There is an excellent contrarian piece of economic analysis in Time Magazine a week or two back about the dissenter to the Federal Reserve’s Quantative Easing policy, Thomas Hoenig. It can be found at:
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, Missouri
And I post a short extract below because I think it represents an alternative approach. I do not necessarily think that it is an immediate possibility while the economy is so fragile, but in the medium term, it would seem that something like this or something else equally radically different, will be essential:
Wall Street vs. Main Street
Meanwhile, in America, the most rapidly rising prices aren’t factored into the core inflation rate, because food and oil are considered too volatile to produce a reliable measure. But just because these costs aren’t part of the inflation rate, it doesn’t mean that people don’t have to pay them. In fact, the poorest 60% of American households spend 12% of their income on energy alone, compared with the 3% spent by the richest 10%.
“Inflation is so unfair,” Hoenig declares passionately. “It is the most regressive tax you can impose on the public,” he adds. “It erodes the buying power of the poor and people on fixed incomes. The people who have money and are savvy come out ahead. In fact, they end up stronger than before.”(See why inflation has become a dirty word.)
It’s not just the Fed’s loose-money policy that bothers Hoenig. He feels that little has been learned from the crisis and that government policy continues to smile on Wall Street but not on Main Street. Instead of breaking up the financial giants whose gambles crashed the economy, the government has let the biggest banks grow even bigger. Now they’re gorging on free money. Where is the penalty for failure? “We don’t have a market economy now,” Hoenig says. “I hate to use this term, but it’s almost crony capitalism — who you know, how big your political donation is.”
If Hoenig made policy, instead of dissents, he would set his course toward “high savings rates, low leverage and a strong currency.” He would bring back the Depression-era Glass-Steagall rule that barred commercial banks from taking excessive risks. He would reduce government debt and promote a manufacturing revival. “We can become a low-cost producer again,” he says. “It won’t be easy — there is no painless approach. But Germany has done it, and we can too.”