Academic journal article Journal of Case Studies

Tom Hoenig and the $600 Billion Bailout

Academic journal article Journal of Case Studies

Tom Hoenig and the $600 Billion Bailout

Article excerpt

Introduction

Tom Hoenig, president of the Federal Reserve Bank of Kansas City, served as a member of the Federal Open Market Committee (FOMC) prior to and during the start of the Great Recession. At the meetings on November 2-3, 2010, the Committee considered buying an additional $600 billion in government securities, which is commonly referred to as a policy of quantitative easing. While the recession that started in 2008, referred to by the Obama administration as the Great Recession, had officially ended, the economy of the United States was still experiencing sluggish growth and excessively high unemployment figures. The U.S. Federal Reserve (The Fed) was considering the large buyout move to stimulate the economy. The Fed was criticized for taking an incalculable risk if it pursued such large purchases of securities. The Fed had also been criticized because of its inability to turn the economy around as well as for taking risks that threatened the long term security of the economy. Hoenig described the move before the meeting as a "bargain with the devil" and questioned whether the benefits outweighed the risks of the additional government purchases (Sewell, 2010). Hoenig had to decide whether he would vote for the financial stimulus package or whether the decision to buy the government bonds would create extensive inflationary pressures that would haunt the policy makers once the economy began to recover and grow.

Tom Hoenig

Hoenig was born in Fort Madison, Iowa, and earned a B.A. in economics and mathematics from St. Benedict's College (now Benedictine College, Atchison, Kansas). His M.A. and PH. D. degrees were earned at Iowa State University. He had been with the Federal Reserve Bank of Kansas City since 1973 where he began his career in the area of banking supervision. Hoenig served in his position as President of the Federal Reserve Bank of Kansas City since 1991, making him the longest-serving president of the twelve Federal Reserve Bank Presidents. His salary was slightly under $400,000 in 2009, as compared to Federal Reserve Chairman Ben Bernanke who could legally earn only $196,700.

On March 6, 2009, his speech "Too Big Has Failed" was critical of current approaches to the capitalization and liquidity crises. His primary concern was how these purchases would influence the money supply and whether they would eventually create a serious inflationary problem for the economy.

The Media

Hoenig captured the attention of the national media for being a rebel and the lone dissenter at the last six FOMC meetings. Paul M. Barrett and Scott Lanman, in the September 23, 2010 issue of Bloomberg Business week, described Hoenig as both "fed up," and as "one very powerful voice of dissent" (Barrett, Lanman, 2010). At a large "Kansas City Tea Party" meeting in a hotel room in suburban Lenexa, Kansas, attendees were wearing anti-tax stickers on their lapels. This was not an after-dinner speech for which most central bankers would accept an invitation to speak. Hoenig was serving as the head of the Federal Reserve Bank of Kansas City, and also as a voting member of the powerful Federal Open Market Committee in Washington, which controlled interest rates and the money supply. Many at the meeting would like to have seen Hoenig lose his job. It was not anything personal. The group just perceived the Federal Reserve as an affront to the Constitution and wanted to shut it down. Hoenig smiled at his audience and began: "This is a support-the-Fed rally, right?" (Barrett & Lanman, 2010). His question was followed by dead silence, but then the room erupted in laughter. He effectively disarmed the Tea Partiers and they listened politely as Hoenig defended the Federal Reserve as an indispensable institution, even if they thought it was heading in the wrong direction at the moment.

Barrett and Lanman wrote, "This is Tom Hoenig's moment, and it's a strange one. In Washington, he is the burr in Fed Chairman Bernanke's saddle: the rogue heartland banker who keeps dissenting alone--for the sixth straight time on Sept. …

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