I came home from my job at Goldman Sachs in a daze on October 19, 1987. I had made thousands of dollars, more money than I had ever had before, or ever will, in a single day. But I was in my early twenties with a young family and I didn’t know if the world as I knew it would even exist the next day. For the stock market had crashed unexpectedly, in a one-day drop worse than even the crash of 1929 that presaged the Great Depression.
Thanks to the rapid and massive intervention of the Federal Reserve under the leadership of Alan Greenspan, the United States did not suffer widespread economic disruption as in the 1930s. Before long, in fact, things were back to normal. normal, and less than three years later, the Dow Jones Industrial Average hit an all-time high.
The lessons learned from this event would be redeployed in an increasingly massive way each time the country faced subsequent crises: the terrorist attacks of September 11, the Great Recession of 2008 and, more recently, the pandemic. In each case, the Fed pumped more money into the economy, eventually inventing new tools with arcane acronyms, such as QE (quantitative easing) and SPV (special purpose vehicles). And in each case, the economic disruption never approached the chaos of the 1930s. But, as Christopher Leonard effectively argues in “Lords of Easy Money,” this is not without real social implications and real risks. long-term.
Historically, the Fed has had two mandates, maximizing employment and minimizing inflation, and a primary tool for doing this, which is the money supply. He uses this tool, monetary policy, to manage interest rates, which are essentially the price of money. (If supply, in the case of money, exceeds demand, rates fall.) If the economy overheats and demand for goods and services goes out of balance, prices rise and we get l inflation, which the Fed compresses with interest rates. increases, especially in the early eighties, when inflation peaked at fourteen percent and the Fed pushed interest rates close to twenty percent. Sure, unemployment soared and the economy was pushed into a recession, but inflation was brought under control. Until now.
Leonard structures his narrative around the increasingly disfavoured views of Thomas Hoenig, a former Kansas City Fed chairman who, when he served on the all-powerful Federal Open Market Committee (FOMC), gained a reputation as a being the only one to vote against then-President Ben Bernanke when it comes to rolling out QE in times of growing economic stability. Hoenig’s main point is that by keeping the system flush with liquidity and interest rates close to zero in good times, the Fed’s ability to get back to normal is hampered by the market’s negative reaction to many such actions, making the agency’s toolkit less effective in bad times. (Recent history suggests that the Fed’s way of dealing with each new problem is simply with a bigger tool, i.e. more money spread more widely. The jury is out on whether it will come down to the home or not.) in early 2021, when growing signs of inflation were seen as transitory symptoms of pandemic-induced supply chain disruptions, a problem that would correct itself. But since then the Fed has announced plans to fight inflation in 2022 with all its tools, so we’ll see who’s right this year, with the stakes high for everyone.
More disconcerting than questionable predictions of impending doom are Leonard’s explanations of the winners and losers in all of this. He makes the compelling case that the growing concentration of wealth in America is the direct result of these Fed policies, since Fed actions are, by nature, confined to financial markets. He explains how hedge funds and private equity funds — like the Carlyle Group where current Fed Chairman Jay Powell made his fortune — and others are thriving on abundant liquidity and favored zero interest rates. by the Fed over the past decade. And he shows how all of this directly harms the working middle class, using the story of John Feltner, who apparently did everything we asked of American workers, and still found himself working for less and less money. as private equity firms disrupted the operations of companies like the one he worked for.
You can’t blame the Fed entirely. Its tools and scope are limited and its operation is, by design, undemocratic. It’s the federal government and its fiscal policy, whether it’s Trump’s tax cuts that exponentially increased wealth inequality, or the CARES Act and disaster relief bills. of pandemics that have at least partly tipped the scales the other way, which can and must be the counterbalance. Rather than the Fed quietly pumping trillions of government dollars into the economic coffers of the wealthiest Americans, Congress could instead pump trillions into the working class by, say, passing the proposed infrastructure and stimulus packages. by the Biden administration. But democracy is no match for the filibuster, and so we have to rely on the Fed to lead the economy, for better and for worse.
This is all complicated, by design, but it profoundly affects America and the world. Leonard traces the rise of the Tea Party and Trump to the ramifications of an economy controlled by monetary policy. Leonard covers a lot of ground, and I often found myself quibbling with his conclusions. But its real achievement is in making it mostly digestible and understandable, using old-school stories about heroic characters like Hoenig and Feltner to turn the pages.
“Lords of Easy Money: How the Federal Reserve Broke America’s Economy”
By Christophe Leonard
Simon & Schuster, 384 pages