The Fed’s Mega-Bailout: How 2008 Set the Stage for 2020 (w/ Thomas Hoenig & Pedro da Costa)
PEDRO DACOSTA: I wanted to start by asking you what I've been asking everybody, first of all, is how are you doing in this pandemic? How has physical distancing affected your life? Are you and everybody in your family okay? THOMAS HOENIG: Yes, fortunately, we're all okay. The distancing in the isolation is like, I think for most people beginning to wear on us and we have family not very far away and we can't get together with them. That's a small price to pay for health, so we're happy to do it until this thing passes. PEDRO DACOSTA: Absolutely. I feel like we're-- I was looking at the stats, and we're in a blessed minority and can accomplish our work remotely in the first place. THOMAS HOENIG: Very good point, very good point. PEDRO DACOSTA: I wanted to ask you, we seem to get mixed messages from the Fed as far as the economy itself and the strength of the financial system. I understand that this is a special-- this is a very significant shock that is external that we're going through. At the same time, the Fed keeps coming up with a new-- and see, I'm a Fed reporter, pays close attention to this stuff. I can't keep up with all the emergency facilities that seemed to be cropping up on a daily basis. Was the financial system truly healthy going into this crisis? THOMAS HOENIG: Well, the only way I can answer that is say that it is certainly was healthier going into this crisis that it was the last crisis. It has more capital. It's not as healthy as it might have been because I think the industry could have benefited from more capital, which would give them greater staying power and greater flexibility but relatively speaking, it is, I think, better positioned to weather this if it doesn't go on indefinitely. PEDRO DACOSTA: What do you make of the Fed's response thus far? Again, we've revived some of the old facilities that you were right there for their original creation, some of the same policies in terms of launching QE if in a slightly different form, but we're also going beyond the scope of measures undertaken in 2008. What do you make of this alphabet soup of facilities but also the monetary action? THOMAS HOENIG: Well, I think that the basically, the tool's the same. The printing of money, the creation of money to fund whatever is needed. Given the nature of this crisis being started from a natural disaster that seems to be ongoing, I'm not sure that the Fed can enjoy it. As different sectors have become under stress and needing some financial liquidity support, the Fed has felt compelled and I think the public agrees with that at this point that it had to step in, in any way it could, and that's why you're seeing the old tools barely being expanded to a greater number of participants in this, shall we call it, a liquidity provisioning going forward. PEDRO DACOSTA: Could we talk a little bit about some of the specific measures? The market's very interested in the corporate bond buying aspect to it of the program because it is new and because the US corporate bond market is so large. I'm wondering, two things. You as a FOMC member, you are always cautious even about potential credit distortions in terms of the Fed's interventions into the mortgage market. This of course, takes us far way further down the rabbit hole of credit allocation. Two, I wonder how you expect the Fed to construct such a program in the way that makes it fairly neutral and that shields it from political criticism of favoring one corporate sector over another? THOMAS HOENIG: Well, I think to begin with, because the banking industry is tough, a levered industry, have you would-- ideally you would want them to provide the liquidity into the corporate world and given the size of this crisis, they are unable to do so, especially given their own current leverage positions which are better than they were, but not as strong as they might have been. That does leave it to the central bank who can, in fact, create the necessary liquidity to fund and they felt compelled. During the crisis, I can understand that. In fact, I supported intervention during the last crisis. The difficult is that you are setting a precedent and that makes you subject to greater political pressure in the future for whatever crisis comes along. That is the unfortunate part of this and whether they can withdraw themselves from this in a way that says whoops, that was a onetime very special, pandemic created and we're not doing that for just any panic that comes about, that will be very difficult, but I think necessary and something for the Fed to be thinking about. Not now, but very soon as the current crisis recedes, they'll have some major challenges, but I hope they do it, otherwise, they will become subject to greater and greater political pressure. PEDRO DACOSTA: Because the fact that I've heard an interesting point, I spoke to Randy Kroszner, your former colleague recently, he made the interesting point that while the Fed feared the loss of Direct 13-3 emergency lending powers after Dodd Frank and the need to go to Treasury for approval, that disapproval actually enhanced the political backing and cover that the Fed now has, what do you make of that view? Does that give the Fed more leeway to intervene in corporate bond markets and muni bonds in a way that it was maybe not able to do when you were there THOMAS HOENIG: Well, I think that's one good way of looking at it. I always had the feeling that having to go to the Treasury was hardly a handicap, your greatest difficulty is resisting the Treasury because it's a political entity. That's a challenge. The Fed's independence is less than it was because of that, and because of other actions that's taken in the past. PEDRO DACOSTA: I wonder what memories about the last crisis does this bring up for you, and how do you see this as a different phenomenon? Because obviously, this is we're talking about whether or not it's a manmade. I guess, if the pandemic is in any way linked to climate change, which it might be, maybe it's manmade, but it's not quite as manmade as subprime mortgages, right? THOMAS HOENIG: Right. It's different in the sense of the source of the immediate source, the trigger source for this crisis is quite a bit different and therefore, that puts everyone in a position. Both parties are in that position, the Fed's in that position, the administration that-- Yes, this was not anyone's fault except this pandemic and therefore, we have to do all we can, that gives them a lot of leeway. The downside of that is it also sets precedent for the future, which will be more difficult to manage, I suspect going forward. Very similar to the last crisis in terms of the need to do something broader than the last crisis in the scope of what they're willing and able to do, and more acceptance by the public and the politicians that they do it. PEDRO DACOSTA: The reason I asked you is, I guess, as a reporter, as a much younger reporter back then, I covered the crisis. Of course, when we were living in that closely, I assume you felt the same way. We're like, this is as bad as things can get. Of course, now we're living through a public health crisis that seems much more severe.