The Lords of Easy Money

The U.S. Federal Reserve, America's central bank and the only institution empowered to create U.S. dollars, has operated since 1913 as a hybrid of government agency and private banking network. Its Federal Open Market Committee (FOMC) meets every six weeks to set interest rates and monetary policy. Business journalist Christopher Leonard argues that the Fed's experimental policies after the 2008 financial crisis, particularly quantitative easing (QE), a program in which the Fed creates new money to buy bonds and push down long-term interest rates, reshaped American economic life by widening inequality, inflating dangerous asset bubbles, and leaving the financial system deeply fragile.

Leonard anchors his account in Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, who on November 3, 2010, cast his eighth consecutive dissenting vote against Fed Chairman Ben Bernanke's plan to inject $600 billion of newly created money into the banking system. Hoenig, a sixty-four-year-old career Fed official raised in a working-class Iowa family, was by nature a rule-follower, not a dissident. His objections centered not on the inflation fears later attributed to him, but on the "allocative effects" of zero percent interest rates: the way such rates shift wealth from savers to asset owners, push banks toward speculation, and risk inflating the kind of asset bubbles that caused the 2008 crash. The vote proceeded 11 to 1. Leonard states that virtually all of Hoenig's predictions proved correct over the following decade.

Leonard traces Hoenig's worldview to formative experiences. After serving in Vietnam as an artillery fire-control specialist and earning a PhD in economics at Iowa State University, Hoenig joined the Kansas City Fed in 1973 as a research economist in bank supervision. His most important education came during the banking crisis of the 1980s, when Fed Chairman Paul Volcker raised interest rates to 20 percent to crush runaway inflation, triggering a collapse in farmland and oil prices that destroyed more than 1,600 banks. Hoenig oversaw emergency lending and watched the failure of Penn Square Bank cascade into the bailout of Continental Illinois, a bank so large that the term "too big to fail" was coined during congressional hearings about the rescue. From this crisis, Hoenig absorbed a central lesson: The Fed's decisions operate with "long and variable lags," meaning short-term interventions create long-term risks that take years to materialize.

Leonard examines the 1990s under Chairman Alan Greenspan, who moved the Fed to the center of economic policymaking while obscuring its power behind deliberately opaque public testimony, a practice known as "Fedspeak." Greenspan's Fed made a fateful choice to control consumer price inflation while ignoring asset price inflation, allowing the stock market bubble of the late 1990s to inflate unchecked. The dot-com crash of 2000 wiped out $1.76 trillion in value; the Fed responded by cutting rates to one percent, which seeded a housing bubble. Average home prices rose 38 percent between 2003 and 2007 before crashing, triggering the worst downturn since the Great Depression.

The 2008 crisis exposed a stark disparity: Congress was slow and divided, while the Fed printed over $1 trillion before Congress finished debating stimulus legislation. Bernanke slashed interest rates to zero and more than doubled the monetary base. Hoenig supported these emergency measures but began dissenting in 2010, when Bernanke proposed using QE as routine stimulus rather than an emergency tool. The midterm elections that year brought the antigovernment Tea Party movement to power in the House of Representatives, paralyzing Congress and leaving the Fed as the sole engine of economic policy.

After Hoenig's final dissent, QE proceeded through specially designated "primary dealer" banks on Wall Street, which sold bonds to the Fed in exchange for newly created dollars. The combined effect of QE and a zero-interest-rate policy (ZIRP) created a "search for yield": Because saving earned nothing, pension funds, insurance companies, and hedge funds poured cash into riskier investments.

Leonard introduces Jerome Powell, who joined the Fed's board of governors in 2012 after a career in private equity at firms including the Carlyle Group, where he had engineered leveraged buyouts that loaded companies with debt. At the Fed, Powell initially raised many of the same concerns as Hoenig, warning in January 2013 that many fixed-income securities were trading "well above fundamental value" and that a correction "could be large and dynamic" (142). He joined Fed governors Betsy Duke and Jeremy Stein in pushing back against further QE. Their resistance forced a compromise: Bernanke announced the Fed might begin tapering its bond purchases. Markets reacted with the "Taper Tantrum," a sudden spike in Treasury rates that demonstrated the fragility ZIRP had embedded in the system. The taper plan was abandoned, and a program intended to add $750 billion to the Fed's balance sheet ended up adding $1.6 trillion.

Leonard uses the industrial manufacturer Rexnord and one of its workers, John Feltner, to illustrate the real-world consequences of these policies. Under ZIRP-era pressures, Rexnord managed its crushing debt through stock buybacks and cost-cutting rather than product investment. In 2016, the company closed its Indianapolis plant and moved production to Mexico, eliminating roughly 300 jobs. Feltner found a hospital maintenance position paying about $46,000, continuing a downward slide from the $80,000 he once earned.

Meanwhile, Hoenig took a position as vice chairman of the Federal Deposit Insurance Corporation (FDIC), the agency that insures bank deposits, and waged an unsuccessful campaign to break up the too-big-to-fail banks by separating commercial banking from risky speculation. His plan drew bipartisan praise but was effectively dead on arrival: Congress had exhausted its appetite for reform, and the banking lobby spent roughly $1.5 billion on lobbyists between 2010 and 2013. Across the broader economy, corporate debt rose from $6 trillion in 2010 to $10 trillion by 2019, and roughly $7 trillion worth of bonds worldwide carried negative interest rates by 2016.

Powell became Fed chairman in 2018 and initially pursued normalization, raising interest rates and selling bonds. When markets tumbled, with the Dow Jones Industrial Average dropping nearly 19 percent by Christmas Eve, Powell reversed course in the "Powell Pivot," reinforcing Wall Street's belief that the Fed would always backstop asset prices. In September 2019, the repo market, the system of overnight loans where borrowers exchange Treasury bills for cash, seized up without warning as hedge funds' enormous leveraged bets strained the system. The Fed responded with emergency lending and bond purchases that created about $413 billion in new money.

When the coronavirus pandemic struck in March 2020, it exposed the fragility built up over a decade of cheap money. The Fed responded with the largest intervention in its history, creating roughly $3 trillion in ninety days by buying bonds, corporate debt, and even junk-rated securities for the first time. Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, but relief was distributed unevenly: More than half of Paycheck Protection Program funds went to five percent of recipient companies. The stock market recovered within months, while the Fed's Main Street Lending Program, designed for smaller businesses, purchased only $17 billion of a potential $600 billion.

Leonard closes by surveying the long-term damage. By late 2020, about 20 percent of large publicly traded companies had become "zombie companies" whose profits could not cover their loan costs. The bottom half of the U.S. population owned about two percent of all assets while the top one percent owned 31 percent. On January 6, 2021, violent extremists attacked the U.S. Capitol; the following day, the Dow closed at a record high. Hoenig, isolated during the pandemic, compared the 1990s and 2010s economic expansions: Labor productivity growth halved, gross domestic product growth fell from 3.8 to 2.3 percent, and real median weekly earnings growth dropped sharply, even as the stock market more than doubled. Leonard argues that the 2008 crash never truly ended but evolved into a long crash that the Fed's interventions widened and deepened, with the full costs still to come.