DENVER - When Tom Hoenig explains America's financial woes, the cause sounds pretty simple and the solution sounds vastly complicated.
Hoenig, CEO of the Kansas City Federal Reserve Bank, spoke with legislators Thursday at the state Capitol. His bank's district includes Colorado, and he's a rotating member of the powerful Fed committee that sets interest rates.
The country will have to suffer until it brings its spending back into balance with its saving, Hoenig said.
"Adjustment has to take place, and if we try to run shortcuts around these problems, we will only encourage the next crisis," he said.
He blames runaway spending this decade for the crisis.
Some investment banks had $30 of debt for every dollar of assets, he said. In 2001, households had $97 in debt for every $100 in disposable income. By 2007, they had $133 in debt for every $100 in income.
"You have to ask yourself, how long can an economy go with a negative savings rate," Hoenig said.
Fixing the problem is much trickier. Now that consumers and businesses are closing their wallets, the only place left to boost the economy is the government, he said.
President-elect Barack Obama announced his stimulus plan earlier Thursday. Hoenig doesn't know details of the plan, but he's confident it will help the economy in the short term.
However, he's worried about the long term, especially because the federal deficit has reached $1.2 trillion even before Obama's stimulus.
"That means that at some point, those who follow us will have this bill to pay," he said.
He also worries that historically low interest rates and massive federal spending will drive up inflation.
The Fed recently cut its interest rate to as low as zero percent. That's OK for now, Hoenig said, but the Fed has to know when to raise rates again. If it raises rates too soon, it will hurt the economy. Too late, and inflation will get out of control.
The audience of about 100 included several state lawmakers who wanted to know what they should do.
It's likely state and local governments will have to cut back, Hoenig said. In fact, Colorado lawmakers are grappling with a $600 million shortfall.
Hoenig advised smart spending on infrastructure projects that will result in something of value, instead of "opening the spigot" just for the sake of pumping money into the economy.
It sounded like reasonable advice to the chairman of the House Finance Committee.
"Basically, if you're going to spend money, do it prudently - good advice in good times and bad," said Rep. Joel Judd, D-Denver.
Hoenig visited the state Capitol last January and optimistically predicted the economy would avoid recession in 2008. He did note risks if the housing market fell - which it did - or if inflation grew.
Hoenig was still saying the country might avoid recession when he visited Durango last July. The National Bureau of Economic Research now says the United States fell into recession seven months before Hoenig's Durango speech.
He joked about his prediction Thursday.
"I was here last year and gave you my economic forecast, and you still invited me back. I'm shocked, actually," he said.