US economy

The Lords of Easy Money — where the Fed went wrong

It’s tough to turn the nuances of monetary policy into personality-driven narrative. But Christopher Leonard has succeeded in doing just that with The Lords of Easy Money.

In it, he follows Thomas Hoenig, the plain-spoken Kansas City banker who was, back in 2010, the single dissenting vote on the policy-setting Federal Open Market Committee to stand against the US central bank’s quantitative easing programme. He turns the unassuming economist into the protagonist of a compelling tale about how the Federal Reserve changed the entire nature of the American economy.

Hoenig was in many ways born to be a central banker. A thoughtful, quiet, easy-tempered man who rose over years at the Fed to head its Kansas City branch, he’s a Midwesterner to his core: prudent, balanced and the opposite of attention-seeking.

But after the financial crisis, he broke out of the traditional Fed consensus and risked public fury (not to mention massive criticism from his peers) to sound the alarm about how a radical experiment in monetary policy, which involved pumping unprecedented amounts of money into the US economy, would increase inequality and encourage ever more risky behaviour on Wall Street.

He was right, of course. We’re all speculators now, a point that Leonard drives home throughout the book by following not only the politics and macroeconomics that drove Fed decision-making, but also its real-world fallout.

More than a decade on from the Fed’s fateful decision to turn the liquidity spigots on full-blast, ultimately increasing its balance sheet from $2.3tn in 2010 to a whopping $7tn by 2020, most investors and even plenty of average people are aware that the central bank has, in some profound way, manipulated the market. What kind of sensible investing is possible in a world in which teenagers talk about “buying the dip”, retail traders on the popular Robinhood app push meme stocks into the stratosphere, and pension funds desperate for yield pour money into cryptocurrencies?

It’s all part of what Leonard calls “the age of ZIRP”, referring to the “zero-interest-rate policy” that has made price discovery in US markets in particular next to impossible. He unpacks all the obscure trader terminology and its meaning, weaving this into a 40-year history of the central bank and its main actors, frequently coming back to Hoenig and his warnings as a touchstone to tie it all together.

Weaving together narrative non-fiction with big ideas can be difficult. One of the best things about this book is that through Hoenig, Leonard, a business journalist, is able to tell the whole, complicated half-century story of how we got to where we are now in a way that isn’t at all wonky. There are real people here, making real decisions about the real world. What’s more, this isn’t just about 10 years of easy money. It’s about a culture in which the Fed has over the past several decades taken over from government as the key economic actor in the country.

The central bank has always held a crucial but fraught position in the US political system. Americans need the Fed, but don’t like it being too powerful. It’s both a government agency but also a private bank. “It was controlled in Washington, DC, but also decentralized. It was given total control over the money supply, but didn’t replace the private banking system,” writes Leonard. “It was insulated from voters, but broadly accountable to politicians.”

That strange middle ground enabled bankers like Alan Greenspan, Fed chair from 1987-2006, to exert ever more power relative to politicians, who were all too happy to hand over the decision-making baton to someone else. With low rates and other monetary tools, America’s central bankers created a kind of saccharine growth on Wall Street that was potent and yet divorced from the real story on the ground.

The Fed-led “irrational exuberance” — to deploy Greenspan’s memorable phrase — was behind the dotcom bubble; the crash of 2008; the past few years’ troubles in the vital repo market that underpins billions of dollars in financial transactions; and to a large extent the outperformance of equities, even the most speculative ones, amid a global pandemic (we don’t get too much about that, since the narrative stops around 2020).

Part of the root problem was that Greenspan and most of his successors worried more about price inflation than asset inflation, which was, after all, good for the investing class. That was convenient, given that Greenspan himself was quite invested in being a part of that class, as detailed in The Man Who Knew by Sebastian Mallaby. The more he did to keep markets propped up, the better it was for the business elite, and the less politicians had to do, creating a dysfunctional dance in which the fortunes of asset owners versus everyone else moved further and further apart.

But Hoenig always cared more about Main Street. And he could see, over the past decade in particular, that while inflation (usually the bugaboo of those who worry about loose monetary policy) wasn’t rising, asset prices were, in ways that encouraged everything from our record corporate debt bubble to energy speculation to a wildly overleveraged commercial real estate market.

Indeed, there’s now academic evidence to show that the Fed has for decades stretched out recovery cycles in artificial ways that have papered over big economic problems, creating bigger and more damaging bubbles.

Many of us have worried for some time now about when this latest one will pop. Given the recent volatility following Fed chair Jay Powell’s admission that today’s inflation is no longer “transitory” and that both interest rates and balance sheets need to be normalised, it’s likely we’ll see some pain this year. What will happen when central bankers, “the only game in town” (to quote another Cassandra of easy money, Mohamed El-Erian), finally, by choice or by force, pull the plug?

Nothing good. We’ve built “an entire economic system” around a “zero rate. Not only in the US but globally. It’s massive,” says Hoenig. “Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think that no one will suffer? Do you think there won’t be winners and losers? No way.” Or, as Leonard himself puts it, the financial crash of 2008 never really ended. It just morphed into another crisis, the bills for which have yet to be paid.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard Simon & Schuster, $30, 362 pages

Rana Foroohar is the FT’s global business columnist


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