Chartbook #85: Unlikely hero - Mr Hoenig goes to Washington.
adamtooze.substack.com
When I was asked to review Christopher Leonard’s The Lords of Easy Money: How the Federal Reserve Broke the American Economy I was not enthusiastic. I don’t like Leonard’s folksy populist framing. As I explain in the resulting NYT review, this goes deep.
What I find particularly interesting about Thomas Hoenig (and his doppelganger: Sheila Bair), is that they are both remarkably deontological. They are capable of nuance and detail, but they prefer to view things as right or wrong. Most people in the money biz are consequentialists, which makes Hoenig and Bair stand out. (I toiled in the vineyards of Mammon for three decades.) The consequentialists can't understand why "too big to fail" sets people's teeth on edge, if the ex ante incentives are more-or-less optimal. No can they understand the social need for retribution.
Had the bad banks been wound down in 2008, and the debts written down as they had been in the S&L crisis twenty years earlier, the financial overhead of the overall economy would have been greatly reduced and all those in finance who were responsible for the debacle would have paid the bulk of the cost.
To big to fail isn't too big to nationalize which is what the $29T in Fed loans effectively did, but without taking title and without punishing the obvious malefactors in the executive suites. The bailouts rewarded failure and QE has sustained a simulacrum of "financial markets" ever since with most of the same actors who precipitated the crisis still in their posts.
The refusal to assign the costs to those who should bear them, "foaming the runways" with home owners instead, is also a refusal to assign costs to those who CAN bear them. As Long Covid depopulates the workforce and similarly incompetent foreign policy "leaders" attempt to wage Cold War on our resource and manufacturing bases at the same time, it will be interesting to watch the Fed try to stop the inevitable inflation by unemploying people who are blameless in the underlying issues.
TBF lots of big dog American financiers genuinely believe in the 'folksy populist framing' of financial issues. We do them a disservice by intellectualising away what in some instances is their brute ignorance (flashback to presentation by temporary US member of the BoE's original FPC who insisted quantitative easing would "debase the currency"). And, well central bank actions to boost asset values by definition drive inequality.
It's hilarious that you didn't "like Leonard’s folksy populist framing" which is to say you didn't like you weren't his audience.
I'm looking forward to your take on how Powell will walk back his dismissal of monetary aggragates in his confirmation hearing(s), specifically:
"Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past. “When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now ... M2 ... does not really have important implications."
Thank you for this review. I don’t have the aptitude for fully understanding economics and I had to give up on Leonard’s book, so I found your comments illuminating and persuasive.
This is a small detail of no interest, but Sedan was not founded in 1871 but in 1424, as a sovereign principality, and was annexed to France in 1561. It is true, however, that the French army was defeated in Sedan during the Franco-German war of 1870 and this resulted in the end of the French "Second Empire" four days later. This defeat did not end the war, however, which continued into 1871.
"As a junior economist at the Kansas City Fed in the 1970s Hoenig got to watch first-hand how a credit and collateral spiral could operate in a pro-cyclical fashion."
Forgive please, but is that verging on a confirmation of Minsky, or at least a use of the Minsky cycle for practical purposes?
What I find particularly interesting about Thomas Hoenig (and his doppelganger: Sheila Bair), is that they are both remarkably deontological. They are capable of nuance and detail, but they prefer to view things as right or wrong. Most people in the money biz are consequentialists, which makes Hoenig and Bair stand out. (I toiled in the vineyards of Mammon for three decades.) The consequentialists can't understand why "too big to fail" sets people's teeth on edge, if the ex ante incentives are more-or-less optimal. No can they understand the social need for retribution.
Had the bad banks been wound down in 2008, and the debts written down as they had been in the S&L crisis twenty years earlier, the financial overhead of the overall economy would have been greatly reduced and all those in finance who were responsible for the debacle would have paid the bulk of the cost.
To big to fail isn't too big to nationalize which is what the $29T in Fed loans effectively did, but without taking title and without punishing the obvious malefactors in the executive suites. The bailouts rewarded failure and QE has sustained a simulacrum of "financial markets" ever since with most of the same actors who precipitated the crisis still in their posts.
The refusal to assign the costs to those who should bear them, "foaming the runways" with home owners instead, is also a refusal to assign costs to those who CAN bear them. As Long Covid depopulates the workforce and similarly incompetent foreign policy "leaders" attempt to wage Cold War on our resource and manufacturing bases at the same time, it will be interesting to watch the Fed try to stop the inevitable inflation by unemploying people who are blameless in the underlying issues.
TBF lots of big dog American financiers genuinely believe in the 'folksy populist framing' of financial issues. We do them a disservice by intellectualising away what in some instances is their brute ignorance (flashback to presentation by temporary US member of the BoE's original FPC who insisted quantitative easing would "debase the currency"). And, well central bank actions to boost asset values by definition drive inequality.
It's hilarious that you didn't "like Leonard’s folksy populist framing" which is to say you didn't like you weren't his audience.
I'm looking forward to your take on how Powell will walk back his dismissal of monetary aggragates in his confirmation hearing(s), specifically:
"Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past. “When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now ... M2 ... does not really have important implications."
Thank you for this review. I don’t have the aptitude for fully understanding economics and I had to give up on Leonard’s book, so I found your comments illuminating and persuasive.
This is a small detail of no interest, but Sedan was not founded in 1871 but in 1424, as a sovereign principality, and was annexed to France in 1561. It is true, however, that the French army was defeated in Sedan during the Franco-German war of 1870 and this resulted in the end of the French "Second Empire" four days later. This defeat did not end the war, however, which continued into 1871.
"As a junior economist at the Kansas City Fed in the 1970s Hoenig got to watch first-hand how a credit and collateral spiral could operate in a pro-cyclical fashion."
Forgive please, but is that verging on a confirmation of Minsky, or at least a use of the Minsky cycle for practical purposes?