About / Knowledge Center

Security Education / Alerts

For more information:

Or call:

Knowledge Center

Return to Knowledge Center

Banking on KC – Thomas Hoenig, former President of the Federal Reserve Bank of KC

publication image

Click here to listen now, or read the full transcript below:

 

Kelly Scanlon:

Welcome to Banking on KC. I'm your host, Kelly Scanlon. Thank you for joining us. With us on this episode is Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and former Vice Chairman of the FDIC. He's here to offer his insights and perspectives into this historic, and some would say unprecedented time. Thanks for joining us, Tom.

Thomas Hoenig:

I'm glad to be here. Thank you for asking me.

Kelly Scanlon:

As we speak here today, there are just so many converging forces at work around the world, social, economic, political, medical, that have created really challenging situations for so many, and opportunities for others. And I appreciate you taking the time to offer your insights today.

Thomas Hoenig:

I hope I can offer meaningful ones, let's put it that way. So I look forward to the conversation.

Kelly Scanlon:

First, let's talk about the CARES Act. It opened up extraordinary amounts of money to small businesses that came perilously close to shuttering back in the spring. Many of them did end up closing their doors anyway, because either it didn't go far enough or, for a variety of reasons, they weren't able to perhaps access the money. So what are your thoughts on the CARES Act? Did it go far enough? Should something else have been done instead?

Thomas Hoenig:

Well, the CARES Act is a response to this, as you said, unprecedented event of this COVID-19 and the pandemic around it, and it was not necessarily caused at all by any kind of financial misdeeds or excesses, and there are a lot of people being affected by it. So I think in that context, the need to provide support for businesses and individuals, as originally in the CARES Act, was necessary.

Thomas Hoenig:

In that sense, what we've done is we've mortgaged our futures to some degree because we're taking on extreme amounts of debt in order to deal with the immediate panic, and that's probably a necessary action to take if we're to really be, I think, fair to the broad base of our population and those in need. So I would be supportive of it.

Thomas Hoenig:

It probably would have been enough had we been able to stop the spread early on, but we were unable to, or, for whatever reason, not able to, and now we're have to wait for the vaccine and that may require some additional aid, hopefully not excessive amounts of aid, but aid for individuals so they can get back on their feet. So difficult, but probably an important thing to do.

Kelly Scanlon:

What is your perspective on the trade off? Through no fault of their own, businesses found themselves having to close because of stay at home orders and various other things that happened over the last several months, but it's also added trillions of dollars to the national debt, and that will have consequences. What are your thoughts on that?

Thomas Hoenig:

Well, I think there will be a trade off. Now whether the trade off or is larger or smaller will depend on how well we manage the future in dealing with this increasing amount of debt. Now, remember, the debt has gone from a mere $11 trillion in 2010, to over $20 trillion a year and a half ago, to nearly $30 trillion now, and so it is a substantial amount. So we get through this, we get a vaccine, we get through the pandemic, and we can begin to rebuild businesses. If we stabilize our economy and get it moving forward, and we do it in a way that we increase future debt, we will have increases in debt going forward, as we have in the past, but if we can get that growing at a slower pace than our national income growth, then we will, over time, slowly reduce the debt in relation to our total gross domestic product over time. I think that should be the goal.

Thomas Hoenig:

If we have decided that well, debt doesn't matter, and I've heard a lot of people talk about that, then I think it could be very costly in terms of the amount of debt and the requirements to service that debt over time. And this will, I think, hurt future generations if we were to allow that to occur. So yes, we had to do it. Yes, we can deal with it, if we get our economy growing at a rate faster than our growth in future debt, and then bring the economy back into line once again. It'll take years, but it can be done.

Kelly Scanlon:

What are some of the tools that we have at our disposal to get the economy growing at a greater rate than the debt? For example, what role would monetary policy play?

Thomas Hoenig:

Well, monetary and fiscal policy both will play a role. And what you want to do is, you want to provide enough fiscal support to your businesses to get them self-sustained again. That could take a year to two years. And then monetary policy has to be, shall we say, accommodative, but not so accommodative that we ignite inflation. If we were to ignite inflation, then I think we'd create a whole new series of problems in terms of misallocation of resources, redistribution of wealth, and so forth. So we have to do it carefully.

Thomas Hoenig:

But the thing to focus on is getting our gross domestic product, in nominal terms, growing again at a decent rate and then our deficit, that is our increases in debt, less than that over time, so enough to get the economy sparked again, let the economy and let the private sector do its thing, and hopefully we will get through this. But it won't be easy, and it will take time.

Thomas Hoenig:

There is a lot of people who think all you have to do is spend more money, borrow more money, whatever it takes, and things will be fine, but it doesn't work that way. Eventually it comes as a problem. And I hope we don't let this go too far. Right now we need to, but I hope we don't go too far under the assumption that there is never a day where you have to balance the ledger again. And that would be a mistake.

Kelly Scanlon:

One of the measures that is consistently touted as an indicator of the health of the economy is the stock market. We continue today to hear that even. And I know that a lot of people wonder, how can the stock market continue to flirt with, for example, this week even, the Dow Jones has been flirting with 30,000, when so many companies have gone out of business and so many people have lost their jobs, and other economic indicators haven't been very robust over the past year? How is the stock market continuing to perform like this?

Thomas Hoenig:

Well, the stock market is affected by any number of things. One is how well the economy generally is doing, how well businesses are doing, right now, they're struggling, we know, and whether jobs are being created and that's under pressure as well. The stock market is also very directly affected by monetary policy and fiscal policy, but at the moment monetary policy.

Thomas Hoenig:

What happens is, when you lower interest rates and you have what they call this quantitative easing, that is the Fed puts all the liquidity that they can muster into the economy, then interest rates go down and the market itself goes up. And it's kind of like if you think about a treasury bond and you lower interest rates, the value of the bond is greater, it goes from 100 to 101 or so. Well, that's the way the stock market works because what you're doing is you're discounting the future earnings of the stock market, but at lower interest rates, those discounts bring a higher present value, and therefore the market goes up.

Thomas Hoenig:

Maybe a cruder, but very vivid way to think about it is it's like pumping air into a tire. It inflates that tire, but you just don't want to do it so much that you have a blowout, which is a financial panic and so forth. And that's the trick right now that the Fed has to maneuver through over the next two to three to four years. And it won't be easy for it at all.

Thomas Hoenig:

The fact of the matter is that when we did this last time, you do have some redistribution of wealth, because if you're an asset holder, whether the stock market or real estate, and you see these low interest rates and this value of those stocks or that real estate goes up, you become wealthier. If you're a wage earner and you don't have as many of those assets, you will fall behind. And that's where you get some mis-allocations and mis-redistribution of wealth, which leads to, I think, greater division within society, and that's what we have to be mindful of.

Thomas Hoenig:

When people see that others are getting more than they are by what they think of as arbitrary policy, then they'd become resentful of that and that's what you've seen going on for some time now.

Kelly Scanlon:

You mentioned real estate. And I mentioned at the start of the show that, despite the challenges, there've been some real opportunities, maybe even some silver linings in certain sectors, and one of those is real estate, especially the housing market. Why has that continued to be so strong? And do you think it's going to hold up?

Thomas Hoenig:

Well, home ownership is a little bit like the stock market. It's an asset that most of America, actually more of America, I think, invest in than even the stock market since they live there. And so when you lower interest rates, that makes the purchase of that house more affordable initially, and then that raises the price of the house, and therefore you feel wealthier, and that encourages more people to say, well, I better get into it as well, like most assets. And so that's what you've seen going on in the housing market.

Thomas Hoenig:

When you can get a loan for two and a half percent, or even 3%, to buy a house, you can buy a lot more house, or you can afford a house much more easily, than if the interest rate is 6-7%. And that's what you're seeing, and the effect is to raise those values to make people feel wealthier, encourages them to invest, and then it becomes self-sustaining, until the correction has to come.

Thomas Hoenig:

Let's say inflation starts to build in the economy. We start seeing inflation getting above 4-5%. Well then you know that the Fed will probably have to let interest rates rise, and then that will be the turning point for that sector, just like you would have for any interest sensitive sector that you've raised interest rates on, and the housing market is certainly interest sensitive.

Kelly Scanlon:

Others say that the commercial real estate industry, that there's some doom and gloom around that. Some experts say that because of work from home, companies are going to continue those kinds of schedules. If not complete work from home, then there's going to be hybrid schedules where people only come in part of the week, and so they won't need as much space, and that there's just going to be a downward pressure then on commercial real estate. What are your thoughts on that?

Thomas Hoenig:

Commercial real estate is very broad. I think the part of the commercial real estate you're talking about is office space, and there will be some pressure there because of the work from home, but I'm more of a person who thinks it won't be as great as some people are currently predicting because human beings are very social and you need to interact within an office if you're running a business or you're engaging in your activities and so forth. And so I think there'll be quite a bit of return to the office as the pandemic recedes.

Thomas Hoenig:

The other is retail, and that was under pressure already because of the e-commerce developments that are going on, and so that may feel even more pressure going forward, shopping malls and so forth.

Thomas Hoenig:

The other is warehousing. That's booming. That's very strong. And so you see this uneven effect across the real estate market as well, with certain kinds of commercial real estate, warehouses, and so forth, doing very well, office space under pressure, but I think that will return, and then retail, that will be under pressure for some time. We'll see how that develops. But right now the commercial real estate on the whole has shifted to these more, shall we say, profitable activities, warehousing and so forth, and is doing really well.

Kelly Scanlon:

Another outcome of the pandemic and from the work from home and the social distancing measures has been an even stronger reliance on technology. Teleconferencing, telemedicine, FinTech, and some of the others that allow contactless transactions and communication. So what are your thoughts on that, especially FinTech, in terms of what we're going to see, more trends that are coming out of that, as well as what kind of adaptations customers and workers are going to have to make?

Thomas Hoenig:

Well, I think FinTech is here and will only become more important. I find it interesting, when people say FinTech, what do they mean? It's like saying I enjoy sports. The idea is FinTech that is related to retail, and you have the Amazons and other communications like Google. They're going to continue to build and become more important as we move through time. They're just very, very prominent and very useful, and therefore will be, I think, adopted increasingly more broadly.

Thomas Hoenig:

Then there's the FinTech in banking, which is a two-edged sword because FinTech makes banking simpler. We bank from home, we do different things, but it also has invited new entrants. We see FinTech companies that are in the payments business only, or you see them wanting to do digital money, that is growing and that's going to be more important, and that's going to be a challenge to banks, as some of these FinTech companies become more bank like as they build their customer base or client base. And then the issues will become more contentious.

Thomas Hoenig:

Should these FinTech companies, like Stripe and that, be required to follow the same rules and regulations as commercial banks. And that will be, I think, controversial, but it will get settled because FinTech will force it to be addressed.

Kelly Scanlon:

When you talk about these new entrants and the fact that there's not a lot of regulation in this area right now, for our listeners, what are some of the precautions they can take, or what are some of the things that they should be aware of, to make sure that what they're doing is safe? And the other question that I have is, is there an opportunity for banks and some of these new entrants to work together to create an even better customer experience and a win-win for each of the parties?

Thomas Hoenig:

Well, that's a very good point. I would say number one, the things to be careful of is some of that money that's in that account that they think they have is not insured. It's with this non-bank tech company, and so if that were to get into trouble, they could lose some portion of their money in that situation.

Thomas Hoenig:

On the other hand, something tech companies, many of them, use what they call sponsor banks or the partnership, and the FinTech would be the, shall we say, the rails in which the payments take place, and they will be the source of deposits to the bank as the partner, and so the bank is where the deposits are lodged and insured and used, and the bank then also becomes a vehicle to lend through the FinTech partner. And that can be win-win.

Thomas Hoenig:

Over time, the FinTech company may say, "Well, look, I can do this myself. I just need to get an account and set it up," but whether they're insured or not, and whether they're subject to the same banking rules and regulation oversight, that will become the critical question as they move forward from the partnership to something on their own. So yes, it can be win-win, but it can also be a competitive environment as well. We'll see how it develops.

Kelly Scanlon:

As the regulations start to impact those smaller entrants, though, the cost of doing business for them will go up as well.

Thomas Hoenig:

Absolutely. And it becomes more difficult.

Kelly Scanlon:

President-elect, Joe Biden, he has announced Janet Yellen as his choice for treasury secretary. What are your thoughts on that?

Thomas Hoenig:

Well, Janet is a very experienced policymaker. As you know, she was the Head of the Council of Economic Advisors. She was Chairman of the Federal Reserve and also a member of its board. She was president of a reserve bank. She has a great deal of experience. She's also a team player, so she will work with President Biden's cabinet, I think, very well. She's very competent and a very steady partner in all this. And I think obviously President Biden has confidence in her.

Kelly Scanlon:

What are your thoughts on what the headline issues and policies that we can expect to see from the incoming Biden administration?

Thomas Hoenig:

Well, I think, first of all, I would tell to bankers that I don't see a lot of new regulations coming, post Dodd-Frank and the regulations that followed the last crisis. So that should be a little more stable for them. I don't know that there will be a lot more deregulation either, but at least that environment, they have a stable environment.

Thomas Hoenig:

The second thing is I do think this issue that we talked about just a minute ago, FinTech, is going to be a huge issue for the banking industry. Whether they should partner, how they should partner, where the risks lie. Is the FinTech going to be a competitor? Will the FinTechs, as some have like Square and so forth who try and get bank charters, will they be a competitive threat or will they over time become more of a partner? So that's a huge issue for the administration because they have to sort that out, and for the banking industry, since they have to work in that environment.

Thomas Hoenig:

The second thing is, I think antitrust will get more attention. I've seen a lot from both the progressives and the populous in the United States, concerned about the growing size or influence of the consolidation that's taking place in the banking industry. And that will, I think, they will petition, if you will, the administration to address that. And I think that will be a pretty significant issue.

Thomas Hoenig:

I think the other is, since we have these large institutions, I think this idea of using the banks for what I'll call socially important endeavors, like the green movement, environmental movement, other social issues, and how you allocate capital to those issues, will become prominent. Those social activists will push the administration to encourage or to force the banks to help fund those areas of the development. So those are just three that I think will be prominent as we go forward with this administration.

Kelly Scanlon:

Certainly big ones.

Thomas Hoenig:

Very big.

Kelly Scanlon:

You were President of the Federal Reserve Bank of Kansas City for 20 years, and during that time you served both Democrat and Republican administrations, but with the partisan mood of our country, and we talked about that just a little bit before, what do you see as successful tactics for moving things forward? Not just economically, that, of course, but also as a country in general, what's needed?

Thomas Hoenig:

I think what's needed is much more than tactics. I think the leadership must pay attention to what I'll call the greater issues and the need to cooperate and work towards addressing those issues. Like the consequences of COVID, and like the consequences of a very significant growing debt. And therefore it requires leadership that is willing to genuinely listen to one another, which hasn't been going on for some time. It requires a far greater degree of understanding of the issues. I think there's so much yelling at one another, that the questions aren't being asked and aren't being addressed, by both Congress, even within the public. There's a low level of understanding of these issues and taking the time to read it rather than watching, what I'll call, a cable news channel or cable channel that's just trying to accentuate the differences rather than the common ground that might be found.

Thomas Hoenig:

Therefore, this is where a lot of attention has to be paid by both the new administration, the new Congress, and the public more generally, to say we want meaningful solutions. We're willing to pay for them, if they are meaningful and they are fair. And that means there's got to be a lot of effort to find common ground, which has been sorely lacking, in my opinion, over the last decade or so.

Kelly Scanlon:

So we all have a role in this. It's not just the politicians. We all play a role in this, and everybody has to be willing to compromise a bit. There's going to be a lot of give and take.

Thomas Hoenig:

Yes, there is, a lot of give and take. But we haven't spent the time understanding the issues, I think, as well as we might, both in the Congress and we in the public. Because they're complicated. They're difficult. It's going to take a little bit of effort there, as you said. And I think then we can find solutions.

Kelly Scanlon:

You bring up a good point though. I think there is a lack of trust in the information that we receive a lot of times these days. That you don't know what to believe. We've got so much information coming at us, but we don't know what's relevant, what's true, how to vet it. Say you're a person who really does want to make an effort to achieve the understanding that you talked about. How do we go about learning about it? What are your suggestions for that?

Thomas Hoenig:

There's really only one way that I know of, and that is you have to read a lot. You can't just listen to the talking heads. The public has to read a great deal. The Congress has to read, and of course they have their hearings. But in the sense of not just reading to find out what you have already made up in your mind, but find out what the other side of the issue is. And that takes effort. I mean, it just doesn't come easily. It comes with effort.

Thomas Hoenig:

That's why, from the founding of our country, not to get on a soapbox here, but the willingness of the public to educate itself is very, very important to the continuation of a Republic like ours and a congressional approach to things with legislation. And that's what I hope we turn to more and more instead of less and less.

Kelly Scanlon:

If you could wish for any one thing, Tom, or maybe two or three things, you pick, for our country, what would they be?

Thomas Hoenig:

I would ask our leadership to lead with intelligence, patience, and grace. I don't mean that I would expect them to agree on everything, but to find and know that they have to work towards finding solutions.

Thomas Hoenig:

We are a country that has actually consumed more than we produce every year. So we're spending our good deal of our capital on buying goods from others, and that's perfectly okay, but we also need to be ready to produce more ourselves. And that means better education, taking on opportunities, making opportunities available through the kinds of laws that we've placed that encourage innovation, entrepreneurship, and growth in our economy. Those are tall orders and difficult, but doable. We've done them in the past.

Kelly Scanlon:

Tom, thank you so much for all the different ways that you have served the country and for joining us today to share your perspectives. We really appreciate it.

Thomas Hoenig:

Thank you for asking, and I hope this was helpful to you. It certainly was helpful to me.

Joe Close:

This is Joe Close, President of Country Club Bank. Thank you to Tom Hoenig for being our guest on this episode of Banking on KC. We appreciate Tom's thoughts on how we as a country can potentially emerge better from our current challenges if we work together to manage the path. This isn't the first time the United States has been through difficult times. A willingness to pull together and make personal sacrifices during times of struggle has been key to building a strong, caring, and innovative country, and it's what will carry us through our current challenges.

Joe Close:

As Tom said, we must commit to being well-read and well-informed citizens, which means educating ourselves about positions and viewpoints that may not be our own. It will take all of us working together to achieve that better future. Remember, E pluribus unum, out of many, one. Thanks for tuning in this week. We're banking on you, Kansas City. Country Club Bank, member FDIC.