How the Fed Redistributed Wealth and Encouraged Reckless Corporate Behavior

The Lords of Easy Money: How the Federal Reserve Broke the American Economy, by Christopher Leonard, Simon & Schuster, 384 pages, $30

In 2010 Thomas Hoenig, then the president of the Federal Reserve Bank of Kansas City and a member of the central bank’s Federal Open Market Committee, thought he was seeing history repeat itself.

In the early 1980s, when he was a vice president at the Kansas City Fed overseeing bank examiners, he had a front-row seat to a boom and bust in land and oil asset values, which gutted the Midwest’s economy. That painful experience stemmed largely from the Fed’s loose money policy in the 1970s, followed by that policy’s sudden reversal. Hundreds of banks had loans that depended on soaring asset prices, and hundreds of banks failed. Hoenig was responsible for helping decide which banks would live and which would die. He saw “lives were destroyed in this environment” and “people lost everything.”

Remembering that experience a few decades later, Hoenig did something the collegial structure of the Federal Open Market Committee was designed to discourage: He dissented. He began voting against the Fed’s ongoing policy of quantitative easing (Q.E.)—that is, the injection of new money into the financial system by purchasing bonds from well-connected “primary dealers” on Wall Street—because he foresaw another ultimately unsupportable rise in asset values along with increasingly risky behavior by privileged market players awash in easy money.

In The Lords of Easy Money, business reporter Christopher Leonard relies on Hoenig’s heretical perspective as a narrative spine for his detailed reporting on the Fed’s thought and action before, during, and after the 2008 financial crisis. The Fed’s drastic and continuous reactions to that downturn, Leonard’s analysis suggests, created an economy that automatically redistributes wealth upward and creates nearly irresistible incentives for foolish choices, as big money chases ways to make more money in a near-zero-interest-rate environment where merely saving means losing.

The Fed’s allegedly crisis-ameliorating methods were complex, but the essential animating idea was simple: Create more money. From 2008 to 2011, the central bank conjured up as much new money as had entered the U.S. economy in the previous century, a 96,000 percent increase. The Fed’s “balance sheet”—a measure of the financial instruments it owns, which it buys from a select group of Wall Stre