Understanding The Fed with guest Chris Leonard

Show Notes

By Joe Duffus

Bestselling author and business reporter Christopher Leonard takes the Federal Reserve System apart on the latest episode of the Drill Down podcast with Peter Schweizer and Eric Eggers. They’re off to see the wizard, the wonderful Wizard of Oz.

Leonard, who also teaches at the University of Missouri School of Journalism, is the author of “Lords of Easy Money,” a widely praised, new look at what goes on at the Fed and whose interests it really serves. He joins Peter and Eric to make sense of it for us.

Frank Vaughn’s 1930s novel was really intended as an allegory for the need for monetary policy, with “Oz” being a reference to the abbreviation for ounce, the measure of gold. In Vaughn’s telling, Dorothy represents American values, the Scarecrow represents farmers, the Tinman represents workers, and (would you believe it) the Cowardly Lion is William Jennings Bryant.

Jay Powell is today’s chairman of the Federal Reserve. In his book, Leonard sometimes refers to him as “the Mighty Oz.” He starts of, though, by taking away the inapproachable mystery around this most powerful government entity. The Fed simply makes policy decisions that create winners and losers. They do this, today, through a process started in 2010 called “quantitative easing.” This policy has pumped $3 trillion into the Wall Street banking system, more money than the Federal Reserve created in its entire first century of existence.

Peter asks, “How does this cheap money policy really help Wall Street?”

“It punishes working people who are trying to save money. It hurts the ability to earn a yield on savings,” Leonard replies. “The Fed lowered rates to below zero by purchasing things from so-called ‘primary dealers’ (banks like JP Morgan). This created trillions of dollars out of thin air in Wall Street’s accounts. In turn, this created a ‘surge for yield’ that pushed banks to make riskier loans and offer cheaper debt and created a huge inflation in asset prices.”

Bear in mind that the top 1 percent of Americans own 40 percent of all assets. The bottom 50 percent own about 7 percent. So, this policy stokes the financial divide, perhaps more than anything else in the last 10 years, between the very, very rich and everyone else, he explains.

Peter notes that “the great growth in wealth creation in the US has come in Silicon Valley and Wall Street. It’s very localized.” This means, Eric adds, that if the Fed must now tighten the money supply by raising interest rates to choke our current inflation, “investment in places like Silicon Valley goes down.”

Leonard cites an example from his book of a Milwaukee-based company called Rexnord Corp. The Fed’s cheap debt policies encouraged that company’s management team to borrow to buy back their own stock and pay their shareholders, thus adding to the company’s debt. Then they had to cut costs by moving jobs to Mexico.

With inflation spiking, Leonard believes “the rubber is hitting the road right now.” The Fed is forced to tighten the money supply, which leads to the market correction we are seeing now.

So, whose interests is the Fed really serving? Eric observes that for the first time, a majority of the members of Congress are now millionaires. And the Fed’s policies clearly seem to be helping the large banks. What does Leonard see coming?

Leonard responds, “The biggest negative we’ll see is financial volatility. Maybe the Fed keeps printing money and forestalls the reckoning, but inflation makes that tough. In this situation, companies will pull back and cut jobs, and the country is not in a great place right now to take another economic blow.”

But Leonard is heartened by the investigations done by the Government Accountability Institute that look directly at the connection between big money and big government. It is vital to connect the dots to show how the “central bank works in Wall Street’s interest by stoking them on the way up, then bailing them out on the way back down … and repeat.”

The revolving door is something we discuss on the Drill Down frequently. Classic case here is Janet Yellin, who left the Federal Reserve, then made $7 million giving speeches to Wall Street bankers, then came back into government service as President Biden’s new Secretary of the Treasury. When new governors are added to the Fed, they all come from the big banks. As Leonard says, that makes the Fed an entity designed to serve not American citizens, but rather the large financial institutions.

As Peter recalls, “Socialism does exist in America… for the banks and Wall Street.”

Leonard’s book provides a brief history of how the Fed was created as a response to populist pressure for a new central banking system. He explains, “It was created in the early 1900s because the currency system in the US was a mess. So at the famous Jekyll Island meeting of bankers, they created the blueprint for the Fed, but specifically insulated it within the existing Wall Street banking. That’s why it creates money through those banks, and not small community banks.”

While doing the book, Leonard was able to read the policy debates that go on inside the Fed. He found there is an insularity to how they see the world and came away seeing how “these folks are not infallible. Privately, they admit they do not know what might happen, and that their forecasts were wrong.”

Eric says, “So, it’s like having the people put in charge of traffic in Manhattan just take a helicopter from Teterboro anyway,” Leonard says, “and then they get mad at the people for getting stuck in a traffic jam!”

Does Leonard see any good coming from the rise of crypto currencies like Bitcoin? Will that move us away from the “Lords of Easy Money?”

Leonard replies, “The power to create money is almost too much… it’s such a great seduction. We disciplined for decades by using the gold standard. Then we tried to discipline through the wisdom of committees (the Fed). Crypto tries to impose discipline through algorithms, because there’s no ambitious “crypto chairman” who can print more crypto currency – it’s a finite supply that can’t be stoked. That’s the attraction. But I’m just as confused as anyone else, because now it’s become another investment bubble partially driven now by the Fed’s policies.”

“What’s most needed, really, is just wisdom and restraint.”