Friday, July 15, 2011


Thomas Hoenig
The issue of "easy money" is getting some attention from someone within the fed, and he's making his position known.

The issue of the savers subsidizing the borrowers is an important one, and one that I hope will get more and more attention. Thank you, Thomas Hoenig.

1 comment:

Frank said...

I'm very conflicted about this. While I agree that in the long term easy money creates bubbles other problems, I do think we need more overall inflation in the short term. The savers need to continue to subsidize the borrowers.

When you have such huge levels of household debt, the easiest way to repair people's balance sheets is through inflation. I'm not talking about Zimbabwe-style 1000% inflation, but the fed should raise its inflation targets to 3-4%, about what they were in the 1980s and 1990s. Right now we have inflation that's barely 1%, and it's making the recession go on for ever.

This would be somewhat bad for the banks (i.e. the "savers") but very good for people who have mortgages, student loans, and credit card debt (the "borrowers").

Greenspan made a terrible mistake keeping interest rates low in 2003 and 2004. It's pretty obvious in retrospect that he did this to keep the bubble inflated long enough to get Bush re-elected, and it eventually led to a catastrophic crash. So I'm sympathetic to Hoenig's argument. I just don't know if now is the time to tighten the money supply.

Ideally, of course, the government would just borrow money at favorable rates and put people to work. But that's way too obvious a solution! :)

Keep up the good writing, Katie...