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Detroit has hosted the Super Bowl twice. Once in 1982, and once in 2000. Each time there was the routine commentary about how free-spending attendees would lift the Motor City’s economy. Except that there was no boost to speak of. That there wasn’t was a statement of the obvious, unless you were a consumption-focused economist; something that describes nearly every economist.

You see, in the real world of economic activity consumption is always and everywhere the consequence of actual economic growth. Production is the catalyst for all consumption, which is something non-economists know intuitively. For those not part of the insular world of charts, equations and theories, consumption is the reward for production. Consumption follows the investment in people and processes that enables abundant production in the first place.

The above truth speaks to why Detroit wasn’t revived by what was nothing more than a helicopter drop of money. No doubt wildly well-to-do people came into town to spend with abandon, but no business is going to expand and add workers for the long-term based on one weekend of feverish consumption. Basically voluminous cash was dropped into Detroit, business owners gladly exchanged goods and services for it, only for those owners to bank or invest the proceeds of a big weekend on the way to the funds rapidly exiting Detroit to far more productive locales well outside the city.

The simple truth is that money is a consequence of productive economic activity. Money naturally migrates to where there’s abundant production to finance, along with the financing of the movement of the production to higher uses. That all this money didn’t remain in Detroit is a waste of words. Money migrates to talent and productivity, yet what was Silicon Valley before Silicon Valley has been bleeding talent for decades. Money never stays put where talent is flowing out.

All of this and much more came to mind while reading Christopher Leonard’s wholly confused new book, The Lords of Easy Money: How the Federal Reserve Broke the American Economy. Leonard promotes the comical falsehood throughout his book (from now on titled, The Lords) that “the Fed’s one superpower is its ability to create new dollars and pump them into the banking system.” All of which is utterly meaningless and economically inconsequential without production. If the latter is scarce, the money serves no purpose. It exits, and without the stimulus that Leonard imagines. See Detroit yet again. A prosperous, Silicon Valley-like past isn’t a lure for return-seeking capital in the present.

Speaking of Silicon Valley, Leonard equates “cutting rates” with economic growth as through the Fed has an ability to turn vitality on and off with the proverbial light switch. Apparently Haiti didn’t get this memo about how easy it is to prosper. How about an airlift of Leonard’s book to Port-Au-Prince? According to the journalist, “When the Fed raises interest rates, it slows the economy. When the Fed lowers interest rates, it speeds up the economy.” It’s so simple! More on this bit of nonsense in a bit, but for now one has to wonder why Haiti doesn’t set up a powerful central bank to fix its problems. To Leonard’s facile mind, the answers are easy. But that’s a digression.

The above paragraph begins with a mention of Silicon Valley. Regarding this most prosperous of places, about a quarter of the way through The Lords Leonard references then Fed-Chair Alan Greenspan “cutting rates” in the early 1990s. According to Leonard, reducing rates as the economy was starting to gain lift “was the opposite of what the Fed should be doing according to the traditional models.” More realistically, what Greenspan did was irrelevant. As even Leonard seems to understand, a major catalyst for economic advance in the ‘90s was the internet, and the region (Silicon Valley) where the internet reached full flower. Does anyone seriously think Fed rate machinations explained the massive inflow of capital into the Valley, capital that was too expensive to be loaned given the high (90%+) failure rate of Valley start-ups?

Reversing the above scenario, what if the Fed aggressively sold bonds to Valley banks as a way of shrinking so-called “money supply.” Does any serious person really think that domestic and global sources of capital relentlessly in search of returns wouldn’t have reversed just this kind of central-bank action in a matter of minutes? What Greenspan did, and that Leonard oddly deemed consequential, was irrelevant given the globalized nature of capital obsessively in search of returns. The Fed can’t alter this truth. It can’t make Detroit prosperous, nor can it make the Valley poor. Talent, and the investment that follows the talent is what causes prosperity, not central banks. This rates constant stress given Leonard’s obvious belief that the Fed is the size credit dealer, deciding with rate fiddling when an economy should grow, and when it shouldn’t. Let’s try to be reasonable in the way The Lords is not.

It’s all a simple reminder of how very much Left, Right and Center in the U.S. massively overstate the role of the Fed in the economy. After which, it’s useful to add that the banks that the Fed projects its well-oversold influence through cannot go anywhere near Valley start-ups as is. Bank loans must perform. Period. Start-ups generally don’t perform, which is why capital has long been so expensive in northern California. Yes, you read that right. Expensive. If you want to fund your extraordinarily risky vision in the Valley, you will give up equity, not future income streams that are much less than certain. In short, the driver of so much economic vitality in the 1990s was a part of the country where low rates of interest were much less than meaningless. In Silicon Valley, growth capital is always pricey.

Which brings us to another major misunderstanding promoted by the author throughout The Lords. He contends that “When rates are low, money is cheap.” On its face such a contention reads as both innocuous and true, but all it takes to see why it isn’t true is to consider the banking industry itself. Leonard yet again naively believes that the Fed’s “superpower” to boost the economy is an ability to “pump” dollars into the “banking system.” Except that it’s long been quipped only slightly tongue-in-cheek that banks lend to those who don’t need the money. Put another way, banks at least try to lend to sure things. Except that what’s known and seemingly “certain” isn’t the stuff of booming growth. In short, even if the Fed could actually create or boost credit (it can’t), banks aren’t in the business of lending to intrepid drivers of future growth. Considering all this via Leonard’s contention about low rates and “cheap” money, the paradoxical truth is that lending rates at banks are low precisely because money is tight. Think about it. And then think some more. 

Now, and in the early 2000s, banks were paying low rates on deposits and lending nominally cheaply given the basic truth that they were rushing away from risk. If money had actually been as “easy” as Leonard naively contends, rates would have been higher to reflect banks taking much bigger risks as “easy” presumes. And for those who will inevitably quietly think “what about the sloppy mortgages” that banks generated and purchased, think again. The reality is that over 90% of the mortgages issued in the manic 2006-2008 range ultimately performed. Again, banks operate in an environment of very slim margins. Their loans don’t have an equity quotient. They must pay. The rush by banks into housing was a migration away from risk, and certainly away from concepts that actually drive economic advance. Housing consumption isn’t one of those. Remember, consumption is a consequence of production. When you purchase a house your dollars aren’t creating the next brilliant software, opening foreign markets, or curing cancer. Repeat it over and over again: housing is consumption.

Yet if you’re still not convinced that the importance of banks is in rapid decline from a standpoint of growth, please consider Michael Milken. His fortune is a direct result of banks lending to those who don’t need the money. Milken would find finance for the businesses of tomorrow that did need the money, that banks turned their noses up to, and who would pay high rates of interest for the privilege of accessing capital. To this day, high-yield is an extraordinarily lucrative form of finance. Does anyone seriously think it would be, and more broadly does anyone think investment bankers would rate such princely pay, if the Fed could truly decree money “easy” through low rates and money “printing”? Hopefully the previous question helps readers to understand for themselves the patently ridiculous reasoning that underlays this book’s charitably absurd thesis. “Easy Money”? There’s no such thing. In a real world of commerce that Leonard is only distantly in touch with, we borrow money for what it can be exchanged for. We borrow money for resources. To pretend as Leonard does that resource access is cheap, and that the Fed can make it so, brings new meaning to childish.

The problem here is that in trying to understand the economy, Leonard is limited in comprehension by what the Fed does vis-à-vis banks. In Leonard’s rather confused analysis of the world, the Fed quite literally has “dominion over the whole financial system,” and as the powerful leader, the Fed could and would “decide who got loans and who didn’t.” In Leonard’s strange world the 20th century during which central planning failed in tragic, impoverished, murderous fashion, the central planning actually worked. No. Not only does the Fed not have “dominion over the while financial system,” its projection of its very limited power through banks shrinks in terms of substance by the day. Goodness, as of 2015 banks accounted for 15% of total credit in the U.S. (this according to Robert Smith, former CEO of Security Pacific Bank, once one of the five largest in the U.S.), at which point we need only ask what the number is now. Rest assured it’s lower. Bank aren’t that important, which means the Fed’s alleged power is for theorists, not realists.

More realistically, to believe in the Fed’s power to reshape the economy in the way that the gullible Leonard does, is to believe that rent controls also work; that in decreeing New York City apartments cheap, New York’s political types made accessing living space in the City both cheap and easy. Lots of luck with that. Applied to credit, an interest rate is the cost of accessing money exchangeable for everything, and Leonard wants readers to believe that Fed can render accessing everything “easy.” Oh please. He insults his readers, though in his defense he probably doesn’t know he’s insulting his readers. He doesn’t because Leonard really and truly believes central bankers can engineer easy credit. No, they can’t.

In that case, remember where you read it first, that in time it will become accepted wisdom that the Fed is just not that important, and really never was. Credit is produced in the private sector. Always and only. We know this because no one borrows dollars, or lends them, as much as they borrow access to resources (trucks, tractors, computers, pens, pencils, labor, etc.) or lend access to resources. The Fed projects its mythical heft through banks least capable of lending toward growth concepts. Which means the Fed can’t produce credit, but it can - at best - funnel what is privately produced through a banking system studiously avoiding growth-instigating risk.

All of which brings us to the hero of Leonard’s attempt at a story. The author is channeling Michael Lewis, whose books have always been a look backwards. Basically, Lewis chooses who his heroes and villains are in advance, only to write his story to support a narrative he’s already decided on. Leonard tries to do the same here. Thomas Hoenig is Leonard’s hero; his John Paulson or Michael Burry as it were. Leonard is making the laughable claim that the Federal Reserve operates and “operated a large part of the American economic machine,” and that the saintly Hoenig was in many ways the lone central banker inside the all-powerful central bank fighting to keep it from “breaking” the U.S. economy. It plainly never occurred to Leonard that if the Fed were even a tiny fraction as powerful as he imagines it to be, that the U.S. economy would be too wrecked and small for anyone to have the time, inclination or means to buy books about it in the first place.

Cast as the avuncular central banker with small c conservative values of the very middle Midwestern variety, readers are treated to gag-inducing lines about how the dissenting (against modern Fed orthodoxy) central banker “was a rule follower,” that he was “born and raised in a small town,” and that he “started working at the family plumbing shop before he was ten years old.” To the journalists of today, average is noble. Don’t worry, it gets worse. Leonard writes of how the small-town reared Hoenig “remembers going to the soda counter downtown and playing basketball with friends.” Apparently since he did those things he must understand credit and asset prices? Don’t worry, it gets sillier. Eager to explain what he’s incapable of explaining, Leonard claims Hoenig was ultimately a good bank examiner for the Kansas City Fed because when he was young, “he’d helped his dad tally the family’s store inventory,” and “As a soldier, he’d helped calculate the trajectory of artillery shells.” You cannot make this up. Back to reality, it seemingly never occurred to Leonard that a good bank examiner would never be a bank examiner, and wouldn’t be for obvious reasons: there’s millions, and realistically billions to be made by those capable of understanding ahead of time the banks that will and will not make it. Funny here is that Leonard quotes Hoenig as saying “Examiners are no more able to predict the future than bankers are.” Oh my! Can he be serious? The book’s hero humbly asserts that the proverbial ankle-biter on the sidelines of actual commerce is no better than those actually in the game. You can’t make this up!

Oh don’t worry, it gets sillier. Always sillier. In trying to elevate Hoenig as the old-time, good values hero, he foisted on his readers the obnoxiously obtuse line that “Modern economists” had “developed theories that justified the actions of large corporations and banks, paving the way for international trade deals, new financial trading in exotic derivatives, and a relentless push toward maximizing profit for people who owned stock.” Books. Could. Be. Written. How interesting it would be to see the alleged ancient in Hoenig debate what the alleged moderns supposedly did.

All of which brings us back to the impossible notion that efforts to enhance the lending ability of banks equate with growth. Leonard doesn’t understand how contradictory such a notion is, and neither did Ben Bernanke. Leonard thinks little of Bernanke because Bernanke thought little of Saint Hoenig, while your reviewer thinks little of Bernanke because the former Fed Chair’s version of how the world works was almost as distant from reality as Leonard’s. Further evidence comes in The Lords care of a line from Bernanke that is surely one for the ages, and that is a certain reminder that the Fed’s power is far more mythical than real. At one point then-Dallas Fed president Richard Fisher relayed to Bernanke an anecdote from Texas Instruments, that the technology giant was borrowing in the .45-1.6% range, only to buy TI shares that paid a 2.5% dividend. Fisher’s point was that TI wasn’t expanding or creating any jobs care of low borrowing rates said to be a consequence of QE, rather it was borrowing the money to purchase TI shares. Bernanke responded with “I do want to urge you to not overweight the macroeconomic opinions of private-sector people who are not trained in economics.” Oh wow! An instant classic! Bernanke’s lack of self-awareness is astounding. Imagine a senior member of a profession that near-monolithically believes all the maiming, killing, and wealth destruction that was World War II actually stimulated growth telling his colleagues to ignore the thinking of those operating actual businesses. Bernanke is a walking, talking straw man extraordinaire.

Notable about his quote for the ages is that the Wall Street Journal’s Joseph Sternberg referenced it in his review of Leonard’s book. Good for him, except that Sternberg either didn’t read the major aspects of The Lords, or more troubling, read the book in total and couldn’t see just how confused Leonard’s analysis was. No doubt Bernanke rates endless critiques, but so does Leonard’s book. To say the author doesn’t understand basic economics or history is quite the understatement. How did Sternberg miss this? Why has the Right been so quiet about a book that’s getting a lot of attention for all the wrong reasons?

The questions remain unanswered, but it should at least be confirmed by Bernanke’s clueless attempt at smackdown what should be well understood by the mildly sapient: the so-called “easy money” that the Fed’s QE program is said to have brought about was once again anything but. And the Fisher/Bernanke exchange tells us why. Texas Instruments is a $164 billion market cap company. Of course it can borrow in the .45/1.6% range, which is the point. Money in the QE era has been “easy” for the big and well-capitalized, but then it’s always been. The low rates were yet again available to the entities for whom rates would be low with or without a central bank. Translated for those who need it, the Fed is a rate follower as opposed to a rate setter. Banks aren’t and have not been taking big risks, and QE was merely confirmation of this truth.

Which brings us back to Hoenig and Leonard’s vain effort to relay history in coherent and reasonable fashion. In Leonard’s estimation, Hoenig was the courageous central banker “sending a message to the public” through his dissenting votes. Oh please. While it’s certainly true that the Fed prizes consensus in a way that the Supreme Court often doesn’t, there was little courageous about Hoenig’s dissent. Since everyone else would vote with Bernanke, his vote wasn’t going to change anything. If anything, it was a message to the public from the Fed that Hoenig’s stance on anything of importance was immaterial. Put another way, if Hoenig’s vote had mattered in any kind of cosmetic way, he would have been coerced into voting with Bernanke and the others. Towards the end of his tenure, Hoenig was too inconsequential to bother with.

Hoenig’s other alleged insight, one parroted over and over again by Leonard, was that QE would “widen the gap between the very rich and everybody else.” In other words, the Fed’s monetary machinations would bring on an artificial stock-market rally, and since the bottom half of U.S. earners can lay claim to 6.5% of total wealth in the U.S. (a stat from Leonard on p. 119), QE would boost the rich. Hoenig isn’t the first to buy into “the Fed juiced the stock market narrative,” which means he’s also not the first to be wrong. Let’s address Hoenig’s theories. That they’re incorrect is shooting fish in a crowded barrel. More important, the popular view that the Fed has engineered the multi-year rally enjoyed by rich investors is quite literally impossible

If the Fed could prop up the markets, then there would be scant markets to prop up. That’s the case because dynamic, rising markets are nearly always defined by relentless change within the proverbial team picture at the top. Goodness, in the 1950s the Fortune 500 was heavily populated by steel companies, in the 1960s GM was seen as the unbeatable automobile giant of the ages, while in the 1980s Circuit City was the top-performing U.S. stock. When the 20th century began, a listing of the top U.S. companies would have included GE (the most valuable company in the world with a $585 billion market cap), certainly ExxonMobil, Tyco (seen as the next GE by Barron’s), Enron, AOL, and Yahoo. Microsoft didn’t rate mention in the previous sentence because in 2000, it was in the midst of being suffocated by the DOJ. Assuming an ability for the Fed to prop up stock markets, it would almost by definition elevate the past at the expense of the future. Such a scenario would be disastrous for always forward-looking markets, not the cause of multi-year rallies. At which point it’s useful to look around the world, and away from the vibrant U.S. 

The QE narrative ignores how the Bank of Japan has conducted somewhere north of eleven QE programs (really, who’s counting at this point?) since the 1990s, but its Nikkei 225 is still well shy of all-time market highs reached in 1989. Moving to Europe, the ECB has for the most part mimicked the Fed’s QE machinations since ‘09, but with vastly smaller results. Considering the world, while the S&P has returned nearly 400% since bottoming in 2009, the MSCI All Country World Index can claim returns roughly a quarter of the S&P’s. If central banks were capable of engineering fake rallies as Hoenig and Leonard assume, then logic dictates that there would have been a uniform quality to global markets over the last 10 years in particular, except that there hasn’t been.

After which, common sense has to enter the equation. In particular, the Fed purchased Treasuries and mortgage bonds with an eye on pushing interest rates down at the long end, and with its mortgage security buys the Fed was working to prop up the housing market. Ok, but what about the subsidization of government spending, the propping up of housing consumption (the very consumption that had ended in relentless tears in 2008…), or both would boost forward-looking markets? If you’re tongue tied, it’s with good reason. Subsidization of government spending wouldn’t trick the markets, nor would the central bank doubling down on housing consumption. 

To which Hoenig and Leonard contend that the Fed, in allegedly pushing yields of bonds so low, engineered a flow of funds “out on the yield curve, out there into the risky investments” that logically included the stock market. It all sounds so intriguing at first glance, but a cursory second glance at the yield curve in Japan over the decades shows lower rates across the curve, but no corresponding stock-market rally. Ken Fisher notes that the Japanese 10-year yields .13 at the moment. Better yet, the scenario imagined by Hoenig et al would give the impression of a “great rotation” out of low-yielding bonds and into equities over the last 10 years. Except that the 10-year Treasury note yielded 3.26 percent in 2009 versus 1.75 at present. There’s just no story there, as even Leonard unwittingly acknowledges on p. 118. The Fed surely tried to push down yields on Treasury notes, but market forces were already doing so. That they were runs counter to the presumption of cash searching for yield. 

Leonard points to the Fed “printing” trillions of dollars that had to find a home, and that found their way into U.S. shares. Nice try, but stop and think. In order for a QE-gulled bull to express that optimism in the stock market, a sober QE bear must be able to express an equal amount of pessimism. In markets, the passions of the bulls are leavened by the pessimism of the bears. By definition

Such central bank mysticism also ignores how equities are valued in the first place. Stock prices represent the market’s expectation of all the dollars any company will earn for all of its existence. Looked at through the QE narrative, what would the Fed’s bond buying have to do with equity prices? And for those who think QE represents currency devaluation (Leonard quotes Dallas’s Fisher as saying just that), and that devaluation is good for stocks, please think again. When investors put capital to work, they’re buying future returns in – you guessed it – dollars. The latter in mind, the notion that market fiddling meant to devalue the currency would actually boost equity returns brings new meaning to absurd. 

Some offer the empty and trite rationale of “don’t fight the Fed”: the central bank wants a strong market, and it will get it because it’s, well, the Fed. It all sounds so compelling until we remember that the Fed aggressively cut rates in 2001 only for the NASDAQ, S&P and Dow Jones Industrial Average to collapse anyway. The Fed can’t alter reality, and in the early part of the 21st century investor sentiment turned bearish. The Fed similarly slashed rates in 2007 and 2008 to stem a falling market, only for stocks to fall further. In 2015, the Fed began a series of rate hikes that took place over several years, only for U.S. shares to rally. 

After that, it’s worth bringing up the obvious question: why on earth would market interventions by inept central bankers actually instigate the upward direction of the deepest, most informed markets in the world? As opposed to rigged playthings for allegedly wise central bankers, stock markets are brutally honest sources of bright light that constantly expose the corporations that aren’t delivering for shareholders. To offer up but one of many examples, previously mentioned ExxonMobil was the world’s most valuable company in 2008 with a market cap of $492 billion. Its valuation has halved since then, and fell all the way to $58 billion in 2020 when it was deleted from the Dow 30. What about GE? With a market cap of $106 billion, it’s literally a fraction of its former self. If the Fed could render markets artificial with its vain rate machinations, then so logically would prices remain artificially high across the board, and without regard to their existing and future prospects. Long-term shareholders of GE and XOM know differently. Stock markets are harsh truth tellers. Which is a crucial truth. 

To see why, and by extension see why there’s nothing to the Hoenig thesis about the Fed and stock prices, it’s very useful to once again travel back in time to when the 21st century began. In doing so, it’s useful to focus on corporations that were largely dismissed back then as yesterday concepts, never concepts, or that literally didn’t exist. 

In 2000 Microsoft was still highly valued, but it was on the verge of a largely lost 10 to 15 years. Having been late to the internet, along with search, social media and smartphones, investors had lost much of their former excitement for the Redmond, WA software giant. This showed up in its stock price. It was mostly flat from 2000 right up through 2013. 

Amazon? A peddler of books, CDs and DVDs, it was known as “Amazon.org” given its inability to turn a profit. Shareholders were mostly ridiculed for owning its shares since, well, you know, well overdone optimism about the internet retailer was already priced. 

Google? It was largely unknown. While by 2006 it had grown fast enough that it was neck-and-neck with MySpace (remember it?) for daily visits, the users of it were much rarer in 2000. In 2000 it was still private, with good reason. 

"What would I do? I'd shut it down and give the money back to shareholders." Who uttered those words? It was Michael Dell. He was talking about Apple in 1997. By 2000 Apple was alive after nearly going bankrupt in ’97, but as evidenced by it nearly going under (Bill Gates saved it) not too many years before, there was a “trust, but verify” quality to its shares. Put another way, returns since 2000 are loud indicators of how little faith investors initially had in the plans of Steve Jobs. 

Facebook? The social media giant didn’t yet exist. Mark Zuckerberg was still a student at Phillips Exeter. 

So, what’s the point of listing Microsoft, Amazon, Google, Apple and Facebook? Non-existent, lightly regarded, or seen as past their prime in 2000, they’re the five most valuable corporations in the world in 2022. How things change! 

Looked at through the prism of the Fed, central banks have been trying (blessedly without success) to rewrite market realities for as long as they’ve existed. While the Bank of Japan went to “zero” in 1999 without market or economic consequence, the Fed tried to mimic the BOJ’s laughable stab at the impossibility that was “easy money” in the early 2000s. The good news is that it failed much as the BOJ did. 

How we know this is that what mattered in 2000 soon enough did not. While GE’s flame dimmed over time, Enron went bankrupt in 2001, Tyco flopped in 2002, Time Warner dropped AOL from its masthead in 2003, and Google floated its shares in 2004; thus bringing market heft to the end of Yahoo as a player in search. 

Imagine then, if the Fed could actually prop up stock prices as Hoenig believes, and by extension, Leonard. If so, the demise of some of the U.S.’s most dominant corporations in 2000 wouldn’t have been so swift. In which case some pretty mediocre corporations would be hogging precious resources to the certain detriment of the U.S. economy, along with the stock market that is a reflection of forward-looking investor sentiment about that economy. In short, what Leonard imagines to have “broken” the economy plainly did not, and evidence supporting the previous claim is the happy fact that market forces that have no regard for central banks and bankers have pushed the past well into the past. It’s worth restating that if the Fed could prop up markets, there wouldn’t be markets to prop up. Investors would have long ago deserted the U.S.

Which brings us to the myriad mistakes of fact, analysis and both within The Lords. Leonard very shamefully refers to Herbert Hoover’s Treasury secretary Andrew Mellon as “heartless and delusional” for having supposedly told him “Liquidate labor, liquidate stocks”, etc. as the economy weakened in 1929-30. To Leonard, failure is what holds economies and markets down, but the opposite is the case. Absent the past being pushed to the past (think GE, Circuit City, MySpace, and the rest previously mentioned), there’s logically no advance. Markets by their very name sort out winners and losers daily such that today’s blue chip is often tomorrow’s forgotten entity. The latter is plainly what Mellon was conveying to Hoover, which leads to one of countless instances in which Leonard’s analysis and history were both wrong. He claims that by “urging Hoover to liquidate so much value, Mellon liquidated years of future economic growth.” Except that’s NOT what happened. Hoover obviously took Mellon’s advice with a grain of salt as evidenced by his myriad interventions naively meant to prop up the economy, including major federal spending increases, record tariffs, and tax hikes. The problem was that Hoover did intervene, yet Leonard still buys into the wholly discredited myth that Hoover approached what was a normal recession in 1929-30 with libertarianism. If only!

Early on Leonard claims that the FOMC meets every six weeks “to effectively determine the value and quantity of American money.” Except that this isn’t true. The value of the dollar has never been part of the Fed’s portfolio despite what Left and Right believe. Comical here is that Leonard alludes to how much obsession there is about the Fed among conservatives. Yes, they believe the Fed controls the quantity and price of money. Except that when FDR devalued the dollar in 1933, he did so by decree. Fed Chairman Eugene Meyer had no control over his decision. He subsequently resigned. In 1971, Fed Chairman Arthur Burns begged President Nixon to not de-link the dollar from gold, which was an explicit devaluation. Nixon ignored him. The quantity of money is production determined, which explains why at least half of all dollars don’t circulate in the U.S. as is. The Fed controls neither quantity nor value. It never has.

Speaking of gold, Leonard writes on p. 96 that “gold supply” restrained the supply of dollars in circulation. Except that it didn’t. Really, to read this book was to marvel at the horrid sourcing. For example, from the late 18th century to the early 20th, dollars in circulation soared 63X. Sorry, but the amount of gold mined during that time globally was nowhere close. Gold has long been used to define money’s price given unique stock/flow characteristics that make its value very constant. It’s never restrained money creation in the U.S., or anywhere else. Speaking of commodities, on p. 57 Leonard claims that oil declined “from more than $120 to $25 by 1986.” Not true. Oil’s all-time-high in the ‘70s and ‘80s was $40. It only eclipsed $100 in the 2000s when the Bush administration oversaw a cruel devaluation of the dollar.

Dollar devaluations are important mainly because devaluation is inflation. This is extra important because Hoenig, and by extension Leonard, believes real inflation and “asset inflation” are “cousins.” Wrong again. During periods of real inflation, it’s no doubt true as Leonard alludes that housing does well. But stocks generally do not. Figure that the S&P rose 17% in nominal terms in the 1970s, and lost a lot in consideration of how much the dollar fell in value. In the first decade of the 21st century, when the dollar was in major decline, the S&P actually lost value. During the disastrous Bush years, the S&P lost 36%. That real assets like stocks lose value during periods of true inflation is a statement of the obvious. Investors are buying future returns in dollars when they invest. Is it any surprise then, that U.S. stocks would lose value during periods of devaluation?

The book’s biggest laugh and sigh came on p. 14. Writing about the early 2000s, Leonard wrote that people “were borrowing more money in part because the decline of labor unions had taken away the bargaining power of workers, depressing their wages and degrading their working conditions.” Ok, even if you believe that the decline of unions has occurred in concert with the pillaging of the American worker (laughable when it’s remembered that the U.S. is the biggest importer in the world), has Leonard ever taken even the most basic Home Economics class? His analysis implies that the poorer individuals are, the more able they are to take out bigger and bigger loans. Sorry, but such a view is backwards. In the world of profit and loss, lending sources studiously avoid those who lack the means to pay monies borrowed back. In other words, “predatory lender” is a fun idea for journalists, Hollywood, and journalists who yearn to have their books optioned by Hollywood, but rare is the lender willing to hand over cash to someone without the income to pay it back.

Speaking of credit, the monetary naif in Leonard writes with regularity about inflation “hawks” and “doves” as though the Fed can restrain or instigate inflation with simple rate machinations. More realistically, the only closed economy is the world economy. Assuming the Fed can actually shrink credit availability, global sources will make up for what it takes. After which, inflation is a devaluation of the currency. Deflation is the rise in the value of the currency. Neither is part of the Fed’s portfolio as is.

Which brings us to deflation. Leonard tries to understand it 2/3rds through. He writes that it’s a “suffocating death spiral for any economy.” Why is that so? According to the author, “People don’t buy things when they know the price will fall.” Except that they do. All the time. Apple iPhones raced off the shelves when this great communications leap reached consumers in 2007, and consumers bought it with abandon despite knowing that the phone would only improve, not to mention how many competitors would come in to drive down prices. The original flat-screen TVs in the late 1990s went for over $25,000, yet buyers proliferated as did they when advanced versions of the flat-screen were rolled out. Missed by Leonard is that the surest sign of a booming economy is falling prices. Why? Because investment is what powers economic growth, and investment is all about producing more and more goods and services for less and less. In Leonard’s rather junior high version of how things work, spending grows the economy. Actually, savings do. Entrepreneurs can’t innovate and businesses can’t expand without savings. Get it? Leonard doesn’t. To him a lack of spending is a “suffocating death spiral.” Oh dear.

The sad truth is that a review seemingly without endpoint doesn’t scratch the surface of all that’s wrong with The Lords. With an eye on wrapping things up, after Leonard makes an odd pivot to private equity in order to (among other things) make a ridiculous case that the latter turned companies into debt servicers as opposed to corporations using debt to pursue “goals,” he then switches back to Hoenig. He’d become FDIC vice chairman after retiring from the Kansas City Fed, only for this supposedly bright mind to make endless cases for breaking the big banks up. Senators Warren (Elizabeth) and Brown (Sherrod) agreed with him, speaking again to how inconsequential Hoenig had become. Furthermore, breaking the big banks up would do what? Lest we forget, it was the large, hybrid banks/investment banks that were best positioned to save the non-hybrids in 2008.

Beyond that, you don’t strengthen banks by limiting their ability to pursue profitable lines. To break banks up would be to make them obsolete. Think about it. What can’t compete, what can’t profit, soon enough won’t have investors to speak of. To Leonard investors are bad, or something like that.

What it comes down to is that Leonard doesn’t understand what he’s peddling, but thinks Hoenig does. And what Hoenig has to offer us now and in the future is whole lot of nonsense. Contra his theories, and those of Leonard, the crisis in 2008 wasn’t bad mortgages as much as it was government intervention in the market’s revelation of bad mortgages. 

Hoeing now wants us to believe that he has discounted a horrific future that markets somehow haven’t. It doesn’t work that way. Markets do our worrying for us, thankfully. In other words, assuming Hoenig has a sense of impending doom, rest assured investors have already priced it.

This isn’t to say that glorious times are surely ahead, but it is to say Hoenig doesn’t know what looms. Which is the point; one missed by Saint Hoenig and Leonard. They don’t get that market disasters are manmade, logically. Of greatest importance is that they’re unpredictable because it’s always hard to tell what exactly politicians will do. 

We don’t have markets to fear; rather we have politicians to worry about. Which speaks yet again to how very unsuited the author was to the story he attempted to tell. As he claims early on, the FOMC “operated a large part of the American economic machine.” Not true, but it signifies how little Christopher Leonard understands what he thinks he comprehends. The crisis is government intervention in the markets, not the markets themselves. Period.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His new book is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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