The book talks through the point of view of Thomas Hoenig, who was often the lonely voice of dissent when the Federal Reserve Governors voted on whether to embark on QE under the chairmanship of Ben Bernanke. (There were others too but they never formalized their dissent by casting a NO vote which by the way would have shook the long standing traditions of the Fed of mostly unanimously consented decisions).
The book does an excellent job of simplifying the jargon of the Fed that is often obtuse and incomprehensible to something an average person can understand.
First off, in FedSpeak - “hawks” and “doves” mean the opposite of what they do in the context of foreign policy.
In FedSpeak:
Hawks - Try to limit the Fed’s reach.
Doves - Argue for aggressive intervention of the Fed.
The book throws some insight into how J. Powell views things related to monetary policy. He has worked in Private Equity in the past so he clearly has seen from close quarters how QE and low interest rates drive up valuations and can lead to distortions in the economy. Specifically, it incentivizes PE firms to take more adventures and make money through financial engineering. At certain points even though he himself didn’t cast an official dissenting note, he clearly voiced his concerns about QE.
Post 2008, when there were reforms to be made - the author suggests the administration did not opt for radical reforms and somewhat middle-of-the-road reforms. Hoenig’s proposal in itself was to break the riskiest parts of banking away from the economically vital part so riskier banks failing wouldn’t impact the system. However, the government. decided to create a more intricate web and labyrinth of regulatory bodies to oversee them. (CFPB/Dodd-Frank).
Fed and Capital Cycles
The cycle goes like this:
Cheaper Money → More Loans → More demand/growth → High employment + Driving up prices → High inflation → Hike interest rates → Expensive capital → Less loans and less demand → High unemployment → Less growth
In one of the chapters, the author explains there are two types of inflations - (1) Price Inflation (2) Asset Inflation.
Price Inflation implies the cost of everyday/essential items - something that is reflected in CPI.
Asset Inflation refers to the inflation in the prices of assets that are a store of value (like real estate, stocks).
Thomas Hoenig believed that low interest rates for too long would lead to Asset bubbles (or asset price inflation).
In hindsight, this seems to have been a problem that the Fed failed to address. They were so focused on CPI/regular price inflation - they did not take any meaningful steps to address the ballooning asset prices as a consequence of low interest rates and QE. This meant, people with assets became richer and richer while at the same time those without it kept falling further behind.
As per the analysis by Allan Meltzer - Reason for the high inflation in the 1970s in the US was- more weight was placed on maintaining high/full employment than on reducing inflation.
Now, let's parse this - Fed printed more money in the 70s unaware that it was causing more inflation as there was more money floating around to chase limited goods. Add to it the events like the formation of OPEC and its cartel-like policies driving up oil prices.
Effects and Side-effects of Quantitative Easing
Between 2008-2010, the Fed printed $1.2 trillion of money -more than what it had printed in the last 100 years.
Fed Balance Sheet
