Lords of Easy Money - book review

Baby boomers have enjoyed a financial fixture of declining interest rates for about forty years.  Declining interest rates drive down the cost to borrow money, reflected in higher nominal prices for housing, stocks, and other assets, not because of any change in the underlying value, but rather, the reduced cost to acquire and hold assets.  What happens when a decades long tailwind stops?  Or reverses?

The Lords of Easy Money chronicles how the Federal Reserve has managed this continued ‘fix’, mostly over the decade since the Global Financial Crisis (GFC), and how asset and income inequality, have grown under these policies.  The question few can answer is how much economic disruption will ensue now that consumer price inflation emerges, after decades of asset inflation.   

The book begins with a focus on the Federal Reserve president from St. Louis, Tom Hoenig, a lone dissenting vote on the Federal Open Market Committee (FOMC) for many years.   Hoenig’s background helps to understand how he was shaped to become the contrarian.  He served in Vietnam as an artilleryman, performing multi-variant mathematical analysis where errors can produce dire consequences (his team recorded no friendly fire errors).   Multi-variant equations compound variations, some of which are by necessity subjective, magnifying errors.   This complicated process guides public economic policy. 

Hoenig’s master’s thesis examined the increasing role and costs states had assumed in government sponsored social programs after World War II.   His focus on the ability of states to manage budgets with unpredictable future tax receipts urges caution with variability in forecasting, in order to minimize social disruption through improved modeling.    His PhD work foretold the decline of community banks as economic forces for consolidation grew.   As he began his professional career, he was caught up in the maelstrom of the S&L crisis, serving as messenger and enforcer of government oversight for failing banks, including $40B Continental Illinois, the largest bank failure ever (in its day).   One insight was how asset inflation creates risk with collateral to debt ratios: when inflated assets fall, debt to equity can go underwater, even faster with enough leverage. 

The book outlines how the Fed actually operates, under 12 Fed regional Presidents, rotating six votes within the Federal Open Market Committee (FOMC)) and seven voting governors who are nominated by the President and approved by Congress.  With a majority, the governors set the agenda.

A telling exchange between Bernanke and President Fisher (Dallas), Bernanke said 'don’t let your friends in private biz over influence a decision for trained economists.' Hmph.

The response to shutting down the economy during Covid could have been far worse.  (Making the risk of a more virulent pandemic an interesting topic.). People are still spending PPP cash and other transfer payments, supporting corporate earnings and GDP, two years after the government dropped it on the economy (a fiscal policy, not a monetary policy matter).  What’s interesting is that more macroeconomists didn’t foresee the monetary inflation a 40% increase in M2 would cause.   Most economists were on board with the “it’s a temporary supply-chain driven inflation” line.   Hindsight’s 20-20, but nobody saw this?   Thus, this inflation can be viewed as another cost of Covid.   How bad could the next pandemic be? 

We discussed the important distinction between asset inflation and consumer inflation.  It is myopic to watch only consumer inflation, when asset inflation has been such a popular trend with Boomers.

The book also covered shadow banking, Venture money, hedge funds, all of which took on greater influence from the seven years of Zero Interest Rate Policy (ZIRP), Risk on!

Fed has become the market maker in seized markets.   Ultimately they’re rewarding bad behavior.

Paulsen didn’t like Bear Stearns because of their handling of the Russian debt crisis.  When Bear went to the Fed, Paulson said NO.   The Fed gets to pick winners.

Quantitative Easing #4 (QE4) was released during the pandemic.  Mnuchin and Powell (primarily) made the decision to flood the economy with money.  In a country structurally defined by limited concentration of power, five old white guys decided to flood the economy with money. Consumer inflation anyone?

Our path forward as a country is limited.  We’re worried.