REVIEW: 'The Lords of Easy Money'

Behind the scenes at the Federal Reserve

Simon & Schuster
January 30, 2022

"The power to print money—and to then decide who gets that money—has to be on the top ten list of superpowers," George Mason University economics professor Garett Jones has written. It's a superpower we've all wished we had. But unlike invisibility or X-ray vision, the superpower to create money actually exists. It's what central banks such as the Federal Reserve do every day.

Of course the power to print money and put it into the economy is not exercised by superheroes, but rather central bankers. They don't have dramatic origin stories or character arcs, and it's not always clear who are the good guys and who are the bad.

Christopher Leonard's book, The Lords of Easy Money, looks at how those regular people make extraordinary decisions that affect the economic incentives people face across the country. He turns his journalist's eye to some of the biggest stories in monetary policy over the past few decades and gives readers a less than flattering view of the inner workings of the world's most important central bank.

The book's quasi-protagonist is not Alan Greenspan, Ben Bernanke, or Jerome Powell, although each of them make frequent appearances. Leonard's focus is on Thomas Hoenig, who is most famous for casting dissenting votes on the Federal Open Market Committee (FOMC) as the president of the Federal Reserve Bank of Kansas City.

Dissenting votes are unusual on the FOMC, which is composed of Fed governors and regional bank presidents and sets the monetary policy for the United States by targeting interest rates. When the committee announces its decisions, it wants to be unanimous to assure the markets that it is 100 percent confident in its policy. There's a certain amount of sense to that idea. Markets hang on every word from the FOMC, and having everyone on the same page publicly helps to maintain consistency and stability.

The problem is that, most of the time, everyone is not actually in agreement. Monetary policy decisions are always complicated by observational equivalence, which is when the cause of a phenomenon can't be determined just by observing it. Take, for example, the market for apples. The equilibrium price of apples is where the demand for apples intersects supply. The price goes up, and someone asks you, "Why?" Based on that information, your best answer is "I don't know." It could have been from a change in supply, a change in demand, or both.

The FOMC, however, can't hold a press conference and say, "We don't know," and the questions it has to look at are a lot more complicated than the price of apples. In the macroeconomy, there are so many data points, variables, and actors to consider that the possibilities for observational equivalence are endless.

Yet people such as Hoenig who express a different opinion—and express it intelligently and based on decades of professional experience—are often dismissed as cranks. If Leonard's mission was to rehabilitate Hoenig's reputation among Fed watchers, he has made great strides to that end. Hoenig comes off as reasonable, thoughtful, and possibly prophetic, in the Old Testament sense of that word.

Hoenig was the lone voice crying out on the FOMC about zero interest rates and quantitative easing in the aftermath of the Great Recession. Leonard is careful to remind readers that Hoenig did not dissent from the emergency measures the Fed took to respond to the financial crisis. His dissent began after the emergency was over and the recovery had begun. He was concerned about the longterm impacts of keeping interest rates effectively at zero for years on end. The Fed didn't initially plan to do that, but Hoenig knew they'd have a hard time reversing course once it started, and he turned out to be right.

Leonard is skilled at explaining complicated financial maneuvering in a way normal people can understand. He describes the incentives that zero-interest policies create around investment and how those policies create asset inflation even if they don’t create price inflation. In the early 2010s, the actual cranks promised price inflation; price inflation was actually probably a bit too low for most of the decade. We got asset inflation in spades, with prices for everything from real estate to fine art going through the roof. The Fed knew that was going to happen, but Hoenig was alone in thinking that was worth casting a dissenting vote.

Aside from the more technical question of observational equivalence, there are other reasons FOMC members don't always see eye to eye. One that Leonard touches on is the tension between economists and non-economists on the committee—members tend to either be from the world of academia or from the world of private equity and banking.

These skillsets should complement each other: The academics have the theoretical understanding of which levers to pull, and the bankers have the practical knowledge to know how best to actually pull them. But the academics tend to view the bankers as unsophisticated, and the bankers tend to view the academics as being stuck in the ivory tower. Hoenig, for his part, straddles both worlds—he has a Ph.D. in economics (but it's from Iowa State, so the Ivy Leaguers still look down on it), and he was a bank regulator with the Kansas City Fed for many years before being president, so he knows how the business of banking actually works as well.

Jerome Powell does not even have an undergraduate degree in economics and is firmly from the private-equity side of the spectrum. Leonard details Powell's background with the Carlyle Group, especially as it related to the acquisition and subsequent sale of Rexnord, a Milwaukee-based industrial firm. His experience there, the author rightfully argues, informs his decisions as chairman now.

Leonard is equally wise to look into those experiences in a way that isn't overtly political. Monetary policy often doesn't come down to progressivism or conservatism per se, especially at the high levels of debate within the Fed. Leonard should know that better than anyone: He finds so much praiseworthy in Hoenig, who is currently a distinguished senior fellow at the Mercatus Center, part of the Koch network that was the target of Leonard's previous book.

To be sure, Leonard lets you know where he's coming from. He gives Glenn Beck an energetic two-minutes-hate and bemoans income inequality. He plays up class warfare by emphasizing every chance he gets that bankers wear fancy suits and go to fancy resorts. But that tone doesn't dominate, and between the explanations of how the financial industry works and the investigation of the dynamics of Fed decision making, there's plenty for people of all political stripes to pick up.

We keep the superpower of money creation separate from elected politicians for good reason. The incentives of pandering to voters with expansionary monetary policy are bad in theory and have proven to be bad in practice in countries all over the world. But being insulated from political incentives doesn't insulate the Fed from all bad incentives. The Lords of Easy Money is a good reminder of how uncertain a lot of monetary policy is, and the potential for major mistakes should encourage everyone to be a little humbler. Central bankers may have a superpower, but they definitely aren't superheroes.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Simon & Schuster, 384 pp., $30

Dominic Pino is a William F. Buckley Jr. Fellow in Political Journalism with the National Review Institute.