There are a lot of ways to assess the extent to which the Federal Reserve has exacerbated economic inequality. Some opinions lean toward the polemical or even conspiratorial, while I chose a more analytical approach in my recent book, “Engine of Inequality.” The business journalist Christopher Leonard brings a unique perspective to this critical question — by focusing on the personal — in his new book, “The Lords of Easy Money.”
Leonard’s book examines how the central bank’s policy of quantitative easing after the financial crisis worsened economic inequality in the U.S. It largely focuses on Tom Hoenig, who was then the president of the Federal Reserve Bank of Kansas City, opposing this monetary policy that pumped billions into the economy and encouraged bankers and others to make more risky loans.
Leonard’s book is not only a compelling read, but also an important contribution to understanding what the Fed did over the last two cataclysmic crises and why those who needed the most help instead got the worst of it. To be sure, Leonard’s more personal approach unfortunately omits another important angle: the political. Thus, we don’t know if Leonard’s terrific insights might also tell us what needs to be done in light of this book’s revelations to right economic inequality in this country.
As with any tale premised on the personal, “The Lords of Easy Money” relies on internal thoughts and scenes that Leonard could not have observed. The book opens with a compelling, but surely somewhat fictional, description of Hoenig waking up in a Washington, D.C., hotel room, dressing and presumably squaring his shoulders to gird for battle opposing quantitative easing in 2010.
As captivating as some of these details may be, it’s not entirely clear that it adds much to our understanding of the effects of Fed policy. Does one need to read about the time Hoenig spent in his youth working at his father’s plumbing-supply company to appreciate the important insights he has brought over the years to the Federal Open Market Committee?
Still, for all the cinematic effect, Leonard points to a vital, under-appreciated fact that led to Hoenig’s crusade. As Leonard rightly says, the definition of money and how much of it there is was once dictated at least as much by political will as by the Fed’s printing press and Wall Street’s might. Now, money is most importantly created by the central bank and no longer just for monetary-policy transmission. Instead, money flows copiously for financial-market and even credit allocation. Money is deployed in the trillions for objectives determined exclusively by each modern Fed chair’s belief in what he or she thinks is best with little regard for the consequences.
Leonard’s painstaking read of years of FOMC minutes leads him to describe much of the Fed’s reasoning as “magical thinking” that was remarkably wrong a stunning amount of the time. Leonard is particularly acidic when he points out that the Fed is lionized for curbing inflation in the 1980s and for countering the crises of 2008 and 2020. But the central bank often somehow escapes a bad rap for its market-transforming, anti-equality policy interventions that didn’t even work.
Leonard is also scathing — with good reason — about the Fed’s actions after the 2008 financial crisis. He rightly recognizes that the Fed overcompensated for its pre-2008 regulatory failings at the biggest banks with tough new rules for them. This inadvertently opened new avenues to even higher-risk activities, such as leveraged lending, by the biggest nonbanks. These turned the pandemic’s unavoidable macroeconomic shock into a financial-market firestorm.
“The Lords of Easy Money” also provides important, unprecedented insight into the repurchase-market crisis of 2019, a massive Fed intervention Leonard rightly dubs the “invisible bailout.” No one yet has so clearly shown how the Fed’s easy money so drenched financial markets that even spectacularly leveraged basis trading by the world’s hedge funds became a no-risk proposition. This $400-billion-plus market rescue was described by Federal Reserve Chairman Jay Powell as only “balance-sheet maintenance.” Leonard criticizes Powell and the central bank for bailing out the markets just as they began to self-correct.
Financial crises are, of course, disastrous, but market interventions at the first sign of trouble turn the Fed into a lender and market-maker of first resort, and the global financial system into a morally hazardous playground that benefits those willing to take the most chances.
Where Leonard goes astray is in his praise not only for Hoenig’s prescient opposition to quantitative easing, but also for his crusade at the Federal Deposit Insurance Corp. to reinstate the leverage ratio as the biggest bank’s binding capital constraint. Opposition to this was not only based on the banks’ desire to have the least burdensome capital regime, but also recognition that the higher a simple capital ratio rises, the larger the unintended consequences. Even with a leverage ratio less than Hoenig wished, the sum total of post-2010 rules redefined banking into a fee-based, trading and wealth-managing business that gutted mass-market financial intermediation even as it enabled the rapid-fire market ascendance of “shadow” banks free from even the lightest capital touch.
Asymmetric rules for companies in the same business breed aggressive regulatory arbitrage and experience proves it. In his fight for a leverage capital standard, Hoenig was stubborn, principled and determined, but that didn’t make him right.
It’s clear that Hoenig fought valiant campaigns — some right, some wrong — that took him through some of the most consequential financial-policy decisions of the last 40 years. Leonard’s storytelling takes us through the years in which the middle class in America was hollowed out. Many things caused this radical transformation of America from the land of opportunity to one of rampant opportunism.
The Fed isn’t the only cause, nor necessarily even the most important one. However, it played a major, albeit unintended, part in creating an economy that works for the few in a nation most Americans now think is headed in the wrong direction. Leonard’s book helps us hold the Fed to account and for that it is an important contribution.
