The Lords of Easy Cash: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Simon and Schuster, 2022
viii + 373 pp.
Christopher Leonard’s book brings to mind the familiar line from Faust: “Two souls, alas! dwell in my breast.” Leonard provides a penetrating criticism of the Fed’s large expansion of the money supply, which has actually won for him applaud from the kept in mind hard-money supporter and good friend of the Mises Institute James Grant. Leonard is a well-known journalist and has actually participated in substantial research study on the Fed, in specific on the documents of Thomas Hoenig, for several years vice president of the Federal Reserve Bank of Kansas City, and the extensive notes in the book demonstrate how assiduous he has actually remained in his research study.
Why, then, do I suggest with my opening quotation that there is a problem with the book? We can best answer this concern by asking another question: What is wrong with the Fed’s inflationist policy? 2 actions right away suggest themselves. Both are right, and both are backed by Leonard. Initially, inflation disrupts the economy, in specific causing organization cycles through bank credit expansion, and the possibility of run-away inflation and the collapse of the financial system can never be dismissed. Second, efforts by the Fed to restore the economy through inflation typically end up offering big subventions to abundant individuals whose companies are bailed out due to the fact that they are “too huge to fail.” The Fed hence widens the space between the rich and the poor
But if both of these responses are right, and both are stressed by Leonard, our question repeats: Why exists an issue with the book? The response, I suggest, is that Leonard sometimes overstates the second answer at the expenditure of the first. In some cases, though luckily not always, he seems to be suggesting that a government-controlled economy, so long as the “individuals” through a democratic election support it, is perfectly all right. The genuine hazard is that the rich “fat felines” run monetary policy to their advantage and the typical people’s hinderance.
Mentioning the New Offer, he states: “The biggest burst of fiscal action in U.S. history happened after the Great Depression and the election of Franklin Delano Roosevelt in 1932. Over the following decade, Roosevelt and a Congress with substantial Democratic bulks passed a set of sweeping and interlocking laws that happened understood jointly as the New Offer. This is essential to consider because of the effect it had on the economy and its plan of winners and losers. The New Deal laws empowered labor unions, broke up or controlled big monopolies, produced the very first transparency laws for Wall Street, and put the banking system on a tight leash. The New Deal was confrontational. It antagonized powerful interests, and it removed their power.”
For Leonard, “fiscal policy” is extremely preferable, and the increase of the Fed’s power is bad due to the fact that it reduces the significance of federal government costs in managing the economy. “On one side of the divide there is monetary policy, controlled by the Federal Reserve. On the other side, there is financial policy, which comes from the democratically controlled institutions like Congress, the White Home, and state governments. Financial policy includes the collection of taxes, the spending of public money, and policy. America’s ability to conduct financial policy weakened slowly throughout the years as the Fed’s ability to carry out financial policy enhanced … But the one important truth about the wear and tear of executive and legislative power is that it was not unavoidable. For a minimum of a century or two, fiscal policy led the way in America, and the Fed, with its money- printing power, followed.” It is clear that Leonard longs for a return to those palmary days.
Despite this failing, Leonard’s book consists of numerous insights, and it is simple to see why James Grant applauds it. One of the most crucial of these insights comes from Hoenig, who served on the Federal Free Market Committee (FOMC), which sets targets for the short-term rates of interest, under Alan Greenspan and Ben Bernanke. Hoenig favored a restrained course of action, advising “that the Fed needs to focus on both of the inflation cousins, possession inflation and rate inflation. It held true that identifying out-of-control possession inflation was harder than discovering price 10|The Austrian|Vol. 8, No. 3 inflation. And property inflation was more difficult to stop without disrupting markets and making rates fall. However the outcomes of property inflation were ravaging. When property prices eventually fixed, and they always did, it triggered massive financial instability.”
This point is specifically valuable in response to critics of the Austrian theory of business cycle, who in past years have said to us, “Where are the rising rates that you state an expansionary financial policy produces? You have actually for years anticipated catastrophe, however the boom continues with prices that stay reasonably steady.” Paul Krugman and others of his ilk directed such queries to us in mocking tones, and they are sufficiently answered by Leonard; the effects of growth appear in property inflation. But of late, as rates increase quickly, the mockers make fun of us no more. Gone are the days when the madness of Modern Monetary Theory were solemnly dealt with as live choices.
Hoenig’s caution about possession rate inflation was set within a bigger context. The Fed should take account of “long and variable lags,” rather than act only to deal with a viewed emergency. Broadening the cash supply may momentarily prevent a crash, however the long term should not be overlooked. This warning is much better than nothing, however it misses out on the basic point that the Austrian school emphasizes. The depression is the restorative phase of business cycle, and the federal government needs to permit the marketplace to liquidate the malinvestments brought on by bank credit growth. Of this neither Hoenig nor Leonard has a glimmering.
The constraints of Hoenig’s method are evident in his response to Fed policy during the 2008 crash. Regardless of it being relatively contrary to his concepts, he supported the Fed’s huge expansion of the cash supply. After all, when confronted with an adequately excellent emergency situation, the Fed needs to act! As Leonard explains, “During the bailouts of 2008, the Fed printed nearly $875 billion. It more than doubled the monetary base in a matter of months … In just a few months after the stock exchange crash of September, the Fed’s balance sheet grew by $1.35 trillion, more than doubling the assets it currently had on its books. All of this was made with the understanding that these were emergency actions, a remarkable attempt to confront an extraordinary threat. The financial panic of 2008 threatened to plunge the worldwide economy into a deep anxiety … The Fed stepped in, as it had been created to do, and short-circuited the panic. Tom Hoenig voted to support each and every one of these actions when they were presented to the FOMC in a series of emergency meetings. He thought that this was the Fed’s task.”
Hoenig’s distinctions with Bernanke’s Fed came later. The Fed’s “quantitative easing” continued despite the fact that the emergency had passed. Although Bernanke and his associates were aware of the consequences, it was too difficult for the Fed to end the policy, as doing so would result in setbacks for those who had actually pertained to rely on the Fed’s largesse. Here Hoenig fixed a limit.
Hoenig is the book’s hero, but he is matched with an antihero. “Jay Powell entered this dispute from a position that was quite near to Tom Hoenig’s. Both gave voice to the idea that the Fed was a highly imperfect engine to drive financial growth in America. Hoenig’s critiques drew from his years of experience at the Fed. Powell’s critiques drew on his years of experience in private equity, and he used hard data and interviews with his market contacts to make his critique of QE both specific and alarming. Both men alerted about the way that the Fed was stiring property bubbles as it went after relatively small gains in the labor market. However this was where the similarities ended between Powell and Tom Hoenig. Powell, for all his critiques, never ever cast a dissenting vote. And Powell, unlike Hoenig, started to soften his criticism, and he ultimately pertained to embrace the policies he as soon as slammed inside the FOMC’s closed meetings. When this took place, Powell’s star started to rise.” In short, Powell offered out for “power and pelf,” as Murray Rothbard utilized to state.
Leonard has depicted very well the Fed’s policy of reckless monetary expansion. However we should not, as he desires, handle this policy by needing the Fed to follow strict rules and by subjecting banks to higher federal supervision, on the other hand wishing for a rescuer in the style of Franklin Roosevelt. We ought to rather follow Ron Paul, who “was pushing a motion to examine the Fed, giving the public a chance to better inspect and govern the central bank.” Dr. Paul’s program can be mentioned more succinctly and properly than this: End the Fed!