THE LORDS OF EASY MONEY
How the Federal Reserve Broke the American Economy
By Christopher Leonard
As the U.S. economy bounces back from the Covid shock, we wait anxiously to see how the Federal Reserve Board will react. When will it raise rates? How fast will it unwind its trillion-dollar asset-purchase programs? With Build Back Better stalled in Congress, monetary policy is, once again, the only game in town.
In recent decades, the Fed has come to assume an ever more important place in public life. This is uncanny. There is no provision for a central bank in America’s Constitution. It has no role in the classic three-way separation of powers. Yet the question of who manages money and regulates credit is foundational for any modern society. It is not by accident that the Bank of England, the mother ship of modern central banking, dates to 1694 and the so-called Glorious Revolution, which set the British Constitution in its modern form.
America finally equipped itself with a central bank in 1913. After repeated financial crises and the populist upsurge of the 1890s, it could no longer be denied that managing money was an essential function of government. For nearly 60 years, the Fed upheld the American currency as part of a global, gold-backed system. With Richard Nixon’s decision in August 1971 to end gold convertibility of the dollar, the Fed in its current form truly came into its own. Money and credit are now the creations of policy and profit-driven business that have made the independent central bank into a pivotal institution.
In America, the half-century since the 1970s has also been one of profound social and political change. Society has become more polarized on lines of inequality, identity and cultural politics, so much so that many feel the “American dream” to be in question. Declinism clouds the horizon on both sides of the political aisle.
Given the coincidence, it is tempting to ask, are these two developments related? Is the rise of the Fed a symptom or perhaps even a contributing cause in America’s national crisis? In his latest book, the journalist Christopher Leonard wants to persuade us that it is both.
Leonard is the author of several works in the muckraking genre. Previous titles include “Kochland” and “The Meat Racket.” In “The Lords of Easy Money,” he explains how the central banking elite have pursued a Janus-faced policy. They have vanquished the forces of inflation conventionally understood, while unleashing a flywheel of financial speculation that benefits the top 10 percent, who own 84 percent of American equities, and most particularly the top 1 percent, who control 38 percent. Leonard doesn’t have much time for formal economics. He plays fast and loose with terminology and economic logic. But we get his point and it is a good one. This has been an era of loose money and the benefits have been very unevenly distributed.
Rather than economics, Leonard’s preferred idioms are the standard story lines and characters of American populism. “The Lords of Easy Money” spins a tale of innocence betrayed that reads like an update of “The Wizard of Oz.” To encapsulate the history of the Fed in the last 50 years, Leonard follows the career of Thomas M. Hoenig, the son of an Iowa plumber who rose inside the ranks of the Kansas City Fed. Through Hoenig’s eyes we see the interest rate shock of 1979 and the go-go years under Alan Greenspan. As Leonard tells it, Hoenig acquired a deep appreciation of the risks that excessive credit expansion posed in dealing with bankrupt community banks and overextended oil loans. From 1991 to 2011 as president of the Kansas City Fed, Hoenig had a ringside seat from which to witness the dot-com boom and bust and the housing boom that followed. When crisis struck in 2008, Hoenig supported the first round of emergency measures to stave off disaster. But when Ben S. Bernanke, the chair of the Federal Reserve, attempted in 2010 to launch a new round of stimulus, Hoenig reached a defining moment. Again and again, he voted no, eight times all told in 2010. It was a breach of Fed solidarity, but Hoenig’s common sense and banking experience told him that more stimulus would simply flow into asset prices. By contrast, as Leonard tells it, Bernanke’s unprincipled experimentation, in which he was vigorously supported by his fellow professor and successor at the Fed, Janet Yellen, stoked the flames of speculation.
To complete his populist triptych, alongside Hoenig and the irresponsible wonks, Leonard adds Jerome H. Powell, the current chair. In contrast to Hoenig, Powell is the slick upper-class operator. Rather than an example of hard graft, Powell’s is the effortless success story of a man without qualities. As Powell climbed gracefully up the greasy pole, Hoenig found himself sidelined.
The office politics of the Fed are well captured by Leonard, as is the intimidating physical setting. The fact that Hoenig is of German extraction and had a picture commemorating the Weimar hyperinflation in his office is a striking detail. Striking too is Leonard’s sleuthing into Powell’s time at the Carlyle Group and his role as a corporate raider, wreaking havoc with stalwarts of American manufacturing and their work forces.
But all too often the treatment seems trite. Leonard makes much of Hoenig’s humble background. But much the same can be said of Bernanke and Yellen. If they favored monetary expansion it wasn’t out of any inherited affinity for Wall Street. Conversely, Powell is no doubt wealthy, but as Fed chair he has been more open to issues of social justice than any predecessor. The context of 2020 and Black Lives Matter demanded no less.
This is the bigger question that lurks in the background of Leonard’s book. Central bankers are powerful. They regulate the flow of credit. In crises they make life-or-death decisions. But they don’t determine the structures within which they operate. It was Nixon who took the United States off gold. It was the Clinton administration that reshaped banking regulations. As the Paul Volcker shock of 1979 demonstrated, when the Fed unilaterally yanks the chain, it risks unleashing havoc.
Of course, the sort of people who end up on the Fed board are influential insiders. But figures like Yellen and Powell arguably have had more opportunity to set the parameters of the financial system during their time at the Treasury or in the White House than they did at the Fed. The Fed’s overriding mission is to drive the monetary machine, not to redesign it.
“The Lords of Easy Money” opens with a melodramatic scene in which Hoenig votes no to the second round of quantitative easing in November 2010. He was in a minority of one. But what would have happened if he’d had the majority on his side? What effect would withholding a moderate dose of monetary stimulus have had? It would surely not have changed the course of American social development or political history over the following decade. The main effect would have been, marginally, to slow the recovery.
If you are worried about wealth inequality in the United States, then the solution is not to tighten monetary policy but to make structural changes to the country’s financial system, starting with the undergrowth of shadow banking. Serious taxation of wealth and capital gains would also push in the right direction.
It would no doubt help if onetime central bankers, rather than cycling in and out of private finance, spoke out seriously in favor of reform. They would be doing the public a service if they spelled out the way that their hands were forced by the current incestuous intertwining of public debt markets with hedge funds and the like. Ultimately, however, it is politics that must grasp the nettle of change.
In the current dispensation, it may be flattering for central bankers to be cast as maestros, but in practice they are less the lords of easy money than its functionaries.
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February 22, 2022 at 05:00PM
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