Why woke ‘Frisco Fed chief missed Silicon Valley Bank’s warning signs

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As a bank examiner, Hoenig spent the 1970s watching as the Fed’s policies helped pile on the inflationary tinder that would later ignite. These policies are known as “easy money” policies, meaning that the Fed was keeping interest rates so low that borrowing was cheap and easy.

The Fed had kept interest rates so low during the 1960s that they were effectively negative when accounting for inflation by the late 1970s. When rates are effectively negative, that might be called a super-easy money policy. This kind of environment fuels inflation because all that easy money is looking for a place to go.

Economists call this phenomenon “too many dollars chasing too few goods,” meaning that everybody is spending the easy money, which drives up the prices of the things they are buying because demand is high. Importantly, the Fed creates these conditions by creating more and more dollars, or increasing the monetary supply, as the economists say.

As a bank examiner, Hoenig realized another very important thing. Easy money policies don’t just drive up the price of consumer goods, like bread and cars. The money also drives up price of assets like stocks, bonds and real estate. During the 1970s, low interest rates fueled demand for assets, which eventually inflated asset bubbles across the Midwest, including in heavy farming states, such as Kansas and Nebraska, and in the energy-producing state of Oklahoma. When asset prices like this rise quickly, it creates that dreaded thing called an asset bubble.

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Yep ... and he was the one person on the Feb pushing against keeping interest rates near zero long term. They need him back at the Fed.

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Meh banking and finance helped create some of those issues (redlining, etc.)

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