Estimated Reading Time: 5 minutes

The Lords of Easy Money: How the Federal Reserve Broke the American Economy, by Christopher Leonard, 373 pp, softcover, $13.40, ISBN-13: ‎ 978-1982166649, Simon & Schuster, 2023.

This book is a brilliant but damning description of the economic havoc wreaked on America’s plebeians by the patricians at the Federal Reserve, at Wall Street banks, at hedge funds, and at government agencies, especially the U.S. Treasury.

The havoc took place, and is continuing to take place, while elected Members of Congress were fiddling and continue to fiddle.

It may not have been the intent, but the book shows that both capitalism and democracy are broken. And they were broken by men and women with advanced degrees, mostly from Ivy League universities. 

Author Christopher Leonard is masterful in explaining in layman’s terms the inner workings of the Federal Reserve and how it creates money, controls interest rates, works hand-in-glove with Wall Street, and, in recent decades, developed such monetary “innovations” as quantitative easing (QE), zero-interest-rate policy (ZIRP), and purchases of long-term debt (Operation Twist). 

He describes with a reporter’s skill what these innovations wrought: the enrichment of Wall Street, inflated asset prices, bubbles in stocks and housing, mountains of debt, and the shifting of capital from productive uses to stock buybacks, financial engineering, and corporate buyouts, which in turn hollowed out companies, closed factories, and threw working stiffs on the street. 

Admittedly, I found the voyeuristic parts of the book to be particularly interesting. The organizational politics, social norms, and even décor within the Federal Reserve’s Eccles building in Washington are described. Also described are the personalities, communication styles, and monetary philosophies of some of the key players, including past and present Fed chairpersons, governors, and regional presidents. 

Reading like a novel, the book features protagonist Thomas Hoenig. The former President of the Kansas City Fed, Hoenig would go on to be vice chairman of the Federal Deposit Insurance Corporation, or FDIC. Hoenig is a Midwesterner and not a coastal elite, with a Ph.D. in economics from Iowa State.

While at the Fed, Hoenig consistently warned about the folly of quantitative easing and was often the lone dissenting vote at the regular meetings of the Federal Open Market Committee, or FOMC. Among other anecdotes, the book describes a speech he gave in 2006 to bankers at a resort in Tucson, Arizona, where he warned the audience that their embrace of easy money would end badly for them and the country. No one applauded at the end. The Great Recession and the bursting of the housing bubble followed two years later. 

Years after that, while at the FDIC, Hoenig gave speeches and lobbied Congress on the need to break up big banks into smaller ones and to increase banks’ capitalization. These actions would be much better fixes for what ails the banking system, he said, than the tens of thousands of pages of Dodd-Frank regulations and the Basil III accords. Naturally, the political power of the big banks kept that from happening. 

In contrast, recent Fed Chairman Jerome “Jay” Powell grew up in Chevy Chase, one of the wealthiest towns in America and a suburb of Washington, D.C. He attended the exclusive Georgetown Prep, and his family belonged to the elite Chevy Chase Club, as well as to an exclusive dining club. In the spirit of full disclosure, I must admit that I also grew up with country-club experience. I worked as a teen at an exclusive country club in St. Louis, Missouri—a club where Jews, blacks, and Italians were not welcome as members in those long-ago years. I was the only non-black in an otherwise all-black janitorial, kitchen, and wait staff in the club house. Thus, I might have a case of class envy. 

Powell graduated from Princeton and earned a law degree from Georgetown University. After a stint as a legislative aide, he went into investment banking. Eventually, he ended up at the Carlyle Group, one of the richest and most prestigious private-equity firms at the time. It was a firm that was headquartered in D.C., unlike most private-equity firms, because that gave it a competitive advantage, due to specializing in the buying and selling of businesses that relied on government spending.

Carlyle was an example of the revolving door between government and the financial industry. Leonard names names and shows Carlyle helped these people monetize their granular knowledge and personal connections in the industries they once regulated.

The book details how Powell took the lead in Carlyle’s leveraged buyout of Rexnord, an industrial conglomerate headquartered in Milwaukee that made high-precision equipment used in heavy industry, such as specialty ball bearings and conveyor belts. He and Carlyle loaded the company with unsustainable debt and made millions from the deal.

At the time of the buyout, Rexnord’s headquarters was in a bare-boned, modest building near a company factory in an industrial area. After Powell became a member of the company’s board of directors and helped manage the company, the management team began holding meetings at hotels and country clubs instead of the headquarters building. In 2014, he made the class separation complete between company minions and fat cats. As companies across the land have done, the executives moved into a renovated downtown office building. The new offices were a self-contained environment, elevated above the middle layers of management and the thousands of employees who worked at Rexnord’s global network of factories.

Such downtowns are a modern version of a Potemkin village. They hide the economic distress in working-class neighborhoods and the hinterlands. 

Tellingly, a new Rexnord chief executive was hired with a background in finance and not in engineering or manufacturing. Financial engineering was key to Carlyle’s strategy for the company. “The management team’s biggest maneuvers had to do with leveraged loans and rising stock prices, rather than conveyor belts or ball bearings.” Carlisle later sold the company to another private equity firm for more than twice what it had paid for the company four years earlier. 

As has become a common tragedy in America, Rexnord workers were fired, factories were closed, and operations were offshored. The book tells the story of a machine operator who lost his job when a factory in Indiana was transplanted to Mexico. He was offered a severance bonus if he would train his Mexican replacement. He refused.

All this destructive financial engineering was facilitated by the easy money and cheap debt created by the Federal Reserve, where, ironically, Jay Powell would become chairman. 

When Powell replaced Janet Yellen, he began normalizing the Fed’s monetary policy by winding down quantitative easing and raising interest rates. But the financial system had become so fragile that the stock market fell, and economic conditions became precarious. President Trump contradicted himself on his earlier position on monetary policy and began attacking Powell on Twitter and in the news media. Powell retreated from the normalization.

Author Christopher Leonard is better than most authors at being nonpartisan in laying blame, but he is not a perfect 50-50. He is about 53% left and 47% right. A sure giveaway is when he uses the adjective “far-right” in describing conservatives who railed against the Fed but doesn’t use “far-left” in describing liberals. This is in keeping with the convention of media and academia in using “right-wing” far more often than “left-wing.” 

Leonard also unfairly criticizes the Tea Party for keeping Congress from addressing the nation’s problems, by the party’s focus on cutting taxes. That’s a curious criticism in a book that exposes the economic carnage from the Fed’s easy money, a regimen that enabled the government to live beyond its means. Tea Party members may not have known how all the gears of government work, but at least they knew that the gear shift is not in the hands of middle- and working-class Americans.

But these are minor flaws in an otherwise excellent book.