Tom Hoenig is retiring from his position as president of the Federal Reserve Bank of Kansas City this fall. Everybody who I have talked to thinks, and I think, that he has done a truly excellent job as bank president. The organization has run smoothly and efficiently. It has successfully maneuvered its way past the challenges of the changing financial system. The banks of his district have not played the game of heads-we-win-tails-the-government-pays. And the bank has greatly promoted and raised the level of the intellectual debate over the role of the Federal Reserve and the conduct of monetary policy.
It is the whole bank that has accomplished these missions, and the whole bank that deserves credit. It is a team effort.
But almost no team effort is ever successful without an excellent coach. Hoenig has been that coach. It is a job very well done.
I have complained that Tom Hoenig is prone to see a glass full of inflation when not only is the glass not half full, the glass is not even there at all. But a tendency to always see inflation where it is at the cost of sometimes seeing inflation where it is not is not a bad thing in a central banker over the long run. It is certainly part of the arcana imperii of monetary policy that in a poor world with a somewhat dysfunctional labor market it is better to disappoint the rentier than to cause extra unemployment, but it is not good for a central banker to say so loudly.
For one thing, as Keynes put it, both inflation and unemployment are evils to be shunned. More important, a central bank that takes its eye off the price stability ball does not trade price stability away and get low unemployment in return. It gets high inflation and high unemployment.
What should the Board of Directors of the Federal Reserve Bank of Kansas City look for in a replacement?
First of all, the new president of the Federal Reserve Bank of Kansas City needs to be an excellent manager. Either he or she will manage the building and the staff, or he or she will find a deputy or two deputies to manage the building while the president goes off and plays a more public role. But successfully managing one or two deputies who feel that they are doing the work of the president's job as the president goes off and has fun--that is in many ways an even trickier management challenge than managing a whole building and its staff. You need to somehow keep them happy while you have the title and they have the workload and you have the pay.
Second, the next president of the Federal Reserve Bank of Kansas City needs to look and sound like a central banker. Central bankers are bankers. Successful bankers look and sound like bankers for a reason. Bankers know mind-numbing amounts of institutional detail, are probably smarter than you, and control your money. A successful banker thus needs to convince the bank's clients that he or she is not going to find some way to take their money away from them. This applies to central bankers as much as or more so then it applies to commercial bankers.
Third, the next president of the Federal Reserve Bank of Kansas City needs to understand and believe in the Federal Reserve's dual mandate. The Federal Reserve is a creature of Congress. The Federal Reserve exercises Congress's delegated article one powers in a manner that, had I been on the Supreme Court in the 1910s, I would have viewed with great suspicion. I would've been strongly tempted to say: if you want a central bank with these powers, do it by amending article one rather than through statutes. If Congress becomes unhappy with the Federal Reserve the institution will not survive. And if the Federal Reserve senior decision-makers do not take the dual mandate seriously, sooner or later Congress will become unhappy with the Federal Reserve.
Already a large chunk of the public is unhappy with the Federal Reserve's judgment that 5% nominal demand growth is appropriate for a US economy with its current employment to population ratio. Or, rather, they would be unhappy with the Federal Reserve if they understood that its decision rather than those of the president and their representatives are mostly responsible for the current stance of economic policy. America's executive and legislative branches are an 18th-century orrery designed for near gridlock except in emergencies. Failure to act is not the fault of individual politicians but rather of the system in which they are embedded. It is the Federal Reserve that can act to manage demand.
It would be much better for the Federal Reserve to take its dual mandate seriously than for popular discontent at economic outcomes to lead us to a future in which either Ron Paul dismantles the Federal Reserve and replaces it with a gold standard or Congress authorizes the Treasury to print up its own Treasury notes to circulate alongside Federal Reserve notes to cover the gap between spending and taxes. And the chances of such an outcome if we continue to maintain a 5% per year ceiling on nominal demand growth are much greater than I like to see.
Fourth and last, the next president of the Federal Reserve Bank of Kansas City needs to be able to go toe to toe with the economists in the FOMC.
It is not clear that giving regional bank presidents seats on the FOMC is the right thing to do. Carter Glass thought they would represent the farmers, the craftsman, and the merchants of America and so serve as a counterweight to the New York bankers and the Washington bureaucrats.
They don't.
But because they do have seats on the FOMC, they need to be able to be full participants in FOMC monetary policy decisions. That does not require that bank president be economists. But it requires the bank presidents be able to avoid getting snowed by Econ. And it requires that bank presidents be able to convince economists: both economists on the board and economists on the staff.
It will be an easy job to fill. It will be a very hard job to fill well.
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