Kansas City Fed President Hoenig's comments on the current situation and Fed's actions

Fed `Has Done About as Much as It Can,' Hoenig Says (Update1) 



By Vivien Lou Chen and Craig Torres



Nov. 17 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank has ``done about as much as it can do'' to revive the economy, which has worsened faster than he expected. 

He's got to be kidding. There is a lot more the Fed
can do. He just doesn't understand. As an example: from 2002-2004 the Bank of
Japan bought stocks to stabilize the market and it worked. The Fed could do the
same here, even if it were just bank stocks.



``Interest rates are extremely low,'' Hoenig said today in an interview with PBS's Nightly Business Report. ``The fact that we have the recession now is a little bit more than what I had anticipated,'' he said in a transcript of an interview provided by the show prior to a scheduled broadcast tonight. 

Obviously doesn't understand the connection between
the Fed's target rate and its effect on reserves. Until recently, actions
designed to maintain target rate led to "sterilization" of liquidity
injections.



The Fed has tried to mitigate the worst credit crisis in seven decades by reducing the benchmark interest rate to 1 percent and channeling more than $1 trillion in loans to banks and other financial institutions. Some central bank credit has gone to non-banks, such as insurer American International Group Inc., and U.S. automakers are also seeking federal assistance. 

Fed authorized under Section 13 Paragraph 3 of
Federal Reserve Act, to discount loans to anybody against any collateral it
deems satisfactory. That's why we have a Fed and Congress gave it that authority
for this exact purpose.



Policy makers should provide emergency lending programs only to financial institutions that create credit and handle payments, Hoenig said earlier today in a speech in New York. 

Again, there are no limits to whom the Fed can lend
to under the Act.



``The focus should be on protecting the intermediation process and payments mechanism,'' he said. ``I would argue for at least drawing a sharp line between banking and commerce, with our discount window only used to fund institutions and markets that play strictly a financial role.'' 

Protect unregulated intermediaries? The very entities
that got us into this trouble?



President-elect Barack Obama said yesterday the government needs to provide a ``bridge loan'' or other help to auto companies on condition that management, labor and lenders come up with a plan to make the industry ``sustainable.'' 

Obama's policies will work on the demand side.
That's what is currently needed.



``For the auto industry to completely collapse would be a disaster,'' he said in an interview broadcast on CBS News's ``60 Minutes.'' 

Agreed.



Federal Aid 



General Motors Corp., Ford Motor Co. and Chrysler LLC need federal aid before Obama takes office Jan. 20, United Auto Workers President Ron Gettelfinger told reporters on Nov. 15. 



Democratic lawmakers would like to use part of $700 billion in bank rescue money approved this year to help automakers, a move opposed by U.S. Treasury Secretary Henry Paulson and President George W. Bush. An impasse in Congress may put more pressure on the Fed to provide temporary assistance. 

Paulson's not even using all the money. Moreover,
his judgment has been extremely poor: letting Lehman fail, the ill-conceived
bailout and flip-flop. Yet we are to trust him when he says that helping the
automakers is going down the "wrong route?" Bizarre.



Loans and other assistance from the Fed and the Treasury have brought several unintended consequences because the U.S. lacks a framework for aiding troubled non-bank financial institutions, Hoenig said. 

Unintended consequences? Such as?



``Many of the steps taken have raised important issues with regard to moral hazard and the subversion of market discipline, equitable treatment of different institutions and segments of the market, and public interference in credit allocation,'' he said at an Institute of International Bankers conference. 

There's market discipline and there's market
discipline. If he is advocating economic depression as a form of market
discipline that's not the best course of action, it would seem.



Emergency Credit 



Hoenig, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser have called for a framework limiting emergency central bank credit. 

Again, this goes against the intent of the Federal
Reserve Act. Who gives these Fed governors the power to do this? Only Congress
can. Who made them God all of a sudden? Audacity!



``An expanded role for the discount window may bring central banks more directly into allocating credit as collateral requirements are selectively relaxed, and lending is used to support specific segments of the market,'' Hoenig said. 

All conforming to the letter and spirit of the law.



The Kansas City Fed president said he was ``especially concerned'' that loans to institutions beyond banks put the Fed in the position of ``mixing banking and commerce.'' 

See comment above.



``Such assistance could put public authorities into the process of allocating credit and selecting the winners and losers,'' he said. ``A long-standing concern is that central-bank lending should not be used to prop up insolvent institutions.'' 

What about letting solvent institutions fail, as in
Lehman, Wachovia, etc? The Fed stood by and watched while that happened.



The U.S. Treasury has set aside $250 billion of a $700 billion taxpayer-funded bailout package for direct capital injections into banks. Changes to the program have created ``confusion out there,'' he said.

You can thank Hank Paulson for that.