A Fascinating Page-Turner Made From an Unlikely Subject: Federal Reserve Policy

There’s one thing undeniably gratifying about an elegantly crafted morality story — and the enterprise reporter Christopher Leonard has written a great one, even when you suspect that the total form of it isn’t fairly as easy as he makes it out to be. “The Lords of Simple Cash” is an enchanting and propulsive story concerning the Federal Reserve — sure, you learn that proper. Leonard, within the custom of Michael Lewis, has taken an arcane topic, rife with the chance of incomprehensibility (or boredom), and constructed a riveting narrative during which the stakes couldn’t be any clearer.

The stakes, that’s, as Leonard and his protagonist outline them, which is the fulcrum on which this whole guide turns. “The Lords of Simple Cash” filters an argument concerning the Fed by means of the expertise and worldview of a retired central banker named Thomas Hoenig, who joined the Kansas Metropolis Fed in 1973, first as a financial institution regulator, then ascended the ranks to earn a seat in 1991 on the Federal Open Market Committee, the place actual selections about financial coverage get made.

For years, Hoenig — described by Leonard as a “rule-follower” — match proper in. With few exceptions, he voted sure to what Alan Greenspan, the chairman on the time, needed to do, after which voted sure to what the subsequent chairman, Ben Bernanke, needed to do. Then got here 2010, when Hoenig forged a string of lone dissenting votes on a committee of 12 the place unanimity was prized.

What Hoenig adamantly objected to was the Fed’s choice to maintain rates of interest at zero and start a brand new spherical of shopping for long-term authorities debt, a coverage often known as “quantitative easing,” which successfully injected trillions of recent {dollars} into the banking system — the “straightforward cash” of the guide’s title. An inflation hawk (so troubled by the prospect of rising costs that he was eager to restrict the Fed’s attain), Hoenig had been positive with such measures through the 2008 monetary disaster, when markets had been cratering; however he didn’t suppose that an unemployment price of 9.6 % amounted to the type of emergency that known as for turning extraordinary strategies for increasing the cash provide right into a matter in fact.

A big a part of “The Lords of Simple Cash” is given over to making an attempt to rehabilitate Hoenig’s repute, which took successful when, yr after yr, the inflation he warned about didn’t occur. However inflation did occur, Leonard repeatedly emphasizes, simply not within the type that individuals thought it will take.

What escalated weren’t shopper costs however asset costs: Within the final decade, the inventory market boomed whereas the true financial system sputtered alongside. Hedge funds, banks and personal fairness corporations had been all incentivized to create newer, riskier and ever extra unique types of debt. All that new cash was serving to to fund one other speculative bubble whereas concurrently leaving little room for the Fed to maneuver within the occasion of one other crash. Leonard says that this asset hypothesis additional enriched the rich few whereas work grew to become ever extra precarious for the numerous.

The final third of the guide introduces us to one of many many: John Feltner, who in 2013 landed a unionized job at Rexnord, a producer of heavy-industry tools, just some years earlier than the corporate determined to maneuver his Indianapolis plant to Mexico. Leonard has chosen Rexnord for example advisedly. First, beginning within the Eighties, a string of personal fairness corporations saddled Rexnord with a lot debt that the corporate’s cause for being grew to become the servicing of that debt. Second, one of many non-public fairness corporations that acquired Rexnord within the early 2000s was the Carlyle Group, and one of many companions of the Carlyle Group on the time was Jerome Powell, at the moment the chair of the Federal Reserve. Powell was appointed because the chair in 2018 by then-President Donald Trump — the identical Donald Trump whose populist rhetoric had gotten the vote of a pissed off Feltner two years earlier than.

All of this usefully highlights how excessive financialization has remodeled (or deformed) the financial system and our politics, even when Powell’s connection to Rexnord ended lengthy earlier than Feltner labored there and his job was moved to Mexico. Powell, who final week signaled a willingness to raise interest rates if inflation persists, is depicted as somebody so protean that it’s virtually as if he’s the personification of the monetary system writ massive — an improvisational, politically astute operator to Hoenig’s principled however doomed Cassandra. Powell’s good standing among the many Washington institution comes throughout as suspect, although Leonard has no endurance for anti-establishment conspiracy theories both, and he laments that criticisms of the Fed’s easy-money insurance policies within the final decade have primarily been the purview of “right-wing cranks.” He takes a substantial amount of care making Hoenig’s hawkishness sound like good outdated widespread sense — as if it’s merely the inevitable conclusion drawn by a stalwart steward of “prudence and integrity.”

Which it very properly could also be, although Hoenig’s hard-line place glides by means of this guide principally uncontested, with solely a scant sense of why it didn’t win over the opposite economists on the Fed. You wouldn’t know that there have been any critical developments in financial concepts since Hoenig was deeply influenced by the inflationary spiral of the Seventies. There isn’t any point out in any respect of modern monetary theory, advocated most prominently by the economist Stephanie Kelton, which takes to coronary heart a line from John Maynard Keynes: “Something we will really do, we will afford.” Even when Hoenig thinks it’s utter rubbish, it will have been good to see precisely how, when pressed, he makes his case.

Nor does Leonard deal with what may have occurred if Hoenig had gotten his manner again in 2010. What the financial historian Adam Tooze calls the “deflationary distress” of the Thirties loomed understandably massive within the Fed’s institutional reminiscence, a horrible reminder of what may occur when the establishment didn’t counteract a collapsing banking system by buoying the cash provide. To not point out that in 2010 the Fed’s actions indicated that it had turn into a guarantor not only for the American financial system however for the worldwide monetary system. Tooze’s latest books, “Crashed” and “Shutdown,” recommend that the relationships between the Fed, the U.S. financial system and the worldwide system have all been torqued to the purpose the place an urge to face athwart all of it, yelling “cease,” is futile.

Leonard (or Hoenig) is correct to acknowledge how precarious, and the way harmful, the present state of affairs is. Leonard (or Hoenig) is correct to name for some “long-term considering,” too. Nonetheless, “The Lords of Simple Cash” presents the complexity of the present system as if it had been merely disguising some unshakable fundamentals; there’s a satisfying readability to studying a guide that places the jumble of political and financial turmoil into such stark narrative phrases, however there’s extra to the story than that.