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Hollywood’s Monetary Policy

A Book Review of The Lords of Easy Money: How the Federal Reserve Broke the American Economy, by Christopher Leonard.1

Many great movies are “based…

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  • A Book Review of The Lords of Easy Money: How the Federal Reserve Broke the American Economy, by Christopher Leonard.1

Many great movies are “based on a true story”—meaning some parts are true, but the details, even entire plotlines, are embellished with what is sometimes called “poetic license.”

Though it’s not on the big screen (yet), Christopher Leonard’s The Lords of Easy Money: How the Federal Reserve Broke the American Economy is the Hollywood version of monetary policy. Leonard explains the Federal Reserve’s activities with an engaging narrative that exposes many difficulties of setting monetary policy as well as the dangerous consequences when those policies are wrong. To do that, however, the author shoehorns complex economic issues into a simple storyline that gives many false impressions about the monetary and financial system.

Thomas Hoenig plays the hero in this story. During his time at the Federal Reserve Bank of Kansas City in the 1970s and1980s, Hoenig witnessed banks expand their risky lending based on inflated prices and overly optimistic projections. By 1991, he rose to become the president of the regional reserve bank and served on the Federal Open Market Committee (FOMC), which decides the Fed’s monetary policy. Hoeing was later named vice chairman of the Federal Deposit Insurance Corporation (FDIC) where he championed stricter regulations for United States banks.

Current Federal Reserve Chair Jerome Powell, who began his career as a corporate attorney and investment banker before moving into private equity with the prestigious Carlyle Group, is cast as the villain. Leonard focuses on Powel’s work with the corporation Rexnord, which, in Leonard’s telling, was pushed to repeatedly increase leverage and cut costs until it was forced to lay off part of its United States workforce and move operations to a plant in Mexico. Leonard also documents Powell’s transition from a Fed Governor and an early critic of the first quantitative easing (QE) program to becoming the main advocate of such policies in his role as Fed chair since 2018.

The main focus of Lords of Easy Money is the Fed’s role in directing—or misdirecting—credit. As an independent central bank, the Fed’s objective is, or at least should be, to support the needs of trade and the financial system rather than influencing where funds are channeled and invested. Leonard explains in detail how excessively expansionary policy—particularly the massive monetary injections under QE—can seep into overleveraged financial markets, driving asset price inflation, reach for yield, and excessive risk taking.

The core of the book is dedicated to exposing the repeated cycle of the Fed driving financial risk through easy credit conditions and the buildup of risks across the entire financial system until the economy crashes into recession. Leonard blames Fed policy for a variety of economic and social ills, including an increasingly fragile financial system, heightened income inequality, even the off-shoring of manufacturing—an ongoing trend since the 1970s.

“While we should surely be wary of Fed-induced risk taking and credit misallocation, I’m skeptical that this was a major problem in the QE period.”

What is fact versus fiction in this story? While we should surely be wary of Fed-induced risk taking and credit misallocation, I’m skeptical that this was a major problem in the QE period. Yes, the Fed created unprecedented trillions in new base money from 2008 to 2014. But the book barely touches on the most significant change ever in the Fed’s monetary policy: its transition from a corridor system of monetary policy to a floor system when it began paying interest on the excess reserves (IOER) that banks held at the Fed.

Because the Fed was paying banks interest to hold reserves, the vast majority of money created by QE was left sitting on bank balance sheets rather than being lent out into the economy. While this topic remains divisive among economists, my recent paper in the Journal of Macroeconomics2 finds that the Fed’s payment of IOER caused banks to reduce their lending, likely stunting the effects of QE. Rather than driving risk-taking in the financial system, the banks held onto the newly-created, ultra-safe base money because the Fed was paying them to do so.

Could the new money added by QE have led to asset price inflation in the broader financial system? Perhaps, but this seems unlikely. Consumer price inflation repeatedly undershot the Fed’s two percent target for almost an entire decade. The Fed could have done more QE, but it probably could have achieved its target by doing less QE if it had lowered the rate of IOER, which was set higher than short-term market interest rates for most of the period. Leonard doesn’t say how to identify asset price inflation, but the combination of below-target consumer price inflation, reduced lending, and higher-than-market rates of IOER seems to indicate that money was—if anything—too tight in this period, so it was probably not driving a major price bubble in financial assets.

This criticism is especially true of the Great Recession of 2007-2009. As Scott Sumner has thoroughly exposed, the major contraction in 2008 resulted from excessively tight, not loose, monetary policy. Hoenig and a few other FOMC members vocally opposed monetary expansion. They even proposed raising interest rates during this period. This opposition inhibited the Fed’s monetary expansion, which almost certainly increased the severity of the recession. So while excessively loose monetary policy can indeed be a problem, it doesn’t appear to have been an issue in 2008 or the decade that followed. Of course, an enlarged Fed balance sheet can also lead to credit misallocation, as George Selgin has dubbed “Fiscal QE,” just not in the way described in the book.

The dangers of resource misallocation and heightened financial risk seem more plausible in the recent QE period starting in 2020. High inflation has made appropriate risk analysis more difficult. The Fed kept interest rates near zero despite the highest inflation in 40 years and nearly the lowest unemployment rates since World War II. Fed officials failed to act to curtail its monetary stimulus and ignored the warning signs of high inflation. Only time will tell if Fed policy has, in fact, created the negative effects discussed by Leonard such as excessive leverage and increased financial fragility.

Aside from monetary policy, the book discusses how Fed officials came under great political pressure during the coronavirus pandemic. The Fed coordinated with the Treasury on its monetary policy and lending programs, which, in conjunction with the Coronavirus Aid, Recover, and Economic Security (CARES) Act, allowed it to go far beyond its normal emergency lending role.

The Fed provided funds to nonbank companies and state and local governments, things former Fed Chairs Ben Bernanke and Janet Yellen said the Fed should never do. In contrast, Chair Powell promised the Fed would do “whatever it takes” to support the economy. Fed officials have bowed to political pressure to pursue climate and social goals that are clearly outside its legal mandate.3

Another thing the book gets right is Hoenig’s criticism of the complexity of Unite bank capital regulations. Like a complex tax code, complex regulations allow banks to evade the burden or regulation. Because regulators cannot perfectly identify the riskiness of every asset, complexity can encourage banks to take more risk than they normally would. These rules incentivized banks to increase their holdings of highly rated MBSs and credit default obligations (CDOs) leading up to the 2008 financial crisis.

Studies by researchers from the Bank of England, the World Bank and International Monetary Fund (IMF), and even the Federal Reserve Bank of New York have all found that complex regulations are not better predictors of bank risk than simple measures such as the equity capital ratio. Complex regulations have large costs and small (possibly negative) benefits.4

There are important lessons to be learned, and even readers who are already skeptical of the Fed will appreciate the thoroughness of Leonard’s explanations. Unfortunately, many “facts” and economic explanations in the book are either inadequately explained or just plain wrong. There are many minor errors and misrepresentations. Leonard’s critiques often are politically one-sided. He regularly calls for government intervention, but he generally fails to recognize government as the source of such problems or that private entrepreneurs might provide superior solutions.

For more on these topics, see

It’s possible that Leonard is right about the extent of asset price inflation. Alas, the high number of factual errors in the book make it difficult to evaluate his claims. He provides little evidence that monetary policy has caused higher income inequality, lower economic productivity, or changes in manufacturing technology—all of which seem to be mostly caused by nonmonetary factors.

Lords of Easy Money provides a gripping introduction to the dangers of faulty monetary policy, but readers should be skeptical of the Hollywood version. Should we be critical of Fed policy? Yes. Should we worry about resource misallocation and excessive financial risk? Absolutely. Should we blame every economic problem (real and imagined) on the Fed? As Tom Hoenig would say, “Respectfully, no.”


Footnotes

[1] Christopher Leonard, The Lords of Easy Money: How the Federal Reserve Broke the American Economy. Simon and Schuster, 2022.

[2] Thomas Hogan, “Bank lending and interest on excess reserves: An empirical investigation,” Journal of Macroeconomics. Volume 69, September 2021.

[3] Thomas Hogan, “The Renewed Politicization of the Federal Reserve,” American Institute for Economic Research, May 5, 2022.

[4] Thomas Hogan, A Review of the Regulatory Impact Analysis of Risk-Based Capital and Related Liquidity Rules,” Journal of Risk and Financial Management. Volume 14(1), September 2020.


*Thomas L. Hogan is a senior research faculty member at the American Institute for Economic Research. He was formerly the chief economist for the United States Senate Committee on Banking, Housing, and Urban Affairs.


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Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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