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Bank president says national economic outlook is hopeful, not guaranteed

by Wyoming Livestock Roundup

Sheridan – At the early June gathering of the Federal Reserve Bank of Kansas City in Sheridan a public luncheon was held, featuring Bank President Thomas Hoenig’s opinions on the current state and future outlook of the U.S. economy.
    Federal Reserve Bank board member John Pearson of Buffalo, who represents Wyoming’s interests along with Chuck Brown of Wheatland, said most of his comments and observations deal with the three economic drivers in Wyoming: tourism, agriculture and energy.
    “One of the most important resources for the Federal Reserve’s responsibilities is the real knowledge gained from business and community leaders serving on the bank boards,” said Pearson. “We can provide insight on current and emerging issues on the local, state and national level.”
    He said the last few years his reports have concentrated on energy because of its impact on the state and its revenue generation.
    Brown introduced Hoenig, saying, “Wyoming people have a reputation of looking you right in the eye and getting right to the point and telling it like it is. I think Tom is one of the most experienced and seasoned central bankers in the United States today.”
    “In the long run, we’re all dead, but our children pick up the price tag,” said Hoenig in the introduction to his speech.
    Of the 12 regional institutions throughout the country, Hoenig said, “Each branch brings a unique perspective from our regions to the national policy deliberation process, and it’s extremely important that we come out into the region and visit areas like Sheridan and talk with business and community leaders about things like energy and agriculture so we can compare it to other parts of our region and contribute to national policy.”
    “When I look at the economy today, I expect we will recover from this recession as soon as the second half of this year, but more likely into 2010,” he predicted. “We have in this country very accommodative and expansionary policies to ensure we recover from this recession.”
    He said an interest rate near zero is by itself a strong force to bring the country out of recession. “In addition, we have engaged in providing direct lending to the financial system in the form of loans and we’ve committed to purchase as much as a $1.25 trillion in mortgage-backed securities and $300 billion in other securities, which provides an enormous amount of liquidity in the economy and is a strong stimulus.”
    “Frankly, it would be surprising if the economy failed to recover based on the magnitude of these monetary and fiscal programs,” he stated, but cautioned, “Despite these actions, I expect the recovery to be more modest than some economists project.”
    As the country moves forward, Hoenig said it’s important to look forward and address fundamental weaknesses. “Over the last decade we in this country have provided conditions to create economic imbalances that need to be rebalanced,” he said. “How we do that affects the inflationary outlook that’s not immediately an issue, but could be down the road.”
    Of talk about restructuring the regulatory system, Hoenig said that won’t correct this problem, giving the centralized supervisory structure of Great Britain as an example. “Their problems are as bad or worse than ours,” he said.
    “What was allowed to take place in the U.S. was the suspension of important financial standards that over the decades we’ve found to be successful in constraining our excess,” he explained. “We used to have very clear guides, like the requirement of capital to expand, and that constrained reckless growth. We allowed those to fall away, which was a prescription for problems.”
    “If we’re going to look at this issue in the future we need to address that and bring the fundamentals back and enforce them,” said Hoenig, adding the guidelines need to be broad-based, counter-cyclical, useful, simple to understand, measurable and enforceable. “That’s the key to good standards.”
    He said the subsidization of failed institutions in the banking industry undermines capitalism and the cycle of success, failure and renewal. “The ability to renew is what makes this country strong,” he said. “We need to rebuild and strengthen our financial system and the discipline around it if we’re to have a sustainable, successful credit environment in the U.S.”
    He said another aspect of today’s situation is that the consumer has changed in terms of consumption relative to national income. “In 1990 our consumption was 65 percent of the gross domestic product, but today we’re over 75 percent. The savings rate used to be above eight percent, but in 1990 it was five percent and in 2006 it was zero. Consumer debt has increased from 85 percent to 135 percent.”
    He said people in the U.S. have changed their habits toward consumption. “When we go back to exports and imports, it’s clear we’re importing consumptive goods. We had to borrow to immediately improve our standard of living.”
    “In some ways the U.S. is such a large and important economy that we can continue these imbalances for some time, but not forever,” continued Hoenig. “They have to be corrected as we move forward in the national economy. We will have some adjustments in consumption, savings habits and where our goods are produced. It won’t happen quickly, but it has to be done and incentives have to be put in place for us to move in that direction.”
    Hoenig said if the savings rate in the U.S. was to rise on a sustained basis of five percent it would require between now and 2013 a consumption growth less than 1.5 percent per year. “That’s the lowest it would be since 1930s, so you begin to see the implications on consumers and on how we allocate our spending and how we incent savings.”
    He pointed out that another reason the economy’s recovery will be more slow than some would like is because, among other things, interest rates near zero will have to come up. “Those rates have to increase as recovery starts because we can’t get too far behind the curve. As the economy adjusts from consumption-oriented to more balanced, it’ll need real interest rates to bring the savings rate up.”
    He said that suppressed interest rates will cause inflation to rise, which the Central Bank needs to resist. “In my experience, inflation is, in fact, the most regressive, unfair tax we pay. We’re earning dollars and paying back in depleted value. That’s why it’s a tax that’s unfair and very aggressive and it affects the least of us.”
    “That’s the outlook that we can address if we choose to, but we can’t just sit back and let things happen,” stated Hoenig. “For me, and the Central Bank, it’ll do the greatest good over the longest time if it stays true to its mission, which is to provide for a currency that holds its value over time so businesses can make transactions with certainty.
    “The outlook is of hope, but not guaranteed.”
    Christy Hemken is assistant editor of the Wyoming Livestock Roundup and can be reached at

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