A fascinating page-turner based on an unlikely topic: Federal Reserve policy
There’s undeniably something gratifying about an elegantly crafted morality tale – and business journalist Christopher Leonard has written a good one, even if you suspect the full form of it isn’t as slick as it looks. claims. “The Lords of Easy Money” is a compelling and propelling story about the Federal Reserve – yes, you read that right. Leonard, in the tradition of Michael Lewis, took an obscure subject, rife with the risk of incomprehensibility (or boredom), and constructed a gripping narrative in which the stakes couldn’t be clearer.
The stakes, that is to say as Leonard and his protagonist define them, which is the pivot on which this whole book revolves. “The Lords of Easy Money” filters an argument about the Fed through the experience and worldview of a retired central banker named Thomas Hoenig, who joined the Kansas City Fed in 1973, first in as a banking regulator, then rose through the ranks to earn a seat in 1991 on the Federal Open Market Committee, where the real decisions about monetary policy are made.
For years, Hoenig – described by Leonard as a “rule follower” – fit right in. With few exceptions, he voted yes to what Alan Greenspan, the president at the time, wanted to do, and then voted yes to what the next president, Ben Bernanke, wanted to do. Then came 2010, when Hoenig cast a series of lone dissenting votes on a committee of 12 where unanimity was prized.
What Hoenig adamantly opposed was the Fed’s decision to keep interest rates at zero and begin a new round of long-term government debt purchases, a policy known as the name “quantitative easing”, which effectively injected trillions of new dollars into the banking system – the “easy money” of the title of the book. An inflation hawk (so troubled by the prospect of higher prices that he was keen to limit the Fed’s reach), Hoenig had agreed to such measures during the 2008 financial crisis, when markets were crashing; but he didn’t think 9.6% unemployment was the kind of urgency that called for making extraordinary methods of money supply expansion a no-brainer.
Much of ‘Lords of Easy Money’ is devoted to trying to rehabilitate Hoenig’s reputation, which took a hit when, year after year, the inflation he warned about didn’t happen. . But inflation do happen, Leonard insists repeatedly, but not in the form people thought it would take.
It is not consumer prices but asset prices that have risen: over the past decade, the stock market has exploded while the real economy has collapsed. Hedge funds, banks and private equity firms have all been incentivized to create new, riskier and increasingly exotic forms of debt. All this new money was helping to finance another speculative bubble while leaving the Fed little room to maneuver in the event of another crash. Leonard says this asset speculation has further enriched the wealthy few while work has become increasingly precarious for the many.
The last third of the book introduces us to one of many: John Feltner, who in 2013 landed a union job at Rexnord, a manufacturer of heavy industrial equipment., just a few years before the company decided to move its plant from Indianapolis to Mexico. Leonard wisely chose Rexnord as an example. First, beginning in the 1980s, a series of private equity firms indebted Rexnord with so much debt that the company’s raison d’être became servicing that debt. Second, one of the private equity firms that acquired Rexnord in the early 2000s was The Carlyle Group, and one of The Carlyle Group’s partners at the time was Jerome Powell, now Chairman of the Federal Reserve. Powell was named president in 2018 by then-President Donald Trump – the same Donald Trump whose populist rhetoric won the vote of a frustrated Feltner two years before.
All of this helpfully highlights how extreme financialization has transformed (or distorted) the economy and our politics, even if Powell’s connection to Rexnord ended long before Feltner worked there and his work was transferred to Mexico. Powell, who last week signaled his willingness to raise interest rates if inflation persists, is described as someone so protean it’s almost as if he’s the personification of the financial system in the sense broad – an improvisational and politically shrewd operator for Cassandra, who is principled but is doomed by Hoenig. Powell’s good reputation among the Washington establishment comes across as suspect, though Leonard also has no patience for anti-establishment conspiracy theories, and he laments that critics of the easy-money policies of the Fed over the past decade have mostly been the purview of “right-wing cranks. He takes great pains to make Hoenig’s hawk sound like good ol’ common sense — as if was simply acting on the inevitable conclusion drawn by a faithful steward of “prudence and integrity”.
Which may very well be the case, although Hoenig’s intransigent position appears in this book mostly unchallenged, with only a faint idea of why he failed to convince other Fed economists. You would not know that there have been serious developments in economic ideas since Hoenig was deeply influenced by the inflationary spiral of the 1970s. There is no mention of modern monetary theory, championed above all by the economist Stephanie Kelton, who takes a phrase from John Maynard Keynes to heart: “Anything we can really do, we can afford”. Even though Hoenig thinks that’s hogwash, it would have been good to see exactly how, when pressed, he makes his point.
Leonard also doesn’t address what might have happened had Hoenig returned in 2010. What economic historian Adam Tooze calls the “deflationary misery” of the 1930s held an understandable place in the Fed’s institutional memory, a terrible reminder of what could happen when the institution failed to counter the collapse of the banking system by supporting the money supply. Not to mention that in 2010 the actions of the Fed signaled that it had become a guarantor not just for the US economy, but for the global financial system. Tooze’s recent books, “Crashed” and “Shutdown,” suggest that the relationship between the Fed, the U.S. economy, and the global system have all been twisted to the point where an urge to thwart everything, shouting “stop,” is futile.
Leonard (or Hoenig) is right to recognize how precarious and dangerous the current situation is. Leonard (or Hoenig) is also right to call for “long term thinking”. Yet ‘The Lords of Easy Money’ presents the complexity of the current system as if it merely masks unshakable fundamentals; there’s a satisfying clarity to reading a book that puts the jumble of political and economic turmoil into such austere narrative terms, but there’s more to the story than that.