The Fed's Dissenter: Saying No to Easy Money

"Inflation isn't a not-here-today, here-tomorrow phenomenon," Hoenig says. It builds slowly. "The sequence of events that led to runaway inflation in 1979 got started back in the mid-1960s. That's what I mean by long term."

Hoenig supported the Fed's dramatic actions in 2008 and 2009 to pour trillions into the staggering financial system. But now the economy is growing fitfully, and all that money "is looking for places to go." A lot of it is pouring into places like Brazil and China, where, Hoenig notes, inflation is rising sharply. Global food prices have risen 25% in the past year, according to the U.N., and many nations are starting to hoard commodities. (See a day’s worth of food around the world.)

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."

Hoenig acknowledges that he has been accused of grandstanding at the end of his Fed career. In his mind, there's no point in giving regional Fed chiefs a vote if they're not going to vote with their conscience. His stand has attracted admirers, like the octogenarian from Connecticut who dug up his unlisted phone number and called him at home one Sunday last year to urge him not to back down. (See the top 10 business deals of 2010.)

He won't.

One of the great novels of Kansas City, Evan S. Connell's Mr. Bridge, tells the story of a man who would have applauded Hoenig's dissents. A lawyer who invested "in companies that he considered essential," Mr. Bridge abhorred "speculations" and lived by the principle that "it is better to trade too little than too much." That spirit of thrift and caution is out of style in a world that's still awash in complex derivatives and computerized trading, a world of trillion-dollar deficits. But it lingers in Kansas City and in the impulses among people like Thomas Hoenig, who may come to be seen as a prophet for a future that looks a little more like a distant past.

This article originally appeared in the Feb. 14, 2011 issue of TIME.

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