When: Thursday, August 25, 2011
Where: CNBC’s “Power Lunch”
Following is the unofficial transcript of a CNBC interview with Kansas City Federal Reserve Bank President Thomas Hoenig on CNBC’s “Power Lunch” (M-F, 1-2PM ET).
All references must be sourced to CNBC.
Kansas City Fed on Recession Chances: http://video.cnbc.com/gallery/?video=3000041610
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STEVE LIESMAN: Tom, let's just start off with the easy part, which is talk about the conference and what we're trying to figure out here.
TOM HOENIG: All right. I think it's-- I hope it's obvious, but, you know, one thing you tend to do in periods like this is move from one crisis to the next, one short-term event-- to the next. And the only way you solve problems is to begin to look to the long run. What-- where do you need to be so you can begin to map how you get there? And that's really what we want to do with this conference. Take a moment, even though we have all this actively-- activity whirling around us, we need to begin to think a little bit longer term and see what kinds of solutions might be out there that will actually solve the problem.
And if you go back and think about it, we have gone through-- more than a decade, well over a decade, of where as-- as a nation, the United States and maybe other parts of the world have systematically consumed more than they produce. And so we've been able to do that by increasing our debt, increasing leverage. Increasing leverage of the consumer, increasing leverage and debt of states, increasing leverage of the federal government-- again, increasing leverage of our financial institutions. Living, in a sense, beyond our means.
So there's not going to be an overnight solution to that. We can pour liquidity into the market, yes, but that doesn't really solve the debt problem and the need to rebalance our national and our international economies. So what about the long run? How might we begin charting a course towards that? That's the goal of our conference.
STEVE LIESMAN: You've obviously thought a lot about this. What are your thoughts? How do you end up reducing the amount of debt? Is it a government-- thing? Is the about m-- about the-- the Fed's interest rate?
TOM HOENIG: It's not something you can do overnight. Everyone knows that. My own view is that we have an opportunity with the plan that Simpson-Bowles-- put forward last December. It g-- it was a long-term plan, 25 years or more. It began to show how you both reduce spending and do some revenue reforms and so forth. And I think if we started with that, and taking that as a starting point, it would give us the real opportunity to begin to map-- a way out of this. There's-- there is no quick fix. And I think they realize that, and that's why they gave us a very reasonable long-term plan. That's what we need to begin to focus on again.
Otherwise, you build the debt. You kind of-- you push for aggregate demand increases. That's-- I understand that. But what you're doing is keeping interest rates very low, you're encouraging debt-- over time to help demand, but all that does, then, is help continue to build more debt for the future. Those are not solutions that will get us to where we need to be in the long run.
STEVE LIESMAN: The question has been raised by some. Are we pushing for an economic growth number that is beyond our means?
TOM HOENIG: Well, I think the potential growth rate in the economy-- is-- hasn't changed a lot. I mean, over the hundred years or so, our average growth rate in this nation, real growth rate, is about three percent, just a little more. There's no reason why we can't continue to maintain that in the long run.
But it doesn't come automatically, just because you name it. If you begin to think about the policies that-- encourage production-- I mean, people talk about jobs, but jobs come from increasing production, either of things or services-- some kind of goods.
That means you have to give an environment for business, not just a zero interest rate, but an environment where you know what your costs are going to be, you can think longer-term. And again-- Simpson-- Simpson-Bowles gave us that in the sense of, "This is the path. If we stick to this, you know what things will emerge." You can begin to make decisions, and I think that's how we begin to solve this problem, long-term.
STEVE LIESMAN: And let's talk about the near-term a little bit. There's been a lot of weak data out there. Is it something-- are you-- be concerned about a recession?
TOM HOENIG: Well, first of all some of it-- some of the-- surveys that were done were-- that have been reported on, Philadelphia and so forth, were done during the most volatile week that we had. So I want to wait for a little more data than came out that particular week. Our own manufacturing survey that's just come out was-- it did moderate, but it wasn't a drop-off-the-cliff like some of the others. So I want to see more data on that.
I have always said-- we would have modest growth. It's going to take time because of the leverage. It's not going to be straight-up. We need to be mindful of that. So yeah, we have-- we have-- a long-- path ahead of us, a long, if you will, almost struggle to rebuild our confidence in our economy, to rebuild our economy. But I am confident we can do that-- if we look a little further down the road and-- and choose policies that are more long-term focused.
STEVE LIESMAN: If you had to attach a percentage to the change of recession right now, where would you put it?
TOM HOENIG: I would-- I would put it maybe at 20 percent, which is a fairly high number, just because of the-- of the conversations, almost. Because confidence does matter. And when you talk yourself into holding back-- businesses are saying, "Hmm. I don't know.
"My business is pretty good. We've had loadings that are-- very good, we're satisfied with them. But I hear that things may be slowing so I'm going to pull back. I'm not going to make the capital expenditures that I was going to make." So it can have-- an element of its own self-fulfilling prophecy in that, and that worries me a little.
STEVE LIESMAN: Do you think the debt ceiling debate had a direct impact on the economy?
TOM HOENIG: I think it did. Yes. It-- it made people wonder, "Can we agree? Can we look forward? Is there a solution? Why have they ignored other solutions?" I think it did have a negative impact. People were less sure of where things are going to be-- now, and they don't see necessarily a clear path forward. Yes, it's had a negative impact.
STEVE LIESMAN: How do you--
STEVE LIESMAN: What's your opinion of those members of Congress who refused to increase the debt ceiling because they opposed any revenue increases?
TOM HOENIG: I don't have an opinion. Because-- one thing I-- here's my issue. I think people are-- politics being what politics are, I think people are well-intentioned. I think people who see the debt growing are concerned, and maybe-- very concerned.
And so they're saying, "We can't live like this, so the only way out of this will be that we inflate our way out. So I don't want to see it go any--" I don't-- I don't criticize that. I've-- I understand that. And other people say, "Yes, but if we c-- if we clamp down now, forcefully, we may actually-- put ourselves into a recession." I understand that. There's the well-intentioned.
That's why I am disappointed in-- a lot of individuals for not picking up, I'm sorry, but Simpson-Bowles. A long-term plan that recognizes we cannot go on as we have, that we have to make change, here's how we go about doing it. Yes, it is longer-term, but it is firm. It is thought through. Here are the consequences. We need to bring our spending down. We need to reform. And go along this track.
I think it would raise the confidence of businesses; it would raise the confidence of consumers, and the idea of shared sacrifice. We talk about it, but unless we all know we're all in it together, then we-- we piecemeal it. And so, "Why should I talk to--" many people-- in agriculture. "Why should I give up my subsidies when no one else will? Why should I give up the house-- the home mortgage-- deduction when no one else will?" That's why you have to come together, and it has to be a firm plan, legislated eventually.
STEVE LIESMAN: Let's talk about the recent meeting you had. There were two huge developments. One was a s-- pretty severe downgrade of the economy, and the other was the extension of the exceptionally low language till mid-2013. I wonder if I can get your opinion on-- on those-- in sequence there. What's your opinion of the sense of the FOMC statement that downgraded the economy?
TOM HOENIG: Well, I think it-- it-- acknowledges that these recent events have been-- traumatic. We can see it in the volatility of the market. And I think it says we need to-- we need to be thinking about this. To me, it also says to others-- Congress and others, that let's-- come on. People need-- they need assurances. We need that long-term plan. So I think in that way it's a good message. On the-- on the second part-- in terms of-- let me make sure I understand what the--
STEVE LIESMAN: The language that extended the exceptionally low language till mid-2013.
TOM HOENIG: Well, I didn't like the extended-period language to begin with, so I can't say that I was enamored with this at all. I think it can-- I don't think you can give guarantees to some parts of the market and not to others. I think it encourages speculation. "Oh, yeah, you're s-- you're safe. Here's a safe haven." I think people have to make calculated judgments based on events.
And that forces the markets to, I think, run more efficiently. One of the things, I think, that we've had as a consequence of these very low interest rates, extended period, I see it in my r-- region. You get these artificial-- asset price movements. You get-- misallocations of resources. When I see land-- that goes from $6,000 to $12,000 an acre and I can't get the-- the cash flows to work on it-- that's a speculative bubble.
When I see-- bond markets that are-- have yields that are so low that it doesn't make sense, then it doesn't make sense. And I don't think we necessarily are going to have-- I hope we have good outcomes, but I don't see how good outcomes will follow from that.
STEVE LIESMAN: The-- ten year is in and around two percent.
TOM HOENIG: That's my point.
STEVE LIESMAN: Is that a result of Fed policy? Is that a result of the economic--?
TOM HOENIG: Any price-- is a result of a combination of things. So part of it is Fed policy, obviously. Part of it is the uncertainty, the safe haven movements of funds. Hard to sort out how much can be attributed to which cause, but they all play a role. But it is incredibly low, and I think-- only time will tell-- what were the more dominant causes of that.
But I still think monetary policy itself needs to move away from zero and needs to move away from extended-period language. I think it would allow the credit markets to give better signals-- still knowing that things are unstable and settled, but it'd give better signals that would help lead us over time on a better path of growth long-term.
STEVE LIESMAN: And just so I understand your position right, you would've been in favor throughout this period of a weak economy, of a one percent fed funds rate, that would’ve been a sort of floor that you think the Fed ought to adopt?
TOM HOENIG: Well, here's what I've said in many a speech. What I wanted to do early on was as liquidity went into the market and as the-- the s-- the liquidity-- crisis-- yeah. You begin, then, to re-normalize and you would try and move to one percent in a fairly expeditious manner. And I think it was in the spring when I said by fall.
And then you pause and you say, "All right. How's the economy? What are the signals? The Fed is confident we're moving. It's going to be modest growth, we know that, but it's systematic." And then you begin to think about can you move-- above that towards two percent, which is a more normalized, historic level?
And then you watch the economy and you start making decisions, then, based on where the economy is moving at that time. That allows you, in a sense, to recalibrate-- and to judge the economy as it evolves, and then to say, "Y-- yeah. Here's what's happening now, but here's where we are and here's where we're looking for-- to the long run. And we will judge our policy based on how those two are in synch or out of synch."
STEVE LIESMAN: So if you were able to set the rate right now, it would be at one percent? That would be your level for now?
TOM HOENIG: Well, I wouldn't do it overnight. It's--
STEVE LIESMAN: Right.
TOM HOENIG: --that's like-- that's like--
STEVE LIESMAN: You would've been there already?
TOM HOENIG: Right. I would've done it--
STEVE LIESMAN: Right.
TOM HOENIG:-- as the economy, and then I would’ve paused, but.
STEVE LIESMAN: But when I read your speeches, Tom, what's clear to me is you don't like zero. And the point you made in the recent congressional testimony was market can't set a price at zero. So--
TOM HOENIG: Right.
STEVE LIESMAN: --you don't like this zero to a quarter?
TOM HOENIG: I do not like it because-- the-- you're misallocating resources. I mean, it-- it contributes to that. And that's not healthy for an economy. I mean, we have-- if-- if I'm-- I'm not saying there's a bubble, but if prices are misaligned in particular segments, they have to correct.
And the longer you allow the misalignment to continue, the harsher the correction. And maybe I am a product of my own experiences because I was in bank supervision in the '80s and I can't tell you how many-- farms were closed, how many ban-- we closed 350 banks. How many commercial real estate-- projects were-- collapsed in front of us, how many people lost their jobs as a result.
It's that concern, that part that you can't see now because you're focused right here, that you've got-- you're right here, looking right in front of you. You can't see what's over the hill, and sometimes what's over the hill is pretty difficult-- terrain.
STEVE LIESMAN: I just want to be clear about this. You would've dissented from that vote?
TOM HOENIG: Well, I'm not saying what I would've done because I didn't vote. I mean-- you know, you've got to be careful. But my record would suggest-- that I probably would have. But-- but you know, the other thing, I-- I think it's important to-- push forward, and that is it is the role of monetary policy to give you an environment where prices are stable, where resources are allowed to be allocated based on proper price signals.
And when you-- try and do more than-- than that's capable of doing, you-- you can get distortions and-- and you can pay a price. Because a capitalistic economy, if you really believe in its long-term benefits, has cycles. People do-- make mistakes. See, the market is valuable not because it's the smartest in the world, but because it's the harshest.
It captures mistakes and punishes and forces a correction. It's when you then interfere with that that you allow the-- the-- the path to go off longer and the correction to be more severe and harder on people, and that's what you can't lose sight of when you say you're for-capitalism, but not really.
STEVE LIESMAN: I thought the market… because it was better than government.
TOM HOENIG: Well-- but that doesn't make it smart.
STEVE LIESMAN: Right.
TOM HOENIG: It just makes it better than government.
STEVE LIESMAN: Let me ask you how the market should think about these descents. We haven't been here in 20 years. Does it mean the Fed is divided? Is there then a kind of-- what's the right word? Is there-- uncertainty to the guarantee that was in the pledge because of all this descent?
TOM HOENIG: Nonsense. If everyone always agreed, you don't need everyone. Debate is healthy. Discussion is healthy. Different views are healthy. And then you come to a conclusion, the majority carries the day, but you've had this big-risk debate.
Would it be credible to the American people to say-- "It's 100 percent, everyone agreed," and no one believe it? I mean, then you would say, "Well, what's going on behind the scenes? Who's being the--" it would, I think, undermine people's confidence in the very institution that they're relying on. Debate is what leads to good decisions over time, and when you stifle that and when you're afraid of it, people might misunderstand. I have too much regard for people. Those who have interest to read about it-- study it, have an opinion of their own, I have too much regard for them to be afraid of descent.
STEVE LIESMAN: But what should we make of this? Should we make that the policy is not very certain?
TOM HOENIG: I think you should make of the fact that people are struggling with a very difficult time. Volatility is everywhere. And that-- there are those of us who are thinking that this has consequences, and we weigh short run and long run different-- than others on the committee.
And therefore, we should express that view, and people should know about that view. And yet, the majority carry the day. They have this view. And the American people should know that. It doesn't mean that-- people don't have confidence in the-- in the leadership. It means that we have rigorous debate. If it's a one-man show, then-- I think we're really open to serious error.
STEVE LIESMAN: And I got two more to go. The market is expecting the chairman, Ben Bernanke, to announce additional quantitative easing on Friday at your conference. Is the market out ahead of itself?
TOM HOENIG: I have no idea. Because I recluse myself from everything as of the last night meeting, so I have no idea what-- what will be said.
STEVE LIESMAN: What would you make of additional quantitative easing at this juncture?
TOM HOENIG: What would I, personally, make? Well, I think it's-- I would rather us look to the long run. That's the whole purpose here. I would be-- I'd want to know what-- is the goal-- in further-- easing. I think everyone-- would want to know that. So I-- I think it's a matter of-- we'll s-- we'll see what's said. I don't have the slightest idea what's going to be said on Friday. I'm-- deliberately asked not to be involved.
STEVE LIESMAN: S&P downgraded the United States. Do you think that was the correct move by them?
TOM HOENIG: I think it's-- you know-- I don't know. I don't know what data they looked at. I don't have a high regard for the rating agencies-- at all. I mean, candidly, I think they were-- compromised in the last boom-- and I think they are a long ways from rebuilding my confidence in them. So they rated it. I-- I don't think it has made a bit of difference, other than create some temporary volatility, which will pass as people understand that the U.S. dollar's still the safe haven, as they apparently have.
STEVE LIESMAN: Presidential candidate Rick Perry used the word "treasonous" to talk about Head Chairman Ben Bernanke and additional quantitative easing. What's your response to that?
TOM HOENIG: I think-- I don't have a response, but I think the best reply was from-- another individual who was a critic of the Federal Reserve, and that's Ron Paul who said, "Well, I would never say you were treasonous. I have accused him of counterfeiting for some time now." You know, everyone's got an opinion. And I think-- we'll see how it all-- how it all plays out over time.
STEVE LIESMAN: Tom, is there anything else you want to add? Any other area we didn't get to that you think is important to discuss?
TOM HOENIG: No. I'm-- it's been-- I'm retiring in a month.
STEVE LIESMAN: Right.
TOM HOENIG: It's been a great run for me. I've enjoyed it enormously. And it's been a real privilege for me to host the Jackson Symposium for the last 20 years.
STEVE LIESMAN: Congratulations on your impending retirement.
TOM HOENIG: Thank you very much.
STEVE LIESMAN: Thanks for sitting with us.
TOM HOENIG: Glad to do it.
STEVE LIESMAN: Great.
TOM HOENIG: Thank you.
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