Wednesday, May 19, 2010

The Voice Crying Out In the Wilderness

Maria Anastasia O'Grady normally writes about Latin America.  She is the Wall Street Journal's Americas columnist.  Perhaps her experience with Latin American inflationist policies and monetary proflicacy made her the appropriate person to interview Tom Hoenig, the one hawk on the Federal Open Market Committee, the only member who seems to think loose money sinks economies.  Ms O'Grady explains this is in part because Tom Hoernig learned bank supervision in the the 1970s in the mid-west when the energy and farmland bubbles burst in the late 1970s and early 1980s.  He saw the effect on the local economies, businesses, employment, and growth.  He is no stranger to the human costs of bubbles.

Yet our policy makers are once again pursuing a policy of negative real policy rates (i.e., the federal funds rate is set below what inflation is expected to be.  Investing in T-Bills is a guaranteed mug's game.  it would seem new bubbles are on the way. "But if it happens the fault won't lie with one stubborn voice of dissent, crying out in Missouri."

It is refreshing to hear Hoenig tell us that "'Monetary policy has to be about more than just targeting inflation. It is a more powerful tool than that. It is also an allocative policy, as we've learned. In other words, when we kept interest rates unusually low for a considerable period we favored credit and the allocations related to it over savings, and we created the conditions that I think facilitated a bubble."

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