Hoenig Urges Fed to Raise Interest Rates

This from the Fed’s longest serving policy maker, who remains hopelessly out of paradigm.

(The ‘encourage individuals to save’ bit is particularly telling.)


Hoenig Urges Fed to Raise Interest Rates

May 28 (CNBC) —Federal Reserve Bank of Kansas City President Thomas Hoenig, the central bank’s longest-serving policy maker, said the U.S. needs to raise interest rates to encourage individuals to save and avoid future asset bubbles.

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20 Responses to Hoenig Urges Fed to Raise Interest Rates

  1. Dan Furlano says:

    Thanks. Much appreciated.

    Dan

    Reply

  2. Dan Furlano says:

    This report done by Harvard economists Alberto Alesina and Silvia Ardagna is being flung around as evidence that austerity works.

    Anyone review this or know of any review on it?

    http://www.economics.harvard.edu/faculty/alesina/files/Large%2Bchanges%2Bin%2Bfiscal%2Bpolicy_October_2009.pdf

    Thanks

    Dan

    Reply

    Oliver Reply:

    @Dan Furlano, The path of the righteous ricardian agent is beset on all sides by the iniquities of expected government infringement and the looming tyranny of bond vigilantes. That’s about what it sounds like to me, but then I’m not a pro.

    I guess if you go out and assume growth as a god given constant and then define government surpluses and high corporate profits as a good outcome that sadly comes at the expense of real wages and employment, you will end up with out of paradigm results. But the conclusion lends support to Warren’s tax cut proposals, even if for incompatible reasons. My 2 cents..

    Reply

    MamMoTh Reply:

    @Dan Furlano,

    If by works they mean economies eventually recover, then yes it works. Of course unemployment will sky-rocket first, people become destitute, and other little details.

    Reply

    art Reply:

    @Dan Furlano,

    FYI~

    “There’s also a growing movement, primarily on the right, to cut public spending in order to boost growth. Proponents are citing the work of Harvard economist Alberto Alesina. However, as capable a scholar as Alesina is, there are two glaring problems with applying his research findings to today’s world. First, it’s based on data from OECD countries over the period of the mid-1970s to the early 2000s. This period happens to coincide with the global financial and trade reintegration that followed World War II, and with the rise of the baby boomer generation in most developed nations (note that Japan is roughly ten years ahead on the demographic composition curve — its 1989 was our 1999). Second, it contains only instances where a single country or at most a handful of countries embarked on fiscal consolidation. Today, fiscal austerity is being pushed on public sectors in a majority of the world’s economies. The clear takeaway is that Alesina et al’s findings cannot be blindly applied to today; our current situation is far more reminiscent of Japan 1989-2009, and the world in the 1930s.”

    Reply

    art Reply:

    Sorry, forgot the link: http://symmetrycapital.net/index.php/blog/2010/06/double-dip-or-muddle-through/

    Reply

  3. Mike V says:

    We could have been saving the past 3 years if we had the proper policy response, which would have been something like Warren’s payroll tax cut proposal!

    Reply

    Geoff Reply:

    Yeah, government deficit equals private saving.

    Reply

  4. Adam2 says:

    I’ll translate Warren to the best of my ability.

    People need income to save, not higher interest rates.

    It comes from the basic principle

    Household Income = Savings + Consumption.

    So where should this Savings come from? From lower taxes for the wage earner, of course.

    Higher interest rates will make some people save more but it will also destroy some investments. So it will net itself out and will possibly create deflation without a change in fiscal policy.

    To kill speculation you raise margin requirements.

    Reply

    Jason Reply:

    @Adam2,

    Institutions and individual are investing in commodities through ETFs in staggering amounts. Increasing margin requirements will have little effect on this as these are not margin purchases.

    Reply

    art Reply:

    @Jason,

    Depends on how the ETF is structured. If it owns futures rather than underlying or warehouse receipts, margin requirements will matter.

    Also depends on how the ETF purchase is financed (eg, the investor can use margin). There to, stricter margin requirements would have an impact, especially on the most levered assets.

    Reply

  5. Jason says:

    Warren perhaps you can explain as it does seem to me that higher interest rates would shift some money from commodities speculation to savings accounts.

    Reply

    WARREN MOSLER Reply:

    it might. just seems the income effects are larger? people earning more interest might buy more commodities with their increased income, etc.

    Reply

  6. Damien says:

    Seems to me that there are quite a few cross currents with interest rates but overall the effect is expansionary as they go higher.

    Reasons are:

    1. A loan originating from the private banking system results in a loan and corresponding deposit which nets to zero i.e. no net effect.
    2. Government spending on the other hand would rise (provided fiscal cuts were not made) via interest outlays on outstanding bonds/treasuries.

    There are a few other factors that you would have to take into account such as demographics, who owns the debt (foreign, rentier or mainstream), any reserve requirements and how much spread the banks are capturing in making loans.

    Reply

    art Reply:

    @Damien,

    Are you saying there’s no net effect on real demand from private credit transactions? And/or money supply? That doesn’t seem right to me. Agreed that the balance sheet effects offset (as they must), but credit creation does impact real demand and output (and money supply, for whatever it’s worth).

    I’m not convinced on the interest rate channel being positively associated with inflation. It’s an interesting argument, but (afaik) hasn’t been documented or tested enough at this point, and the arguments running the other way seem just as logical, eg, higher ST rates (1) curb private sector credit demand and supply as real returns on holding money match or exceed risk-adjusted expected returns on investment (or consumption) and (2) increase financing risks for entities that lend long and borrow short, with negative systemic effects arising from the leverage they carry.

    If we all agree that private sector credit demand impacts real economic activity, then those two effects could potentially overwhelm interest-channel effects. They might also all be at work, but with different time lags (eg, there might be an initial inflationary impulse followed by deflationary ones). It certainly deserves a closer look (Warren might agree).

    Reply

    Oliver Reply:

    @Damien,

    I think the main point is, that it isn’t necessarily interest rates that drive investment decisions, but rather expected investment opportunities and income flows. Interest rates just reflect CB’s reaction functions in accordance with their inflation mandate – it’s a secondary effect. In fact, there is a positive statistical relation between high interest rates, high inflation rates and high growth rates and vice versa historically. And while I don’t know the quantitative and qualitative composition of loans within your typical Western economy, it makes sense to me that at least borrowers with long time horizons (e.g. home owners) would not be particularly sensitive to changes in short-term interest rates as long as these are somewhere around the long-term median but very much so to changes in values of their assets and income. Asset bubbles are self-feeding.

    The other reasons for rejecting interest rates as a policy tool are more ideological in that they tend to be very disruptive to outstanding loans, as opposed to only discouraging new ones, and not selective in the quality of their impact, i.e. those who are weeded out can’t necessarily be equated with the class of malinvesters who should be. But that’s another issue, I guess. In any case, Warren pointed out the first, not the second point of Hoenig’s comment.

    Reply

    WARREN MOSLER Reply:

    yes

    Reply

  7. Dan Furlano says:

    Because everything would become too expensive and people would then save their money. This saving would cause employment to go up and the debt to go down. Once we are back at full employment then those rates would come down and people can buy stuff.

    Simple isn’t it. This country is truly blessed with smart good looking people.

    :(

    Reply

  8. MamMoTh says:

    Why wouldn’t higher interest rates dis-encourage the formation of asset bubbles?

    Reply

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