The Lords of Easy Money

By Christopher Leonard

Simon & Schuster/January 2022

Reviewed by Doug Porter

February 11, 2022

With central banks around the world on the precipice of not just beginning to raise interest rates but also considering a reduction of their asset hoard, Christopher Leonard’s deep dive into the Federal Reserve’s zero-interest rate policy (ZIRP) and quantitative easing (QE) couldn’t be more timely. The single most important reason that global financial markets have stumbled out of the gate in 2022, with both stock and bond prices weakening markedly, is the growing realization that the hyper-loose policies of the past two years are coming to an end. A critical issue in the next few years is how markets and global economies will fare without the heavy-duty monetary largesse of QE. Leonard’s underlying view is: Not well.

His three main contentions are that QE is:

• Dangerous, because it poses a variety of long-run, and sometimes unknowable, risks and is so difficult to exit.
• Ineffective, because its rewards are uncertain and/or small for the broader economy.
• Unfair, because those rewards largely accrue to the very richest in society.

To many, a 373-page book on the technical details and plumbing of Federal Reserve policy may be about as inviting as a plumbing problem of your own. Perhaps to compensate, the book’s subtitle is: How the Federal Reserve Broke the American Economy. Even for a long-time sceptic of QE, there is a strong urge to push back. After all, the U.S. unemployment rate is now just 4 percent, close to the lowest in 50 years. And, while the big problem of the day — inflation spiking to 7 percent — is a concern, it’s hardly symbolic of a broken economy, and can scarcely be fully pinned on the Fed. Curiously, Leonard spends very little time fretting about the inflation risks surrounding QE, focusing much more on potential distortions (‘misallocation of resources’) and inequality.

“When America relied on the Federal Reserve to address its economic problems, it relied on a deeply flawed tool,” Leonard writes. “All the Fed’s money only widened the distance between America’s winners and losers and laid the foundation for more instability.”

Probably the biggest distortion from the Fed’s QE is the extent to which it fuels asset price inflation. Leonard drives home the point that central banks have done a good job of controlling price inflation (at least until recently), but have let asset prices rip. It’s a debate we have all the time in our department—what is the best course for monetary policy when inflation is stable, but asset prices are running wild (whether it’s stocks, crypto, real estate, art, or baseball cards). Now that price inflation is no longer slow or stable, central banks are backpedaling furiously. I have a lot of time and sympathy for the argument that the Fed went too far in its easy policy regime. The central bank had a hammer (ZIRP) and a mallet (QE), and saw every economic problem as a nail. But the reality is that not every problem is a nail.

Leonard does a good job of setting the historical backdrop, explaining complex concepts in a straightforward manner, and bringing his subjects to life. The book studies three main characters in some depth:

Thomas Hoenig, president of the Kansas City Fed from 1991 to 2011, who voted against every FOMC decision in 2010, including the second round of QE in November of that year. It is generally rare for any FOMC member to dissent at a meeting, let alone every decision for an entire year.

Jerome Powell, current chair of the Federal Reserve, who is characterized as an early sceptic of QE when he first joined the Fed board in 2012, but later spearheaded the most aggressive phase of QE in 2020.

John Feltner, a former employee of Rexnord, a company Powell bought out when he worked in private equity. Feltner lost his job when the ball bearings factory he worked for in Indianapolis was shut and production moved to Mexico (around the same time that Carrier, in the same city, made a similar announcement and became a focus in Trump’s 2016 campaign). He is portrayed as the victim of the financial engineering spawned by easy money. While it’s an interesting diversion, and a curious link to Powell, it’s not at all convincing that the company’s experience relates to free money…more to free trade.

Hoenig is profiled as the lone, near-heroic, voice holding out against QE. But, in fact, there has been some opposition almost all along the way. Not all regional Fed presidents vote in any given year (only 5 of the 12 do so), and many of the others were at least as stridently opposed as Hoenig’s on-the-record votes.

Still, the details on the inner workings of Fed votes, and the background on Powell may not be well known by those who think they know him and/or the Fed. While Powell is not an economist, Leonard suggests that “his long career could be considered an extended training course in the modern financial system and its shortcomings.”

The book’s detail will appeal to those who already study this subject for a living. The fly-on-the-wall specifics on some Fed meetings and the inner workings at the Fed are fascinating. (former Fed Chair Ben Bernanke is portrayed as a bit of a villain, but Leonard helps explain how the taper tantrum developed in 2013 when Bernanke was basically forced by others on the board to dim market expectations of the scope of QE3.) The author even goes into great detail on the Fed’s Eccles building, with many references to its massive oval table. Having sat in that room a few times, I can confirm that it is impressive, but not really germane to the debate over the appropriate policy stance.

As enjoyable as the book is, and as much as I agree with some of his main contentions with QE, Leonard takes the argument too far. QE may have exacerbated inequality, but there are many other forces at work, playing a much bigger role (e.g., globalization, winner-take-all technologies). And, it ignores the fact that QE likely did help reinforce the economic recovery from the 2008 meltdown (avoiding a Great Depression II) and certainly helped avoid a more long-lasting economic downturn in the past two years.

On balance, I would recommend the book, with the warning label that the author has a very clear but not always convincing slant. He suggests that QE was designed and implemented solely to boost equity markets—definitely not the case, as the goal was to bring down long-term borrowing costs, which indirectly helps all asset prices (real estate, for example). Still, this highly readable book provides a worthwhile and timely entry into the monetary policy debate, a debate that is about to get even hotter.

Last word to Hoenig: “An entire economic system. Around a zero rate. Not only in the U.S. but globally. It’s massive. Now, think about an adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think no one will suffer? Do you think there won’t be winners and losers? No way.”  

Doug Porter is chief economist and managing director, BMO Financial Group. His weekly Talking Points memo is published by Policy Online.