Inflation outbreaks always focus people’s minds on central banks. In the Federal Reserve’s case, our present inflationary times are no exception. From that standpoint, Christopher Leonard’s The Lords of Easy Money: How the Federal Reserve Broke the American Economy could not be better timed. It amounts to a sustained critique of an institution that, by Leonard’s reckoning, has well and truly lost its way and, to make matters worse, both reflects and embodies the deep dysfunctionality that characterizes the making of economic policy in America today.

A New York Times business journalist, Leonard presents a picture of a Fed that, to paraphrase Talleyrand’s alleged description of the Bourbons after their restoration in 1814, has largely learned nothing and forgotten nothing since the 1970s. For Leonard, the Fed’s general adherence to easy-money policies, which achieved a type of apotheosis in the form of quantitative easing, has facilitated asset bubble after asset bubble, and incentivized ever more risky behavior by not just Wall Street firms but also smaller banks and businesses across America.

In other words, far from being an institution that promotes long-term stability throughout the financial system, the Fed has become a facilitator of considerable turbulence throughout the world’s biggest economy. Making matters worse, Leonard maintains that the same policies have helped create winners and losers. The former includes big banks and the financially sophisticated who are the first to access and utilize cheap debt. The latter are the asset-poor, or who live from paycheck to paycheck, or who try to save money.

The Dissenter

Leonard’s thesis is not a new one. Many a Fed-watcher has lamented how serious monetary policy errors contributed to the dot-com and mortgage bubbles that blew up in 2000 and 2008 respectively. What’s different is how Leonard tells this story.

Much of Leonard’s tale is presented through the eyes—and, at times, direct voice—of the former President of the Federal Reserve Bank of Kansas City, Thomas M. Hoenig. During his twenty years in this position, Hoenig served as a voting member on several occasions on the Federal Open Market Committee (FOMC) that controls interest rates and the money supply. Here Hoenig earned a reputation, especially towards the end of his tenure, as the FOMC member most likely to formally dissent when he believed that his colleagues were making grave mistakes. In 2010, for example, Hoenig was the only one to vote against the FOMC’s easy money position at each of the eight FOMC meetings held that year.

This doesn’t mean that Hoenig was consistently at war with people like former Fed Chairs like Alan Greenspan or Ben Bernanke. Nor was he the Fed’s resident Cassandra. Hoenig’s overall voting record, Leonard stresses, reflects his awareness of the value of the FOMC projecting a unified position to markets. Nonetheless, Hoenig also brought to his position particular experiences and intellectual commitments which gradually led him to conclude that the Fed had ceased to do what any central bank should do: which is to take a long-term view and resist the perpetual short-termism of everyday politics.

Working in the Kansas City Fed throughout the 1970s and 1980s, Hoeing saw how low-interest rates and cheap debt had incentivized banks to support businesses engaged in highly risky endeavors, many of which turned out to be based on illusions and delusions. By Leonard’s account, Hoeing was deeply affected by the subsequent wave of bank failures that occurred in the early-1980s, not least because he was charged with deciding which banks in the Fed’s 10th District should be extended credit from the Fed and which should not. In short, Hoeing experienced all the drama involved in telling people that their economic life, as they knew it, was over. He never forgot the experience.

The background to these bank failures was the Volcker Fed’s determination to smash the inflation that engulfed the U.S. economy in the late-1970s. In retrospect, Paul Volcker surely did what needed to be done—and what others had lacked the will to do. But as Leonard points out, the Fed’s low-interest-rate policies over the previous decade as it tried to revive the troubled economy of the Nixon, Ford, and Carter years were at least partly responsible for the inflationary outbreak in the first place.

There were two basic emphases that Hoeing brought to his reflection on these issues. The first was that the effects of monetary policy adjustments show up considerably later in the future. Any reputable monetary theorist will tell you that there are always long and variable lags between monetary policy choices and their effects, some of which might be years in the making. Hoeing wanted the FOMC to pay more attention to this reality. Alas, the opposite occurred. Over time, Hoeing became frustrated that Fed interventions were driven more and more by the perceived need to “just do something” in reaction to short-term problems like a sudden uptick in unemployment or a downward blip in the market.

Hoeing’s stress on this point became core to his reputation as a monetary hawk. His position wasn’t one of “we must burn down the economy in order to save it” from rampant inflation, bankrupt banks, insolvent businesses, and serious capital misallocations. Hoeing’s hawkishness was defined by the conviction that monetary policy must be about the long-term. Why otherwise have a central bank whose relative autonomy from other government institutions exists to insulate monetary policy from the tyranny of the immediate? It followed, Hoeing believed, that the Fed “should follow the rules that it imposed upon itself,” instead of constantly junking them to respond to the very latest unemployment numbers. Again, that’s hardly a radical viewpoint. It did, however, become progressively marginalized inside the Fed as time marched on.

Hoeing’s second concern was that easy money policies were producing asset-price inflation (increases in the price of goods like stocks, bonds, housing, etc.). This problem had attracted Volcker’s attention, but throughout the 1990s and 2000s, the Greenspan Fed focused on consumer-price inflation (increases in the price of consumer goods), which is relatively easy to detect, but largely ignored asset-price inflation.

Admittedly, asset-price inflation can be hard to identify, and often only reveals itself when a bubble begins to implode. But when asset prices start to correct themselves (such as when traders start realizing that they can’t accurately price financial instruments like derivatives, or when Jack and Jill Citizen recognize that the housing market is vastly overvalued), the resulting turmoil can be truly destructive. As a result, the Fed finds itself having to intervene—big-time—and pumps even more money into the economy, thereby storing up trouble for the future.

The Politics of Money

Why, it might be asked, did the Fed focus primarily on consumer-price inflation? One reason, Leonard suggests, is that legislators and ordinary citizens pay attention to that number. At this point, we start to realize that, for all today’s legitimate worries about Jerome Powell’s Fed becoming politicized, the Fed over which Greenspan and Bernanke (and, to be fair, most of their predecessors) presided was already a highly political animal.

In one sense, that’s to be expected. To imagine that any state institution, even those endowed with considerable legal or even constitutional autonomy, can be completely immunized from politics, or can ignore machinations concocted in the White House or Congressional committees is quixotic. This, however, is not Leonard’s concern. His claim is that, since the mid-2000s, the Fed has been steadily absorbing responsibilities that belong to the fiscal authorities: i.e., Congress and the Executive Branch.

Nature, the axiom goes, abhors a vacuum. That’s as true of politics as everything else. For Leonard, it was telling that as the Financial Crisis overwhelmed the U.S. economy in 2008, “the Fed had printed and disbursed more than $1 trillion while Congress was still arguing about the language of the stimulus bill.” That reflected and reinforced a trend whereby an institution that is by design un-democratic gradually began to assume responsibilities of the elected fiscal authorities who were increasingly paralyzed by their inability to agree about very much at all.

The Fed’s growing propensity to act as an “over-mighty citizen”—a phrase coined by former Bank of England senior official Paul Tucker in his 2018 book about central banking, Unelected Power—was most manifest when quantitative easing became a feature of what I’ll call peacetime monetary policy. It’s one thing to print money during a world war or a global financial meltdown. A hawk-like Hoenig voted to support all the FOMC’s actions during the Financial Crisis because he believed the nation faced a dire emergency in 2008 that called for extraordinary measures. But adopting quantitative easing as a way to stimulate economic growth because Congress is perpetually deadlocked isn’t just an economic problem. It raises significant political questions that neither Fed officials nor many legislators seem anxious to discuss.

A Fed concerned about the constitutional proprieties of intruding on Congress’s fiscal prerogatives (or, more mundanely, worried that a drift into fiscal policy could compromise its ability to run sound monetary policy) might have used some of its then-considerable institutional capital in the late-2000s to state publicly that it should not be doing the job of elected officials. This, one may speculate, could have functioned as a wake-up call. Instead the Fed’s decision to embark on a second round of quantitative easing in 2010 followed by QE3 in 2012—a time in which growth was slow but the economy was recovering—indicated that America was being pushed into a new financial and political world by an institution that didn’t have to account to voters for its decisions.

Are We Doomed?

As it happens, quantitative easing did not go on forever. By 2012, several Fed governors (including one Jerome Powell) were expressing concerns about the scale and length of quantitative easing: so much so that Bernanke, by Leonard’s account, was having to engage in a fair amount of aggressive lobbying to get his way.

But the damage, financial and political, had already been done. This was underscored by the Fed’s actions throughout 2020 as America found itself beleaguered by a pandemic. The quantitative easing programs deployed by Bernanke in the late-2000s and early-2010s were quickly reimplemented, almost as a form of standard operational procedure, but on a scale that dwarfed QE1, QE2, and QE3. As in the past, asset prices started going up in QE4’s wake, but the Fed insisted that it would continue its interventions as long as consumer price inflation came in at 2 percent.

When consumer price inflation rose from 1.4 percent to 7 percent between January and December 2021, the Fed started signaling that it might change course. Yet as Hoenig observes, however necessary low-interest rates and quantitative easing might have been in the short-term, they have placed, in his words “an ever-larger mortgage against the nation’s future income.” What are we going to do once the latest crisis is over? Where is the next asset bubble? When is it going to implode?

I happen to think that there is a good case for a relatively independent central bank, albeit one that is laser-focused—whether by legislation, constitutional mandate, or even something like the classic gold standard—upon price stability. But even such a Fed would require an internal culture that emphasizes that there is no point to having monetary rules unless you adhere to them. That means resisting pressure brought to bear by governments and interest groups who can’t see beyond the next election or financial quarter, or who think that monetary policy can somehow compensate for their failures to tackle some of the U.S. economy’s deeper problems, ranging from over-regulation and excessive government spending, to a ramshackle tax system and metastasizing cronyism.

Put another way: until the Fed summons up the inner courage to say “no” to those loath to fulfill their responsibilities, I’m inclined to agree with Leonard that the long crash which began in 2008 will continue. And the price will be as much political and constitutional as it is economic.