Savings will drive the economy forward
David Brancaccio: Thomas Hoenig is president of the Federal Reserve Bank of Kansas City for another couple weeks. He’s hitting the mandatory retirement age, 65 and that’s it. But even before he was a short-timer, Mr. Hoenig was a remarkably outspoken regional Fed president. He joins us from Kansas City.
Mr. Hoenig, how are you?
Thomas Hoenig:I’m good, thank you.
Brancaccio: We had an economy based on consumer spending. And when central bankers in Washington say we need low-interest rates to keep people spending and the economy growing, who are we to argue that more spending might be a problem?
Hoenig: My issue with that is it has a very short-term focus and I understand transition economics. But the fact of the matter is, David, we have, as a nation for the last two decades, systematically consumed more than we produced as a nation. Now the only way you can do that over a longer period of time like that — is to have very low interest rates and to increase your debt, increase the leverage of the individual, increase the leverage of the country. And the best example or illustration of that is when you think back to two decades, the debt of the consumer, as a percent of their disposable personal income, was between 80 and 90 percent. And then over time, until the peak in about 2007 and 2008, it increased to a 125 percent of disposable income. That’s not sustainable. And our economy reflects that fact. So now the adjustment takes place; we’re overleveraged.
And in the mean time, to try and ease that transition, we’ve decided to keep interest rates very low, zero, for an extended period. And we’ve asked our federal government to borrow trillions of dollars and leverage its own balance sheet to help with the transition. The danger of that, of course, is that we continue to encourage leverage. We disadvantage the saver, who can make nothing on their savings, zero. One percent is a long-term CD these days. And I think it’s very strongly disadvantageous to the nation over the long run it seems.
Brancaccio: But can we run an economy where people once and for all really do save? If you get your wish, will there be enough resources out there to drive the economy forward?
Hoenig: The only way we can drive this economy forward is to save. Nations know that. You could only build from strength. And strength comes with the right amount of savings, so that you can have funds — real funds, not artificial printed money — available to buy plant and equipment to help entrepreneurs get started, to build businesses that produce things. And when you produce those things, then people have money and income and they buy those things.
I understand what we refer to as a “paradox of thrift,” if everyone saves too much at once, the outcome can be a worse recovery. As a nation, we need to think about the long run. How we’re going to deal with our long-run debt, we need to think about how we rebalance this economy. If you fail to save, if all you can do is consume and borrow from the rest of the world and import their goods, then you make yourself poor over the long run.
Brancaccio: You know, of course, Japanese people like to save, but they’re not doing so well. For 20 some years they’ve had that problem. And they save like crazy.
Hoenig: Yes, they do save. It has come down. That’s why they’ve allowed their government to borrow extensive amounts for longer period than they otherwise would. But the fact of the matter is, they have chosen to be primarily export-oriented. They didn’t have a balanced economy either. They save very high, so they get export goods. Now, what they did during their boom period was, of course, print a lot of money and they had significant asset bubbles that they created. Which then undermined their very banking system, and when their crash came, those banks were highly leveraged. And they’re still recovering from that mistake. The fact that you temporarily live very well, like borrowing, is a very familiar story through history. And the outcome is almost always the same: A crisis, people out of jobs and a long run recovery.
Brancaccio: What I’m hearing from you is this: Back during the housing boom, it seemed good for the economy, for people to buy houses with these low-interest rates. And then go to the hardware store to fix up the houses and the furniture. It seemed good for the economy. But it created a distortion in the real estate market that has hurt us all. And we actually have the example of what you’re talking about, is that what you’re saying?
Hoenig: That’s exactly what I’m saying. It wasn’t just that some people were buying a home to live in and so forth. They were refinancing the home to fund their consumption. Between the period of 2002 and 2007, there were about three million more homes built than households formed. And what happens when supply exceeds demand? Prices fall. And during that period, people who had homes, who had equity, they decided to cash out that equity, borrow against their home. That meant you were increasing your debt that you had to pay back someday. And then when crisis began to level off and then fall, that all became debt that they had to repay and the house wasn’t even worth the amount of debt that they had.
Now we have to go through that adjustment. I wish there was a painless way. I wish there was a shortcut, but we all know what happens when you take shortcuts. You tend to find yourself in the ditch. And that’s what I’m worried about.
Brancaccio: Thomas Hoenig, outgoing president of the Federal Reserve bank of Kansas City. Thank you very much, sir.
Hoenig: You’re very welcome, it’s good to be with you.
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