Legendary economist John Maynard Keynes is known to have supported his economic theory calling for short-term government stimulus during a recession through the statement, "In the long run, we're all dead." It was the classical economists who argued that the market will always reach equilibrium on its own in the long-term, but Keynes found patience unpalatable. In a speech today in Denver, maverick Kansas City Federal Reserve President Thomas Hoenig made clear that he disagrees with Keynes. He argued that the Fed should resist the temptation to engage in additional quantitative easing ("QE2"), because it could have disastrous long-term consequences and only modest short-term benefits.
Towards the beginning of Hoenig's speech (.pdf), he makes clear that the Fed's directive to maximize employment does not necessarily require monetary expansion whenever unemployment is high:
There is, within the Act, a clear recognition that our policy goals are long-run in nature. In this way, the Act recognizes that monetary policy works with long and variable lags. Thus, the FOMC should focus on fostering maximum employment and stable prices in the timeframe that monetary policy can legitimately affect - the future. The FOMC must be mindful of this fact and be cautious in pursuing elusive short-term goals that have unintended and sometimes disruptive effects.
He then moves on to argue that QE2 isn't likely to be very effective anyway. He says that, considering that the financial system is already functioning relatively well, it might only take 10 to 25 basis points off longer-term rates. That, he says, won't do much to lower unemployment. Instead, banks will just take that additional money in the system and continue investing in and then hoarding safe securities like government bonds, rather than lend, until the recession has more clearly dissipated.