityinto the market to take care of things.
(40:22):
But what were the other effects?
Because you had thischeap borrowing capacity.
You went in andyou encouraged speculation.
You encourage hedge funds to go in andbuy companies,
borrow the money to buy them, strip outthe equity and then move them offshore.
That's number one.
(40:43):
Number two, they said, well yeah, butthey'll take, the investors will take that
money and they'll invest it inother things like the stock market.
Well, the only thing you did with thestock market, that's not new investment,
that's not plant and equipment, that'sraising the price to earnings ratio.
And that's what they did.
(41:04):
So how much more productive did we become?
Well, that decade was a low productivedecade and a low real increase in wages.
So you accomplish nothing butto distort the allocation of resources,
find yourself unable to pullback without having a crisis.
(41:24):
You know, the paper tantrum and
all that stuff that followed andwe're still suffering from it today.
And we go, we go past the COVID period andwe're bailing, we're,
I understand we put the money in and Iwould have been for it from March of 2020
to August of 2020, but they continuedquantitative easing for another 18 months.
(41:48):
And what they did is theyincrease asset value.
So we had further just redistribution ofwealth, relatively speaking, because if
you held assets, you were richer,if you didn't, you didn't gain much.
And, and what do you, what,what else did you sow?
Societal unrest because peoplewere saying, wait a minute,
(42:10):
this isn't fair, I want mine, I want mine.
And so now we have a governmentspending $6 trillion a year,
issuing new debt of $2 trillionbecause everyone wants theirs and
it's not going to end well.
>> Jon Hartley (42:28):
Well, I'm curious about like I've heard those same
arguments from QE critics in the past.
And I’m curious, what about this fora different argument that
QE largely awash, in the sense that,sure, the Fed goes out,
buys some 10-year longer-dated Treasuries,
(42:52):
maybe they decrease the yieldson those by 20 basis points,
30, 40 basis points,I've done event studies myself.
Other people have done eventStudies that find some small but
meaningful effects to that extent.
They issue some reserves andjust paint bearing reserves.
(43:14):
At some level they're taking intreasuries and long term maturities,
issuing essentially very shortterm maturities or reserves.
And it's kind of just swappingone hand for the other.
I'm curious what you thinkabout that at some level too.
I think that there is someconflation in my mind.
(43:36):
I don't buy the argument thatquantitative easing is responsible for
the run up in US equities inthe past decade and a half or so.
Because I think you look atthe US compared to say Europe,
Canada, Japan, a lot of these,Europe, UK, Japan,
they've had just as much quantitativeeasing as a fraction of GDP.
(44:01):
And those places have had stockmarkets that are essentially flat for
the past 15 years or sothat haven't seen almost any return.
Their GDP per capita hasbeen extremely flat as well.
I think the difference between the US andthose places are largely the US has this
massive tech sector that's very vibrantand we can debate why it has that, but
(44:22):
it has it and these other countries andregions don't.
And if you were to strep outthe earnings and the productivity from
the tech companies in the US,you probably would see something.
You see a US economy that lookspretty similar to Europe,
UK, Japan and maybe Canada.
I'm just curious what yourthoughts are on that.
(44:44):
That like the inequality thing mightnot necessarily be what's going on.
I buy the whole, once we're in this thing,it's very hard to get out.
And if you were to get out of it,you'd need a Fed chair and
an FOMC that is extremelylaser focused on doing it.
Even if it did upset investors,
they'd have to communicateextremely transparently.
(45:05):
But yeah, the whole inequality thing,QE I've never really bought.
>> Thomas Hoenig (45:10):
Well, first of all, we'll have to see how the, how,
how it all plays out in the end.
But number one, I would say, you know,frankly, Europe, Japan, Canada,
they all did quantitative easing,you're right.
And a good part of that was strengthenedthe dollar as they invested in our tech.
(45:30):
So the money did move, it moved in it.
But the other part of it is okay, soyou want to argue about it didn't,
it didn't matter relative to equities,housing, other assets, both here and
in Europe and Canada, inflation,they all have experienced that.
And that didn't happen because we reducethe amount of money in the economy,
(45:56):
the nominal GDP numbersare all up nominal-wise,
even though sometimes productivityisn't as high and so forth.
So I mean your marketsignals have been distorted,
the relative cost of capitalhas been distorted and
the effects have been, I think forthe most part damaging.
(46:19):
And if you didn't have the QE andyou still had the technology,
yes, they may not carrythe values price to 200 to 1,
price to earnings orprice to book, whichever, but
they would still be verysuccessful companies.
(46:41):
You didn't need the money printingthe QE to make them successful.
That's not why they were successful.
And therefore that doesn't excuse the factthat we've expanded the wealth difference
in this country across the board, notjust in stocks but in every asset held.
(47:04):
I don't see any good outcome from that.
>> Jon Hartley (47:07):
I guess on the inflation point, I've always associated the 2020s,
early 2020s inflation more so with,I guess, the fiscal policy and
transfers that hit all thesepeople's bank accounts,
whether it's the economic impact paymentsin the US or PPP loans and so forth.
(47:28):
I guess, looking at how the Fedperformed during that period of time,
do you think that the Fed madea critical mistake by not raising rates
early enough when it was very apparent,say by October 2021,
that the inflation story wasn’tpurely about used car prices jumping,
and that it was very broad-based andinvolved housing rents?
(47:53):
I'm curious what you think about how thePowell Fed has performed in recent years,
how they responded not only tothe great inflation, but also to COVID.
I mean,how would you rate them in that sense?
>> Thomas Hoenig (48:08):
Well, in terms of the response to Covid,
they did more than they needed to do,but I wouldn't criticize them.
I mean, in a crisis like that,you do what you have to do.
I'm not going to criticize them.
I think after August,when we knew that recovery was underway,
then it was clear that theyshould been they didn't have to,
(48:30):
they didn't have to shock the economy.
They just, instead of 120billion of new reserves a month,
weaned the economy off that gradually.
Rates didn't have tobe zero after a while.
I mean, they didn't have to be five anda quarter percent either, but
they could have been higher and you wouldhave had a transition that I think would
have been more successful ratherthan a shock that we had to take.
(48:53):
Now I think they also made a mistake usingthe word transitory as long as they did.
And, everyone tends to agree with that,even them.
So I think had they made theirmoves more modestly sooner,
we could have had a smoothertransition than we had.
But at least they moved this timeas opposed to after the great
(49:14):
financial crisis, andI give them credit for that.
>> Jon Hartley (49:20):
Yeah, no, it's amazing and
interesting to see just how much haschanged just in the past few years.
I mean, do you think that the Fedmaybe under the next Fed chair,
whether it's Chair Kevin Warsh ora Chair Scott Besant or someone else?
I mean,do you think that we will ever in our
(49:42):
lives get back toa reserve neutral system or
a world where we don't havea QE balance sheet any longer?
Do you think that that will ever happen or
do you think that the politicaleconomy problems are just too big?
I mean, there is this problem whichis when you're at the Fed and
you're tightening sometimes that when youcause disruptions in financial markets,
(50:07):
my sense is that there's always thistemptation to ease and turn around,
just like the Fed did in 2019in response to the repo crisis.
I'm curious what you think in, through thelong run, whether we'll ever get there or
whether we'll be able to solve ourtoo big to fail issues as well.
>> Thomas Hoenig (50:23):
I think we're on a path that it will take enormous leadership,
not just at the Fed, butenormous leadership in this country
to bring us back to a moreneutral kind of policy era.
For example,I do agree in 2019 that was a bailout for
(50:46):
certain groups, if you will.
I think it's very hard not to Bailout when you're under that pressure.
And let's, let's think about the Future.
So the US government has to fund$2 trillion of debt every year or
more going forward.
So where is the money going tocome from to fund that debt?
(51:09):
Well, because of our tariffs,war potential war or
war, whichever way you think of it,foreign entities
aren't going to be as forthe least, for what I can see,
as anxious to fund that debt tohave those government securities.
(51:32):
I hear Europe talking about portfolioof reserve currencies and so forth,
I have other.
So there's less demand there.
The bank industry isloading up on them now.
Who's going to buy it?
Who can print money to buy it?
Only one institution that I know of,maybe two,
(51:52):
given that there's no capitalrequirements and no reserve requirements.
And that would be the banking industry andthe Fed.
The Fed can print the money orby buying and
recycling the treasury money,it, it can be the shadow central,
what I call the shadow central bank andprint the money as it multiplies up.
(52:15):
That's the future.
And what follows that?
Well, either a crisis that brings it undercontrol or inflation which has another
form of crisis that brings iteventually forces it under control.
That's not an outlook I really want atall, but I don't see it any other way
unless the leadership says, yes, we'regoing to, we're going to scale this back.
(52:42):
Yes, we're not going to print money fora while.
We're going to go through that transition.
But in the long run, I think we'll havehigher productivity and we can maybe,
maybe bring our debt under control.
It's pretty hard to bring under controlnow because the amount of interest
we're paying on the debt and so forth.
(53:03):
So it's going to take a lot ofwillpower and a lot of leadership.
Or we'll wait and have a crisis.
Tell us what to do.
That's my, that's my thinking.
>> Jon Hartley (53:13):
Fascinating.
Tom, I really want to thank you forcoming on.
It's been a really amazing conversation.
>> Thomas Hoenig (53:18):
Well, I enjoyed it, and great questions.
I wish I had perfect answers for all ofthem, but it was a great conversation.
Thank you.
>> Jon Hartley (53:26):
This is the Capitalism and Freedom in the 21st century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm John Hartley, your host.
Thanks so much for joining us.
[MUSIC]
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.