Bailout Bonds Men

 “The Lords of Easy Money – How the Federal Reserve Broke the American Economy” by Christopher Leonard, 2022

This is a conventional but enlightening account of how the Federal Reserve has actually worked since the 1970s. It follows the involvement of a long-serving Federal Reserve governor from Kansas City, Tom Hoenig and chairs Arthur Burns, Paul Volcker, Allan Greenspan, Janet Yellen and Jerome Powell, who is still head of the Fed. It basically shows how the issuance of cheap or free money by the Fed created 'asset bubbles' in real estate and farmland, in oil and gas, in the tech and dot.com sectors, in corporate and junk bonds, in mergers, hedge funds and private equity, creating financial crashes since the 1970s as entities searched for high yields. These asset bubbles fueled inequality as cheap money allowed various top financial actors to profit, while closing factories and small businesses, cutting benefits and laying off workers.

The Fed governors and regional bank presidents are appointed, not elected; only 12 vote on a rotating basis in the Federal Open Market Committee (FOMC); and they are from the capitalist banking sector, academe or government. It is not a democratic institution. It was created in 1913 because of so many bank and currency failures before that. Private banks own stock in their regional federal reserve banks and Leonard claims it is a 'private-public' partnership, yet the evidence for that is slim.  The Fed is in charge of the 'monetary' side of the capitalist economy; Congress and politicians in charge of the 'fiscal' side. According to Leonard the latter has been in a stalemate since the Tea Party arose in the 1990s and that continues with Trumpism. It is left to the Fed to deal with inflation or unemployment with limited means, while fiscal policy stands relatively stagnant. Leonard ignores the billions poured into the arms industry, tax breaks and financial welfare for corporations and the rich and the protection of Wall Street – all 'fiscal' policies.  He also ignores the falling profitability of many industrial firms. But let's follow his story.

During most of this period money was created by the Fed to pay 24 'primary dealers' through the 'discount window' at zero interest rate policy (ZIRP) or very low interest. These dealers include Goldman, J.P. Morgan, Citigroup, Credit Suisse, Nomura and Cantor Fitzgerald. In Europe and Japan there was even negative interest. This book looks at 2010's 'quantitative easing' (QE) as an even more egregious version of zero interest money, as it meant buying trillions in bonds by the Fed to prop up the markets and firms. Much of this was secret or not reported on, and in 2008, dwarfed the public Congressional TARP bailout. Of note is how inaccurate Fed predictions go, as Leonard shows the Fed's Ph.D quants getting it wrong and to compensate, speaking in impenetrable “Fedspeak”. At one point they called their policies 'a shot in the dark.'  Hoenig later became assistant secretary of the FDIC in 2012 and advocated breaking up the big banks. He also wanted a return to FDR's Glass-Steagall law to separate commercial from risky capital markets banking. When those policies didn't fly, Hoenig proposed higher capital reserves for each 'too big to fail' bank. After the FDIC Hoenig went on to work at a libertarian think tank at George Mason University, a conservative business school.

No one in the book suggests nationalizing the big banks or the shadow banks - hedge funds, private equity and dark pools - as the real solution to inequality and instability. When a bank is 'too big to fail' it actually means it has become a social entity, a public utility, not a private enterprise. The book notes the high integration of the finance industry, to the point where one failure cascades into others. This shows the social nature of the banking system, which is 'competitive' only to a small degree and is really an oligopoly - and now almost a single entity, a monopoly. This is confirmed when the capitalist state repeatedly rescues, maintains or outright owns major parts of the capitalist banking system, as shown in this book.

Leonard tracks how the Fed, in its role of preventing price inflation, ignored asset inflation and had a tangential record on employment, its other 'responsibility.' It's actual practice pushed money to more risky investments by flooding the big banks with cash. This led to various crises – the Great Inflation of the late 1970s; the vast Volcker interest rate hikes of the early 1980s; the failing bank panic of 1982; the junk bond / S&L crisis of the later 1980s; the tech wreck in the late 1990s; the severe real estate CDO Great Recession of 2008 and years of QE and ZIRP afterwards; a hidden hedge fund meltdown in 2019 over repo basis trades that led to secret billions in bailouts. And lastly the pandemic of March 2020 which affected overly-leveraged and indebted markets across the board and created the quickest bailout in U.S. history. This involved corporate bonds, real estate and commercial real estate loans, commercial paper, collateralized loan obligations (CLOs), stocks, foreign currencies, leveraged loans, repo basis trades and even 'stable' Treasury bonds – just about everything. In 2023 3 of the largest bank failures in history occurred.  This sequence shows the instability, high debt and over-complexity of the capitalist money markets for the last 50 years, but also their insanely privatized profiteering.

A 'dollar' is actually a Federal Reserve Note

In the pandemic case, the Fed had to bring in the U.S. Treasury department led by Goldman alumnus Steve Mnuchin to provide more cash and authority through Special Purpose Vehicles (SPV) – for a total of $3T in aid, almost a record. As one financier put it, these actions “socialized credit risk.” Congress followed with added trillions in aid through the CARES act and the botched 'Paycheck Protection Plan' for businesses, which mostly went to big corporations and rich individuals, saving the jobs of very few. The Fed's 'populist' “Main Street Lending Program” barely worked either, much like Obama's 2008 homeowner mortgage 'bailout.'  Ultimately the Fed ended up owning $7.4T in rescued assets and had saved mostly the wealthy and the large asset owners. Yeah...

Leonard follows the valuable story of Rexnord, an industrial company in Milwaukee. It was first bought by Powell's Carlyle private equity, then Apollo private equity, who merged and burdened it with debt as a fee-producing cash cow that resulted in the closure of a number of unionized Rexnord factories. Of most importance in this story is how the real source of wealth for the owners and managers was no longer ball bearings, gears, chains and conveyor belts - their real products - or improving quality, productivity, better machinery, technology or worker satisfaction.  The real source were financial machinations, mergers and stock buy-backs. The low profits from production and exploitation led Rexnord to the financial markets, proving one of the contentions of Marxist economics as to the real source of 'financialization' – the falling rate of profit in the productive economy. This pattern is shown in a number of other examples in the book. Cheap Fed money was not being used for hiring or factory improvements or even making loans to small entities but for speculation and monetary maneuvers.

Altogether an exciting narrative about U.S. financial disasters! Leonard ends echoing Marxist Michael Roberts' 'long depression' about a “long crash” after 2008 that is still going on. Most people are unaware of how fragile the financial system is and this book will help illuminate that fact. The conventional, complacent argument is that events are 'circular' and will repeat. There will be no 'qualitative' change, so yesterday's Fed and banking solutions – ZIRP, QE and SPV - will always work going forward, even to the point of a hidden but real state 'socialization.' Has liberal MMT actually been proved by the Fed to always work?! 

 Yet that is not how history actually functions. Ever larger financial debts across the board, increasing monopolization and complexity, higher levels of derivatives, the virtual intertwining of nearly every large financial entity and product, the evisceration of the productive economy, massive privatization and inequality, more zombie corporations, short-term thinking, increasing Federal government involvement, growing moral hazard – what could possibly go wrong? This is not a circular pattern, but a spiral upwards... or down.

P.S. - The collaboration between BlackRock and the Fed, as told by Wall Street on Parade:  https://wallstreetonparade.com/2024/03/billionaire-larry-fink-of-blackrock-which-grabbed-fed-bailouts-in-2020-2021-lectures-struggling-seniors-on-making-more-sacrifices/

Prior blog reviews on this subject, use blog search box, upper left, to investigate our 17 year archive, using these terms: “The Deficit Myth,” “These are the Plunderers” (on private equity - PE); “The Big Short,” “Liar's Poker”(on Salomon Bros); “Flash Boys,” (all 3 by M. Lewis); “The Wolf of Wall Street” (Scorsese); “Den of Thieves” (on Drexel); “Liquidated – An Ethnography of Wall Street” (2 part review); “The Ponzi Factor,” “House of Cards” (on Bear Stearns); “Ponzi Unicorns!” “Antitrust” (Klobuchar); “Debt, Prices & Credit,” “Who is Ron Paul?” “Griftopia” (Taibbi); “Who Gets Bailed Out?” “MMT,” “Mean Girl,” "The Long Depression"(Roberts).  

May Day Books has many Left books on financial topics.

And I got it at the Public Library!

Red Frog / March 14, 2024