Has The Federal Reserve Broken The Economy?

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

Christopher Leonard. Published by Simon and Schuster

Upon receiving the book, at first, a bit of eye-rolling occurred as the dust jacket touts “The New York Times Bestselling author of Kochland.” He also authored Meat Racket, which takes a critical look at the corporate concentration taking place in the food industry. Perhaps Mr. Leonard sees himself in the mode of the socialist Upton Sinclair of a previous era. At any rate, the professional Left has had issues with the Koch brothers because of their occasional support for conservative or libertarian think tanks and efforts.

To be sure, the perspective in this book is that of a journalist left of center.  In many ways, it echoes William Greider, a left-leaning journalist in the late 1980s who voiced similar concerns about the Federal Reserve in his books Secrets of the Temple and later, Who Will Tell the People.

At least traditional Liberals of the day and Conservatives shared a concern about the concentration of immense power in the hands of an unelected elite, that has close ties to Wall Street interests.

Leonard is particularly concerned with the development of Quantitative Easing, the Federal Reserve operation to buy large quantities of government debt to be held on its own balance sheet and its close association with ZIRP, or zero interest rate policy.

To tell his story, he concentrates on following one of the few FED governors who often dissented, Thomas Hoenig of the Kansas City Fed. To some extent, it is the tale of the clash between professional economists like Ben Bernanke and actual bankers like Hoenig. Also getting an honorable mention is Richard Fisher of the Dallas FED.

What Leonard sees as a problem is that Quantitative Easing morphed from being a program to deal with financial emergencies to a policy that is used in good times as well. The background to the latter really was pushed by Bernanke, who felt the Fed needed to move to stimulate the economy because Congress was unable to act.

It is a story of mission creep. The FED by law is supposed to deal with somewhat two contradictory goals derived from the errors of Keynesianism. It is supposed to balance price stability with full employment. These are the primary goals enshrined in law.

It was felt that higher inflation must be tolerated to get full employment as per the Phillips Curve. We say the errors of Keynesianism because the stagflation of the 1970s and 1980s showed that high unemployment and slow growth could coexist with high inflation, and full employment could exist with low inflation in the 2000s,  which is not at all the relationship Keynesians espoused.

Nevertheless, there is a structural political risk when an unelected board decides to take bold actions that affect every American (and the world) because that agency feels Congress is dysfunctional and cannot act appropriately. No one voted for them to fill the void. And there is an additional risk when Congress imposes more tasks on the FED such as engaging in the Left’s view of social justice and environmental reforms.

The FED is supposed to be independent of such things, but increasingly it is simply becoming another institution corrupted in its purpose by the Left.

QE as it is called injects bank reserves and lowers interest rates, giving retail banks, investment banks, and hedge funds an ever-increasing supply of cheap capital, thus enriching the financial food chain that lives off the nourishment of the FED.

This allows for leverage deal-making, huge stock buybacks that support equity prices, as one investment banker washes the hands of another.

Thus, a whole industry, that can direct the investment direction of the country, grows in wealth and power from the actions of an unelected board of so-called experts at the FED. These experts in finance migrate back and forth from the financial industry to the regulatory body that supervises them, demonstrating “regulatory capture.” It is hard to know where the role of the FED begins and the power of Wall Street ends.

A good example is the current Chair of the FED, Jay Powell. He formerly was a Wall Street lawyer and leveraged deal maker with Carlyle Group. Ironically, Powell at times was critical of QE and he is now in the uncomfortable position of trying to reign it in.

QE makes asset price inflation possible, something the FED actually promotes because it is supposed to create a “wealth effect.”  However, other than making a certain class of asset owners famously wealthy and powerful, there is scant evidence it has helped the entire economy grow.

Asset price inflation is hard to contain as it can spread and now has spread to consumer price inflation. Consumer price inflation impacts the masses.

Zero interest rates do more than that, however.  Leonard spends considerable time discussing arcane things such as “leveraged loans” and “collateralized mortgage obligations.”  In short, the FED has supplied the cheap and copious quantities of money for all manner of financial engineering, which has made hedge funds like Bain and Carlyle (both close to political power) very rich, while promoting the offshoring of American jobs to Mexico and China.

He gives some case studies such as Rexnord, an industrial firm from Milwaukee, that is leveraged up multiple times by investment bankers (Jay Powell himself), all the while shutting down production in the US.

He follows the experience of John Feltner who worked as an engineer for Rexnord, became a union leader, and later lost his job as the plant closed when the jobs were shipped to Mexico.  Feltner as a union man is shown hoping that a Republican Donald Trump, might be able to save his job.  Who looks after the interests of the working man?

This is one of the areas where at least the moderate Left and the MAGA right have interests that intersect. The MAGA right also worries about such power in the hands of unelected elites and does not think it acts in the interest of America. America and American workers should come first, not hedge funds creaming profits from leveraged buyouts.

Both sides worry about asset bubbles created by the FED, and both sides worry about the concentration of political and economic power in the hands of a few bureaucrats and big businesses.

The MEGA right believes in free enterprise, not cartels that get special favors and cheap capital from quasi-government agencies.

Neither side has given enough attention to this problem.  If the government was forced to borrow in the markets the huge deficits it is generating, interest rates would already be higher.  The FED by buying all this debt, and covering up the negative consequences, has enabled a spending drunk Congress to massively increase the size of government. The liberal sees the same process and sees increased corporate power. In a sense, both are correct.

It has made the asset owners of stocks, bonds, and real estate richer while making those that rent poorer, those that use bank deposits poorer, and those on fixed incomes poorer. In short, the FED has engaged in a massive transfer of wealth from the poor to the rich, all while following the orders of Congress and politicians from both parties that claim laughably that “they are for the little guy.”

So, if you are a moderate liberal or a conservative with populist leanings, this book offers arguments and case studies where the two sides might agree more than one might think.

One certainly walks away with a better understanding of how the FED has become the secret arsonist that works for the fire department.  They get to blow huge financial bubbles and then are tasked with cleaning up after them and then remarkably, they get to start the process over again. The arsonist is never arrested.  All this, of course, is in the name of “financial stability” and oversight by experts.

Although the book can’t cover the entirety of this great monetary experiment, the book narrowly focuses on the U.S. While the FED is the central bank of the U.S., it also actually functions as the central bank of the world, lending money to foreign banks in trouble through swap lines and intellectual leadership. Yet all major economic systems from Japan and China to the UK and the EU, are pursuing similar policies. The lords of easy money rule most of the world. Unfortunately, they may be breaking more than just the American economy.

One can’t know for sure, but because of certain shared viewpoints, one would suspect Christopher Leonard and former Congressman Ron Paul might very much enjoy having a discussion over a cup of coffee, or something stronger.