'The Lords of Easy Money' by Christopher Leonard
How the Federal Reserve Broke the American Economy
I read a book a week and review it every Sunday.
Have you ever wondered why stock and asset prices are through the roof? Why income inequality is out of control? Why the rich keep getting richer while the poor and the middle class stay stagnant or are worse off? Why the rich live completely different lives from the rest of us? The answer is the U.S. Federal Reserve System (“The Fed”), which is the only institution in the world that can create (or print) the U.S. dollar at will. The Fed creates money and deposits them into big banks, called “primary dealers,” that deal directly with the Fed. There are about twenty-four of these banks that seed the economy with dollars directly with the Fed, including Goldman Sachs, JP Morgan, etc.
In the news media, the Fed is portrayed as if it were one bank, but it’s actually a network of twelve regional banks, all controlled by a central office in Washington, DC. The Fed’s powerful Federal Open Markets Committee (FOMC) meets every six weeks to effectively determine the value of the U.S. dollar and to set the supply of dollars in the economy. The FOMC also sets interest rates. It is a very powerful committee made up of regional bank presidents and the Fed Board of Governors, and chaired by the Fed Chairman. The Fed Chairman and the Board are appointed by the President and confirmed by the Senate.
The Fed slows the economy by raising interest rates. It speeds up the economy by lowering interest rates. The interest rate is the cost of money. When rates are high, it’s harder for businesses to get credit and expand, and for individuals to get mortgages and other loans. When rates are low, it’s easy to borrow money because institutions and individuals cannot make money by saving, so they lend out their reserve cash to seek profit (“search for yield”).
The American financial system totally collapsed in 2008. The economy was on the brink of another Great Depression. Politicians responded by bailing out the Big Banks (crony capitalism) and passing massive regulations like Dodd-Frank (huge mistake, in my view, but that’s a post for another day), further entrenching the power of the big banks and driving community banks out of business. Between 1913 and 2008, the Fed gradually increased the money supply from about $5 billion to $847 billion. But between 2008 and 2010, the Fed printed $1.2 trillion. In other words, the Fed more than doubled the monetary base in less than two years, and continued to dramatically increase the money supply throughout the decade of 2010s and even to this day via a policy instituted by formed Fed Chairman Ben Bernanke called “quantitative easing”.
The other important policy of the Fed in the wake of 2008 was to lower the interest rate to zero for years after. These two actions by the Fed—-pegging interest rates to zero and printing an unprecedented amounts of money—-fundamentally transformed the American economy. It disproportionally benefitted a very small group of people who owned assets, punished wage earners and those who tried to save money, stoked stock market and other asset bubbles, widened the gap between rich and poor (the top 1% owns 40% of all assets; the bottom 50% owns only 5% of all assets), and created an environment of cheap debt and heavy lending that encouraged Wall Street to make riskier and riskier loans, potentially creating the kind of bubble that caused the 2008 financial crisis in the first place. What followed was a decade of 2010s characterized by slow growth, depressed wages, and rising income inequality. At the time, Fed Chairman Ben Bernanke was the Tony Fauci of the economy. The same Fed policies of low interest rates and wild money printing, in the wake of the coronavirus pandemic, has created an inflationary period unheard of since the stagflation days of the 1970s (the Fed has now raised interest rates to contain inflation).
“In many important ways, the financial crash of 2008 had never ended. It was a long crash that crippled the economy for years. The problems that caused it went almost entirely unsolved. And this financial crash [the 2020 crash due to the coronavirus pandemic] was compounded by a long crash in the strength of America’s democratic institutions. When America relied on the Federal Reserve to address it economic problems, it relied on a deeply flawed tool. All the Fed’s money only widened the distance between America’s winners and losers and laid the foundation for more instability. This fragile financial system was wrecked by the pandemic and in response the Fed created yet more new money, amplifying the earlier distortions.
“The long crash of 2008 had evolved into the long crash of 2020.
“The bills had yet to be paid.”
I read a book a week and review it every Sunday.