A review of The Lords of Easy Money: How the Federal Reserve Broke the American Economy, Christopher Leonard (Simon and Schuster), £25
There is nothing better than a crisis when it comes to making money, but only if you are already very rich.1 Christopher Leonard’s The Lords of Easy Money is not just a testament to this adage. It explains the lengths to which, following the 2008 global crash, the people who ran the Federal Reserve—the United States’ equivalent of the Bank of England—guaranteed that it would come true. Between 2007 and 2017, the Fed adopted quantitative easing (QE) to flood the world’s money markets with $3.5 trillion, five times more than it had printed in the first 100 years of its existence, thus quintupling its balance sheet. In addition, up to 2015 and again in 2020, it employed a zero interest rate policy (ZIRP) in order to force banks and other lenders to invest in riskier and risker ventures and ensure that “anybody was punished for saving money”.2 The result? Just in the first five years of the programme, between 2007 and 2012, major US corporations received an estimated bonanza worth some $310 billion. At the same time, US household savers lost approximately $360 billion through lower earnings on interest rates, and insurance companies and pension funds were hit with $270 billion of losses.
However, Leonard’s fine book does not just present the dry figures. It describes, at times dramatically, the way the Fed reached its decisions, how they were enacted and the effect they had, not just on Wall Street and the major US banks, but also on medium-sized companies and the people they employed. Moreover, it describes the incredible damage the Fed’s policies caused to the world’s financial system.
The effects of the Fed’s policies were, from the beginning, predicted. Leonard highlights the projections of Thomas Hoenig, a US banker and economist who was a member of the 12-person Federal Open Market Committee (the body that sets US interest rates) at the time these policies were set in motion. He argued then, and continues to argue today, that they would drastically increase inequality by enriching the wealthiest and pauperising the poorest, and that they would be difficult, if not impossible, to bring to an end. These are predictions that have come true with startling effect.
Leonard provides fascinating detail on how the Fed brings about rate changes, and how this was changed radically during ZIRP and QE to ensure the nation’s banks lost their traditional refuge for storing reserves—short-term Treasury bonds—forcing them to offer cheaper and cheaper credit and seek to lend to new businesses that they would not have considered before. The Fed’s new procedure also established a sort of conveyor belt whereby hedge funds were encouraged to borrow money from banks in order to buy billions in bonds and sell them to the Fed for a profit via one of Wall Street’s “primary dealers” such as Goldman Sachs. The result of both strategies was a cascade of new cash “looking for a place to live” and the creation of greater and greater amounts of debt throughout the economy.3
Leonard uses the mounting debt of a medium-sized, Wisconsin-based manufacturer of engineering components, Rexnord, to describe the result. Even before the 2008 crash, the company had been loaded with $2 billion of debt, care of a global asset management company, the Carlyle Group, and then a private equity firm, Apollo Management LP. This cost it $105 million in interest payments alone, which was more than its annual profit. In 2012, however, investment bank Credit Suisse, inspired by the huge sums being pumped into the markets and by the Fed’s clear message to lend, came to Rexnord’s aid, refinancing $1 billion of its debts. However, the bank was not interested in keeping the loan but rather in syndicating it and selling it on to institutional investors such as pension funds. In doing so, it turned to a financial instrument, the collateralised loan obligation (CLO), which had been created alongside the collateralised debt obligation (CDO): a package of loans made famous for its role in the contagion it caused across global markets in the 2008 crash. Prior to ZIRP and QE, the CLO had been spurned by dealers because of the risks involved, but the years of easy money raised its attractions. In 2014, Credit Suisse bundled loans such as Rexnord’s into a series of 11 CLOs, worth around $6.7 billion, and sold them to a variety of institutions, including several pension funds.
By now, though, analysts were beginning to suspect a problem. The Fed’s largesse had created a market that had no bottom apart from the one that it set. Investors could now believe it would be impossible to lose. The value of instruments such as CLOs and other so-called leveraged bespoke loans more than doubled from $300 billion in 2010 to $617 billion in 2018. What is more, the covenants (terms) they contained placed fewer and fewer restrictions on borrowers; this was to such an extent that Wall Street dealers termed them “cov-lite loans”.
Leonard quotes Credit Suisse dealer Robert Hetu, who had the job of selling such risky loans to investors: “It’s tough. You see what people agree to and you’re like: ‘Oh my god. Do you realise what you’re agreeing to?’”4 Yet, the easy money ensured the buying frenzy continued, making the cov-lite loan the industry standard. By 2019, they accounted for 85 percent of the leveraged loan market.
The effect on companies such as Rexnord was not surprising. Its overall focus switched from engineering commodities to engineering financial products for its owner, Apollo. It became central to the owner’s wheeling and dealing on the financial markets, and it was loaded with even more debt. By 2016, its ability to pay off interest payments had become unsustainable; in May of that year, it effectively announced it was for sale and proceeded to decrease its debt in order to make it attractive to potential buyers. One of the first assets it chose to sell was its original factory in Milwaukee.
Leonard follows the career of one of Rexnord’s workers, John Feltner, who started work there in 2013. He started on a $60,000 salary, some $20,000 less than his previous job at an auto-parts maker and with worse benefits and healthcare provision. When the Rexnord plant closed in 2017, he got a job at a hospital on $40,000—and with even worse benefits and healthcare. Meanwhile, Rexnord’s chief executive officer, Todd Adams, was rewarded with a $12 million pay-off, making his estimated net worth around £40 million.
The era of easy money had not just created greater inequality. It had also made the markets much more vulnerable to potential disasters. One of the most dramatic chapters in Leonard’s book, “The invisible bailout”, describes the events on Wall Street on 17 September 2019, when the global finance system faced a collapse that would have been twice as large as the one in 2008. The precise circumstances that precipitated this incident concerned the behaviour of hedge funds and were centred on the movement of repurchase agreements (“repos”): short-term (often overnight) loans, which also featured in the turmoil that engulfed London’s money markets in October 2022.
Hedge funds survive not only by taking risks but also by seeking out and exploiting what Leonard calls a “wrinkle” in the financial markets. In this instance, it was the minute difference in price between a Treasury bill (basically a government-issued IOU) and a futures contract on that Treasury bill, that is, the repo: a promise to deliver the bill to someone on a certain date at a certain price. Hedge funds on Wall Street had been taking advantage of the easy money regime in order to gamble on these minute price differences, levering up their bets so that for every dollar they had 50 more dollars to use for trading. In Leonard’s words, “It was easy money, like collecting millions of loose pennies off the sidewalk”.5 Between 2014 and 2019, the total value of such gambling rose from around $200 billion to $900 billion. Everything worked as long as repo rates stayed low but, if they went up, it would destroy the trade.
Just such a rise happened in September 2019 when a combination of major corporations paying their annual tax bills and the Fed’s quarterly auction of Treasury bills required huge sums of money to be drawn from the market. The resulting drain of cash forced up interest rates, leaving the hedge funds with no option but to begin selling off assets, such as bonds and Treasury bills, in order to remain in business. The ensuing panic saw rates shoot sky-high; the Fed was staring into the abyss. Its only option was to swamp the market with $75 billion in the form of overnight repo loans, kicking off a programme of injections into the system that continued until the end of October 2019.
The onset of the Covid-19 pandemic also showed just how vulnerable the global markets had become as a result of the easy money regime. This time the Fed ended up bailing out the system with $625 billion in bonds. It also persuaded Congress to invest $454 billion into the system, enabling it to loan £4 trillion in new debt. Leonard tracks what happened to all that money. It is no surprise that the biggest chunks ended up in the pockets of the richest.
The final prediction that Hoenig and others had made at the beginning of the easy money regime was that it would be difficult to terminate. That, of course, is precisely what has happened. Leonard tracks the shocking events on Wall Street surrounding the “Powell pivot”, when Fed chair Jay Powell announced in January 2019 that he would stop raising interest rates after four years of having done so. He also describes the market volatility, dubbed the “taper tantrum”, in May 2013 that accompanied the announcement that QE would be gradually decreased. That time, the big losers were foreign investors, with the value of the currencies of developing nations such as Turkey, Brazil, Mexico and Poland falling by 4 to 5 percent.
As Leonard says, the 2008 crash has never ended. The issues that caused it have never been addressed. Instead, they have been hidden by a deluge of easy money that has distorted the global money markets, enriched the wealthiest and enabled investors to gamble with riskier and riskier trading in the knowledge that the Fed will always bail them out.
The book has faced criticism, however, from left-wing commentators in the US, such as Tim Barker and Timothy B Lee, because of its lack of economic analysis and the author’s choice of “hero”, Thomas Hoenig. Hoenig’s views on monetary policy are influenced by the Austrian school of economics associated with Ludwig von Mises and Friedrich Hayek. In turn, these economists strongly influenced the arch-champion of monetarism, Milton Friedman. Margaret Thatcher and Ronald Reagan were perhaps the most famous admirers of all three thinkers, and particularly the putative results of the policies their theories are said to have engendered.
Lee, in his Full Stack Economics website, argues that far from hurting workers such as John Feltner, the decade-plus period of easy money almost certainly benefitted workers in a host of other industries.6 Moreover, he provides evidence that makes clear the Fed’s massive bailout of the system in 2020 helped produce the fastest recovery in employment in US history, which followed the Covid-19 lockdown. Barker also provides figures that disprove the claim that the era of easy money significantly increased wealth inequality.
Criticism does not just come from left-wing commentators. In his recent book, Alan S Blinder, a former vice-chair of the Fed and a champion of Keynesian economics, describes Hoenig as a “first cousin” of monetarism, and mocks his advocacy for “raising interest rates modestly” in 2010, at the height of the crisis in the months following the collapse of Lehman Brothers.7 Blinder also makes the point that, by then, Friedman’s claim in 1963 that inflation is “always and everywhere” a monetary phenomenon—a statement that launched a controversial attack on Keynesianism in the 1970s—had long been proven wrong, at least in terms of the development and enactment of monetary policy in the four decades since he had made it. He also alleges that one of his heroes, former Fed chair Paul Volcker (the “Babe Ruth of Central Banking”), performed as if he was following monetarist principles when he jacked up interest rates to 20 percent in June 1981.8 After the event, however, he made it clear the performance was a subterfuge—keeping the money supply under control was an “easier way to get public support” for higher interest rates.
That US monetary policy has become a critical aspect in the management of the US and, by extension, much of the global economy, has, according to Blinder, been the case ever since “a die (of sorts) was cast” in 1967 under Lyndon B Johnson’s administration. Until then, policy makers had looked to Keynesian fiscal measures (taxation and public spending) as well as monetary ones in order to boost demand during a recession. However, when it came to dampening demand during an inflationary boom—when higher taxes and spending cuts would be necessary—monetary policies took centre stage “thereby taking the onus off politicians”.9 Such manoeuvring, as well as the tightening gridlock between the Democrats and Republicans, whereby political agreement on managing the economy has become near impossible, has placed the onus on the Fed to steer policy.
Yet, the Fed is not the only central bank to have undergone significant change as a result of the years of quantitative easing and the huge bond buying programmes that the Covid-19 crisis instigated. As left-wing liberal historian Adam Tooze says in his Shutdown: How Covid Shook the World’s Economy, on gaining independence in the 1970s and 80s, central banks refused to monetise government debt, and any suggestion they should buy government bonds was out of the question. Today, however, they have become “more like warehouses” for such bonds.10 It is anyone’s guess as to how long it will take for them to sell them, and how much profit or loss the sales will produce. This makes any assessment as to who gained what from the easy money regime covered by Leonard almost unknowable.
Finally, two questions arise from the era of easy money. First, as Leonard makes clear, the “lords of easy money” steered US monetary policy toward encouraging investors to plough cash into riskier and riskier projects, so why did so little of it go into productive industry? After all, production is the key source of the surplus value that keeps capitalism running. Second, why did the enormous period of quantitative easing never result in inflation? Significant inflation did not kick in until Covid-19 lockdowns were eased and economic take-offs were quickly throttled by bottle-necked supply chains.
The answer to the first lies in the long-term decline of the rate of profit: the amount of surplus that productive capital is able to extract from its investments. It is this that explains why capitalists have for the past three decades sought higher gains from investments in the global finance system via ever-more sophisticated instruments—such as derivatives, collaterised debt obligations and so on—where higher returns could be attained.
The answer to the second follows from the first. Most of the cash never actually became cash. It remained in the finance markets in the form of bonds, repos, Treasury bills and so on, where it was ploughed into the stocks, shares and financial assets that only the rich can afford: a world that is seemingly divorced from the reality of the wheels of industry and commerce where real wealth is supposedly created.
Karl Marx made clear, however, that capital’s finance markets—the credit system—came about as soon as workers’ labour power, with the capacity to produce more value than it consumes, became available as a commodity:
The owner of money and the owner of labour power enter only into the relation of buyer and seller… But the buyer appears also from the outset in the capacity of an owner of the means of production… The class relation between capitalist and wage labourer therefore exists… It is not money that by its nature creates this relation; it is, rather, the existence of this relation that permits of the transformation of a mere money-function in a capital-function.11
As David Harvey says in The Limits to Capital, in other words, “Money could not be converted into capital if wage labour did not exist”.12
As soon as money is transformed, via the existence of wage labour and labour power, capital sets off on its desperate campaign to smash down any hindrance to the release of money that can be transformed into capital, and the smoothest way to do that is through the creation of the credit system—the forerunner of today’s finance markets.
The credit system enables not just the break-up of hoarding. The creation of value via the exploitation of labour power requires continuity and smooth coordination over a productive system that is replete with discontinuity and discordance. What is more, the all-important profit rate that governs investment can be equalised only if money capital can move quickly from one sphere of production to another, while accumulation and reinvestment require periodic outlays of large sums, which would otherwise have to be hoarded. As Harvey says, “For these and other reasons, the credit system emerges as the distinctive child of the capitalist mode of production”.13
Marx goes on to make a critical distinction between the owners of money capital—the investors of interest-bearing capital, such as the Carlyle Group and Apollo Management—and productive capitalists such as Rexnord, which employ capital in the accumulation of surplus value. The importance of this distinction becomes clear in the formation of fixed capital, such as factories, railways, harbours and so on, where large amounts of capital are required to be invested over long periods of time. Here the owners of money capital invest in the expectation of a share of the surplus value produced in the future—a form of investment that Marx called fictitious capital inasmuch as it does not exist until its realisation in real value form. Their claims or titles of ownership to future value, which Marx referred to as “paper duplicates”, are circulated on the finance markets, just as Carlyle’s investments in Rexnord were, and profits were made as a result. Nonetheless, these profits were fictitious until Rexnord itself had accumulated the surplus value that would eventually turn them into a reality. In other words, owners’ claims to fictitious capital—the paper duplicates—can fluctuate according to finance market movements “quite independently of the movement of value of the real capital for which they are titles”.14
It is this “independent movement” of interest-bearing capital and the fictitious capital it sources that, in Marx’s words, becomes the “fountainhead of all manner of madcap forms” that Leonard’s book so graphically illustrates.15 The Lords of Easy Money, no matter its lack of serious analysis, provides a fantastic record of the “madcap forms” that world’s biggest financial market is capable of producing, and just how easily it can collapse into crisis as a result.
The book ends with a comparison that is worth quoting:
In the 1990s, labour productivity in the US increased at an average rate of about 2.3 percent. During the decade of ZIRP, it rose by 1.1 percent. Real median average earnings for wage and salary employees rose by 0.7 percent on average annually during the 1990s, but rose by only 0.26 percent during the 2010s. Average real GDP growth rose an average of 3.8 percent annually during the 1990s, but by only 2.3 percent during the recent decade. The only part of the economy that seemed to benefit from ZIRP was the market for assets. The stock market more than doubled in value during the 2010s. Even after the crash of 2020, the markets continued their stellar growth and returns.16
- • Ben Bernanke, the Fed chair responsible for introducing ZIRP and QE, was one of three economists awarded the Nobel Prize for Economics in September 2022 for “significantly improving our understanding of the role of banks in the economy, particularly during financial crises”.
Alan Gibson is an Socialist Workers Party member in Hackney, London.
Notes
1 Thanks very much to Rob Hoveman for providing guidance on drafts of this article.
2 Leonard, 2022, p211.
3 Leonard, 2022, p116.
4 Leonard, 2022, p180.
5 Leonard, 2022, p253.
6 Lee, 2022.
7 Blinder, 2022, pp43 and 309.
8 Blinder, 2022, p124.
9 Blinder, 2022, p22.
10 Tooze, 2021, p148.
11 Marx 1974a, p32.
12 Harvey, 2006, p253. Chapters 9 and 10 of The Limits to Capital are worth studying on this issue.
13 Harvey, 2006, p253.
14 Marx, 1974b, p47.
15 Marx, 1974b, p465.
16 Leonard, 2022, p302.
Reference