The Washington PostDemocracy Dies in Darkness

Inside the ideological divide between the Fed’s board and its bankers

Thomas Hoenig in 2011, when he was serving as president of the Federal Reserve Bank of Kansas City. Hoenig frequently disagreed with then-Fed Chair Ben Bernanke. (Andrew Harrer/Bloomberg)
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There are many books about the Federal Reserve, most of them about its chairman, probably the only Fed official the majority of the public ever hears about.

Christopher Leonard’s “The Lords of Easy Money” is a timely addition — appearing just as inflation is making headlines — that focuses on the president of one of the 12 regional Fed banks, and not a very important bank at that. His star is Thomas Hoenig, who from 1991 to 2011 presided over the Federal Reserve Bank of Kansas City. Unlike the Ivy League types who have served as recent Fed chairs — Ben Bernanke (MIT), Janet Yellen (Yale) and Jerome Powell (Princeton) — Hoenig was not one of the elites who seem to reign over the Beltway.

Hoenig was a plumber’s son from Fort Madison, Iowa, who attended Catholic schools; enlisted in the Army, serving as an artilleryman in Vietnam; and got his Ph.D. in economics from Iowa State. In 1973 he went to work at the Kansas City Fed. He stayed for 38 years.

As bank president, the modest Hoenig was chauffeured by limousine to meetings at the Federal Reserve Board’s D.C. offices, the cavernous temple of American finance, just as Bernanke was prescribing unprecedented monetary medicine to revive the slow-growing economy. Although, as Leonard makes clear, Bernanke encountered more opposition than is generally acknowledged, only Hoenig, defying the Fed’s unspoken traditions, repeatedly voted against him. Bernanke became furious at Hoenig for upsetting the surface image of consensus, which he feared would weaken the Fed’s credibility (though surely dissent is healthy for any institution). Bernanke lobbied even more strenuously to head off “no” votes from his fellow governors, the seven officials who run the Fed.

This highlights an often-overlooked point. The Federal Reserve embraces two unequal hierarchies: the Board of Governors in Washington and the regional banks. When the Fed was created in 1913, the banks were designed as a check on power at the center (and on Wall Street). Back then, fear of centralism sprang from populists such as William Jennings Bryan, who hankered for easier credit for farmers. It is no small irony that today, anti-Fed populists on the right and on the left accuse the Fed of making credit too cheap and thus too accessible.

What matters to Leonard is the ideological gulf between the board chair — Bernanke, and later Powell — and regional bankers such as Hoenig. What did this divide mean in terms of policy?

Bernanke had been schooled in the Great Depression, when the Fed had failed to act with sufficient vigor. After the 2008 financial crash, Bernanke was all vigor. He lowered interest rates to near zero percent and embarked on large bond-buying campaigns (“quantitative easing”) to revive investment and spending.

Hoeing’s school was different. His formative period was the 1970s, years of epochal inflation and bubbles in oil, precious metals and farmland. And unlike the data-driven Bernanke, Hoenig saw close up how painful it was when asset bubbles popped and waves of banks in his territory failed.

The author, very much in Hoenig’s camp, says Fed policy planted the seeds for future bubbles and aggravated economic inequality. Since investment values rise when interest rates fall, zero percent rates were good for Wall Street but, putatively, didn’t do much for folks in Fort Madison.

Leonard writes vividly about a technical subject, thus: “Each dollar created by quantitative easing put pressure on the dollars that already existed, like water pushing into an overflowing pool.” He is correct that these policies achieved relatively modest gains and that (as Hoenig forecast) their effects proved difficult to reverse.

By focusing on a regional banker, Leonard offers a refreshingly non-Washington view. The author recounts a Fed Open Market Committee meeting in which the president of the Dallas Fed offered an example of how low rates could be fostering inequality. The official had spoken with the chief financial officer of Texas Instruments, who said his company was exploiting the Fed’s cheap money policy to buy back stock, adding, “I’m not going to use it to create a single job.”

That’s a powerful anecdote, but it’s not the full story. If Texas Instruments was repurchasing shares, its investors were pocketing cash. Either those investors were spending the cash, stimulating business, or they were reinvesting it in companies that were creating jobs. Sooner or later, the money had to go somewhere.

Leonard doesn’t explore the point. The simplicity that is his strength is also the book’s weakness. “The Lords of Easy Money” is a one-sided assessment that squeezes Bernanke into a rather black hat (I wondered about Leonard’s fairness when he reported that, in his memoir, Bernanke made many “mean-spirited” comments about Hoenig, without showing us any). There are similarly judgmental tropes about Wall Street “types” (“greedy”) and hedge fund managers (“greedy” again).

The author, whose previous books include “Kochland: The Secret History of Koch Industries and Corporate Power in America,” goes to lengths to establish that Bernanke’s post-recession policies induced a borrowing binge that was ultimately catastrophic, as per his subtitle, “How the Federal Reserve Broke the American Economy.” His trouble is that no catastrophe occurred. He therefore posits that “in many important ways,” the mortgage-related crash of 2008 “never ended.” Rather, it “evolved” into the crash of 2020, which makes Bernanke responsible for it as well. That makes for a good narrative but not good history. Before the pandemic, the U.S. economy was healthy. A virus shut it down, and with massive government help it quickly revived.

Similarly, to buttress his point that the Fed tilted toward the rich, Leonard says low interest rates benefited corporate borrowers and penalized individual savers. True — but what about the millions of people who took out loans? Didn’t they also benefit from low rates?

Leonard blames the Fed for tolerating bubbles without acknowledging the topic’s (much-debated) complexity. For one, not every bubble is the Fed’s fault; some result from Keynesian “animal spirits,” or emotional and psychological factors (what Warren Buffett once referred to as excessive wine-drinking). Even allowing for the Fed’s ability to dampen speculation, Leonard ignores the difficult trade-offs this entails. For instance, should the Fed engineer a recession today and throw people out of work, just to pierce the crypto bubble? Leonard attempts to frame the Fed’s reluctance as a departure, writing of a gradual “decision” to ignore asset bubbles, but this is misleading; asset bubbles were never the Fed’s primary focus.

Leonard elsewhere stretches for the sake of narrative coherence. There was no “wave of public sentiment” behind the Fed’s founding. The 1970s, when Hoenig was recruited, were not “a decade of race riots.” And Alan Greenspan’s verbal opaqueness hardly removed “the politics of money from the center of American public life.” The Fed was never at the center. If anything, the former chairman’s celebrity drew attention to the Fed.

Finally, Leonard creates an exaggerated sense of inflationary effect by loose application of phrases such as “printing money.” He writes that the Fed’s balance sheet nearly quintupled between 2007 and 2017, “meaning it printed about five times as many dollars during that period as it printed in the first hundred years of its existence.” But the Fed’s balance sheet is not a measure of money in circulation, what most readers would construe as “printed.”

The author is surely correct that many Americans view the Fed as an unelected power aligned with elites, perhaps contributing to the disaffection that exploded on Jan. 6, 2021. He might have explored their prejudices with more dispassion.

Roger Lowenstein is the author of “America’s Bank: The Epic Struggle to Create the Federal Reserve” and of the forthcoming “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War.”

The Lords of Easy Money

How the Federal Reserve Broke the American Economy

By Christopher Leonard

Simon & Schuster. 373 pp. $30