A Fed morality tale

The Lords of Easy Money: How the Federal Reserve Broke the American Economy

Author: Christopher Leonard

Publisher: Simon & Schuster

Price: $30 

Pages: 373

There’s something undeniably gratifying about an elegantly crafted morality tale — and the business reporter Christopher Leonard has written a good one, even if you suspect that the full shape of it isn’t quite as smooth as he makes it out to be. The Lords of Easy Money is a fascinating and propulsive story about the Federal Reserve — yes, you read that right. Mr Leonard, in the tradition of Michael Lewis, has taken an arcane subject, rife with the risk of incomprehensibility (or boredom), and built a riveting narrative in which the stakes couldn’t be any clearer.

The stakes, that is, as Mr Leonard and his protagonist define them. 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 as a bank regulator, then ascended the ranks to earn a seat in 1991 at the Federal Open Market Committee, where real decisions about monetary policy get made.

For years, Mr Hoenig fit right in. With few exceptions, he voted yes to what Alan Greenspan, the chairman at the time, wanted to do, and then voted yes to what the next chairman, Ben Bernanke, wanted to do. Then came 2010, when Mr Hoenig cast a string of lone dissenting votes on a committee of 12 where unanimity was prized.

What Mr Hoenig adamantly objected to was the Fed’s decision to keep interest rates at zero and begin a new round of buying long-term government debt, a policy known as “quantitative easing,” which injected trillions of new dollars into the banking system. An inflation hawk Mr Hoenig had been fine with such measures during the 2008 financial crisis, when markets were cratering; but he didn’t think that an unemployment rate of 9.6 per cent amounted to the kind of emergency that called for turning extraordinary methods for expanding the money supply into a matter of course.

A large part of the book is given over to trying to rehabilitate Mr Hoenig’s reputation, which took a hit when, year after year, the inflation he warned about failed to happen. But inflation did happen, Mr Leonard emphasises, just not in the form that people thought it would take.

What escalated were asset prices: In the last decade, the stock market boomed while the real economy sputtered along. All that new money was helping to fund another speculative bubble while simultaneously leaving little room for the Fed to manoeuvre in the event of another crash. Mr Leonard says that this asset speculation enriched the wealthy few while work became ever more precarious for the many.

The last third of the book introduces us to one of the many: John Feltner, who in 2013 landed a unionised job at Rexnord, a manufacturer of heavy-industry equipment, just a few years before the company decided to move his Indianapolis plant to Mexico. 

Mr Leonard has chosen Rexnord as an example advisedly. First, starting in the 1980s, a string of private equity firms saddled Rexnord with so much debt that the company’s reason for being became the servicing of that debt. Second, one of the private equity firms that acquired Rexnord in the early 2000s was the Carlyle Group, and one of the partners of the Carlyle Group at the time was Jerome Powell, who was appointed as the chair in 2018 by then-President Donald Trump, whose populist rhetoric had gotten the vote of a frustrated Mr Feltner two years before.

All of this usefully highlights how extreme financialisation has transformed (or deformed) the economy and our politics, even if Mr Powell’s connection to Rexnord ended long before Mr Feltner worked there. Mr Powell, who last week signalled a willingness to raise interest rates if inflation persists, is depicted as someone so protean that it’s almost as if he’s the personification of the financial system writ large — an improvisational, politically astute operator to Mr Hoenig’s principled but doomed Cassandra.

Mr Hoenig’s hard-line position glides through this book mostly uncontested, with only a scant sense of why it didn’t win over the other economists at the Fed. You wouldn’t know that there have been any serious developments in economic ideas since Mr Hoenig was deeply influenced by the inflationary spiral of the 1970s. There is no mention at all of modern monetary theory, advocated most prominently by the economist Stephanie Kelton, which takes to heart a line from John Maynard Keynes: “Anything we can actually do, we can afford.” Even if Mr Hoenig thinks it’s utter garbage, it would have been good to see exactly how, when pressed, he makes his case.

Nor does Mr Leonard address what could have happened if Mr Hoenig had gotten his way back in 2010. What the economic historian Adam Tooze calls the “deflationary misery” of the 1930s loomed understandably large in the Fed’s institutional memory, a terrible reminder of what could happen when the institution failed to counteract a collapsing banking system by buoying the money supply. Mr Leonard (or Mr Hoenig) is right to recognise how precarious the current situation is. Still, the book presents the complexity of the current system as if it were merely disguising some unshakeable fundamentals; there’s a satisfying clarity to reading a book that puts the jumble of political and economic turmoil into such stark narrative terms, but there’s more to the story than that.

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