Mostly Economics

Bob Dylan sang – Knock Knock Knocking on heaven’s door. Thomas Hoenig of Kansas Fed just says – Knocking on the Central Bank’s Door.

In managing our nation’s debt going forward, it strikes me that we have only three options. First, the worst choice for our long-term stability, but perhaps the easiest option in the face of short-term political pressures: We can knock on the central bank’s door and request or demand that it “print” money to buy the swelling amounts of government debt. Second, perhaps more tolerable politically, although damaging to our economy: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level.

I recognize that this last option involves hard choices and short-term pain. However, in my view it is the responsible path to sustainable economic growth with price stability.

Hoenig has been raising numerous concerns over US economy in the previous speeches as well. This is another one on fixing the US fiscal problems. In the end he says:

The only difference between countries that experience a fiscal crisis and those that don’t is the foresight to take corrective action before circumstance and markets harshly impose it upon them. In time, significant and permanent fiscal reforms must occur in the United States. I much prefer this be done well before anyone feels an irresistible impulse to knock on this central bank’s door.

Pretty harsh words.

Addendum:

Here is another central banker, Alex Weber  referring to Bob Dylan’s very apt song for economists- times are changing. So before the crisis, we say times are changing. Then as crisis strikes (to prevent meltdown) and even after the crisis (to prevent fiscal crisis), we sing knock knocking on central bank’s door.  🙂

Elizabeth Duke, Fed Governor, reviews her first year at the central bank . She calls it unusual and exigent.

The Federal Reserve has been entrusted with special authority to act in unusual and exigent circumstances. Webster’s dictionary defines unusual as “not usual, uncommon, rare.” It defines exigent as “requiring immediate aid or action.” I sincerely hope that financial panics such as the one we just experienced remain rare and uncommon.

Very useful overview of various Fed policies in this crisis. She like Bernanke (and many others) considers AIG support as the most difficult decision. Though she adds given the circumstances, she would still vote to give support to AIG. She even defends usage of Section 13 (3) to prevent another depression. Overall she is proud of the way Fed handled this crisis

The speech gives you hints of pressure Fed officials faced in this crisis. Though, it would have been nice if she had also gioven her views on how Fed plans to manage the huge moral hazard they have created.