PDF Summary:A Monetary and Fiscal History of the United States, 1961–2021, by Alan S. Blinder

Alan Blinder's A Monetary and Fiscal History of the United States, 1961–2021 chronicles six decades of policymaking and economic events that shaped modern U.S. fiscal and monetary policies. Blinder examines the rise of activist fiscal policy under Kennedy and Johnson, its subsequent decline with inflation and monetarism's ascendance, and monetary policy's dominance under Volcker, Greenspan, Bernanke, Yellen, and Powell.

The book explores the politicization of economic policies and ideological debates that often trumped sound economics. Blinder also details major economic crises like the Great Recession and COVID-19 pandemic, and how unprecedented interventions—both fiscal and monetary—stemmed their fallout while reviving aspects of Keynesian theory.

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Practical Tips

• Develop political and media skills through role-playing exercises with friends or colleagues. Set up mock interviews or press conferences where you practice delivering your message, handling tough questions, and staying composed under pressure. This can help you become more articulate and media-savvy, qualities that are beneficial in any field that requires public interaction.
• Create a personal "communication playbook" by recording yourself speaking on various topics, then reviewing the recordings to identify areas for improvement. Focus on clarity, choice of vocabulary, and pacing. Over time, you'll develop a more polished communication style tailored to your voice and expertise.
• Develop a reputation for reliability by volunteering to lead small projects or initiatives in your community or workplace. Make sure to communicate clearly and maintain a steady presence throughout the project, especially if unexpected challenges arise. This will help you build a track record of steadiness that people can trust during more significant events.
• Start a side project that leverages online platforms to reach a global audience. With the internet's role in the 1990s boom as a backdrop, consider how you can use current online platforms to create a product or service that can be delivered digitally. This could be as simple as starting a blog, creating digital art, or offering consulting services online.
• Start a virtual investment club with friends or family to explore how different economic theories play out in real-time. Each member could hypothetically invest in stocks or other assets they believe will perform well under current economic conditions, without actual financial risk. This exercise will help you understand market dynamics and the impact of economic growth on investments, mirroring the investment strategies that capitalized on the New Economy's growth.

Fed-treasury Dynamics During Financial Crisis and Covid-19 Pandemic

Blinder emphasizes that while the Fed operated independently during the 1980s and 1990s, independence became a less salient issue with the onset of the financial crisis in 2007. The Fed's substantial interventions in credit markets, including rescuing AIG and Bear Stearns, were undertaken jointly with the Treasury Department led by Hank Paulson. Furthermore, Paulson demanded that the Fed refrain from purchasing bank shares, a move that would make future injections of public capital into banks politically more difficult, if not politically impossible. Was the Fed serving the Treasury under the exigent circumstances of 2008? Certain detractors believed it. Bernanke, no.

The Fed also worked more or less hand-in-glove with the Treasury in standing up what was eventually known as TARP, intended to support asset prices, especially the prices of mortgage-related securities. That initiative was widely perceived by the public as rescuing banks, a charge that contained a grain of truth.

The joint Fed-treasury intervention in 2020 proved even more pervasive than their efforts in 2008. The Trump administration and then the Biden administration, working cooperatively with the Fed, stood up a variety of new and unorthodox lending facilities that extended far beyond the Fed's limited activities in 2008 and into arenas—state and local governments, small- to medium-sized nonfinancial businesses—that were previously terra incognita for the Fed. This was a case in which it did not matter, practically, whether it was the Federal Reserve or the Treasury that sat in first chair, for the two seemed to be rowing in the same direction.

Practical Tips

• Create a personal financial contingency plan that includes steps to take if the government announces new asset support measures. This might involve adjusting your investment portfolio or saving strategy to take advantage of potential market shifts.

Other Perspectives

• The concept of independence does not mean that the Fed was completely insulated from political pressures or influence during the 1980s and 1990s.
• The concept of central bank independence does not preclude cooperation with the government in times of national emergency, which could be argued was the case during the financial crisis.
• The Fed has its own set of tools, such as adjusting interest rates and conducting open market operations, which it can use independently of the Treasury to intervene in credit markets.
• There could have been legal or regulatory constraints that made the purchase of bank shares by the Fed problematic or less effective than other forms of intervention.
• The focus on banks in discussions about TARP ignores the assistance it provided to the automotive industry, which was also a significant component of the program.
• The 2008 interventions included significant and controversial actions such as the bailouts of AIG and Bear Stearns, which could be seen as extensive given the moral hazard and the precedent they set, even if the sheer number of programs in 2020 was larger.
• The lending facilities may not have been entirely unprecedented, as the Fed has a history of adapting its roles and tools in response to economic crises, which could include exploring new areas of intervention.
• The Fed and Treasury may have had aligned public efforts, but internally there could have been disagreements on policy decisions and implementation strategies.

Central Bank Independence as a Global Norm

Blinder recounts that although the Federal Reserve operated largely independently for decades, independent central banks were the exception in the 1980s, not the rule. That changed dramatically in the 1990s, first in the formerly communist countries of Eastern Europe, followed by numerous Western European nations. The last two significant central banks still lacking autonomy were the British central bank and the Bank of Japan, which achieved this in 1997 and 1998, respectively. By the late 20th century, central bank independence, once a theoretical oddity in 1961, had become the global norm. While the details differed across countries, the common element was that politicians had ceded financial regulation to central banks.

Practical Tips

• Explore the impact of central bank independence by tracking currency stability in your investment decisions. When considering foreign investments, especially in Eastern European markets, analyze the historical performance of their currencies post-independence. This can give you insights into the effectiveness of central bank policies and help you make more informed decisions about currency risks.
• Consider volunteering for a committee or board that requires a level of independent governance, like a local non-profit or community organization. By participating in a group that must make decisions autonomously, you'll gain firsthand experience in the challenges and benefits of independent governance structures. This will give you a practical understanding of the principles behind central bank independence and how they can be applied to various organizations.

Political and Ideological Debates Surrounding Economic Policymaking

This section of Blinder's book delves into the ideological and political debates that have shaped U.S. macroeconomic policymaking over the past six decades. He examines how political considerations and ideological beliefs about government's functions often trumped good economics, leading to unwise decisions with sometimes deleterious consequences.

The Politicization of Economic Policies

The president holds political office, an elected role with political motives that economists often find puzzling, if not inexplicable. And decisions about fiscal policy, unlike monetary policy decisions in most countries, are political in nature. So, it's no shock that politics pervades U.S. fiscal policy's history, argues Blinder.

The Nixon-Burns Political Business Cycle of 1971-1973

Blinder contends that the Nixon administration, with the assistance of Fed Chair Arthur Burns, illustrates how policy makers might deliberately manipulate economic conditions to achieve political objectives. The episode began in 1971, when President Nixon announced that he now followed Keynesian economic principles. However, it was a ruse, for Nixon's main motive was to get himself reelected in 1972. To that end, he and Burns engineered a combination of growth-oriented fiscal measures (especially increased spending) and expansionary monetary policy to boost the economy in the months preceding the election.

To prevent inflation from escalating during a booming economy, Nixon implemented controls on wages and prices in August 1971. Burns backed this decision, despite being a conservative economist, which surprised numerous analysts. The controls managed to temporarily suppress inflation, exactly as intended. However, once voting was over, Nixon removed the control program, and inflation roared back. The entire episode discredited price and wage controls and branded Keynesian economics as inherently inflationary, even though it was Nixon and Burns's political meddling with the economy, not Keynesianism, that was to blame.

Practical Tips

• Develop critical thinking skills to evaluate political statements critically. Whenever a politician makes a claim about the economy, take a step back and assess the statement objectively. Look for evidence, check against multiple sources, and consider the timing of the statement in relation to upcoming elections or political milestones. This practice will help you discern whether economic information is being presented for political gain.
• Create a 'personal monetary policy' by managing your credit and savings to support your financial goals. Similar to how expansionary monetary policy works, you might decide to take a low-interest loan to fund a significant investment, such as buying a house or starting a business, with the expectation that the return on investment will outpace the cost of borrowing.
• Volunteer to serve on a committee for a local organization or club that deals with budgeting or finance. Propose a temporary freeze on membership fees or prices for services when there's a risk of decreased participation due to rising costs. Monitor the effects over time to see if it helps maintain membership numbers and overall participation.
• Engage in conversations with local business owners to gauge the real-world effects of price and wage controls. Ask them how these controls have affected their ability to operate, hire, and grow. This firsthand information can be invaluable in shaping your perspective on economic policies and their practical implications.

Political Logic of Reaganomics & Supply-Side Economics Rise

Blinder argues that Reagan's political success with supply-side economics in 1981 marked a turning point in the political economy of the budget deficit. The story begins during Jimmy Carter's presidency when Congressman Jack Kemp and Senator William Roth, inspired in part by economic theorist Arthur Laffer and Jude Wanniski, put forward a tax-cut plan that would become known as the Kemp-Roth proposal. The main concept was that lowering taxes would create strong incentives for work, saving, and investment, so government tax income would actually increase. The government would be able to reduce taxes and simultaneously get more revenue. The concept was politically seductive. But as Laffer, Wanniski, and others presented it, it was based on the outrageous claim that U.S. tax rates were so prohibitively high in the late 1970s that tax cuts would pay for themselves.

Even though virtually no reputable economists endorsed supply-side economic policies as presented, the doctrine caught on quickly in Republican circles, largely on the grounds that tax cuts were always popular with voters and donors to political campaigns. As Blinder puts it, cutting taxes makes “good politics” even if it makes “bad economics.”

The supply-side notion of a cost-free benefit gained significant momentum after Ronald Reagan was elected president in 1980. Reagan embraced the Kemp-Roth tax cut idea and pushed a slightly modified version through Congress in 1981, arguing that the resulting economic growth would reduce the deficit. The reverse happened. Rather than balancing the budget, Reagan's tax cuts dramatically increased it. But the economy began recovering from a deep recession just before the 1984 election, and voters were happy. Reagan’s gamble on supply-side economics paid off politically.

Context

• The success of the Kemp-Roth proposal in passing through Congress set a precedent for future tax policies, influencing both Republican and Democratic administrations in their approach to fiscal policy and tax legislation.
• The theory assumes that individuals and businesses respond predictably to tax incentives, increasing their economic activities such as working more hours or investing in new ventures when taxes are lowered.
• In the late 1970s, the top marginal tax rate in the U.S. was around 70%. Proponents of supply-side economics argued that such high rates discouraged investment and productivity, although this view was not universally accepted among economists.
• Prominent economists, including several Nobel laureates, publicly criticized supply-side economics, arguing that it was based on overly simplistic assumptions and lacked rigorous theoretical foundations.
• Conservative think tanks and media outlets played a crucial role in popularizing supply-side economics. They provided platforms for proponents to advocate for tax cuts, framing them as a solution to economic woes and a path to prosperity.
• Persistent budget deficits can lead to higher national debt, which may have long-term economic consequences, such as increased interest rates and reduced public investment in infrastructure, education, and other critical areas.
• While the Kemp-Roth proposal was the basis, Reagan's administration made adjustments to the plan, including accelerated depreciation for businesses and incentives for savings and investment, aiming to stimulate economic activity more broadly.
• The national debt tripled during Reagan's presidency, partly due to increased military spending and the failure of tax cuts to generate the expected revenue.
• The Federal Reserve's decision to lower interest rates after successfully curbing inflation played a crucial role in the economic recovery. This monetary easing made borrowing cheaper, encouraging spending and investment.

Presidents Clinton and Bush's Rhetoric on Fiscal Policy for Political Goals

Bill Clinton, according to Blinder, did something even more politically shocking: he sold a deficit-reducing program to voters as a "jobs creation" program, thereby turning traditional Keynesian economic principles upside down. Clinton’s political strategists were horrified by the prospect of selling higher taxes and lower spending – the epitome of “root canal” economics – to an electorate that had grown accustomed to big budget deficits and reductions in taxes for the wealthy. But Clinton understood that he could not ignore the budget shortfall, and he persuaded himself that lowering it might actually benefit the economy.

Clinton's program, which reduced the deficit and passed in 1993, was a political gamble that paid off handsomely for both the president and the U.S. economy. In a rare display of bipartisanship, the bond market loved the plan, and long-term interest rates plummeted, counteracting many of the negative impacts on aggregate demand from a larger budget surplus. Economic conditions flourished. Unemployment decreased. And Clinton easily secured another term.

George W. Bush followed Reagan's footsteps, arguing that government surpluses should be returned to taxpayers, even though the economy was doing well. In the campaign, Bush's supply-side rhetoric was more muted than Reagan’s had been in the early 1980s, but he nonetheless repeatedly sounded the Laffer theme that tax cuts, at least in part, should pay for themselves. However, after the economy's downturn in 2001, Bush's team changed its tune. Now tax cuts were needed to provide "Keynesian" stimulus, a label the Bush team was hesitant to embrace.

Practical Tips

• Use a debt repayment plan to tackle your own debts strategically. Prioritize paying off high-interest debts first, which can be likened to a government focusing on areas that contribute most to its deficit. You might use a spreadsheet to list all your debts, their interest rates, and monthly payments to create a clear repayment schedule.

Other Perspectives

• There is a possibility that the deficit-reduction program's success in job creation was partly due to the political and economic context of the 1990s, and such a strategy might not be as effective in different circumstances or under different economic conditions.
• The concern of Clinton's political strategists may have underestimated the electorate's capacity to understand and support complex economic policies when they are clearly explained and linked to tangible benefits such as job creation and economic growth.
• The emphasis on addressing the budget shortfall might have overshadowed other critical issues that required attention, such as social welfare programs, healthcare, or education, which could have suffered from reduced funding.
• The positive reaction in the bond market could have been due to investor expectations rather than the actual impact of the fiscal policy, as markets often move on perceptions and predictions about future policy impacts.
• The reduction in long-term interest rates following Clinton's program could have also been a result of investor confidence in the overall direction of the economy, rather than a direct result of the deficit-reduction measures themselves.
• The improvement in economic conditions might have been part of a larger cyclical trend, and Clinton's program may have coincided with a natural upswing in the economic cycle.
• It's possible that the methods used to measure unemployment may not capture the full picture of joblessness, such as excluding discouraged workers who have stopped looking for employment.
• The argument for returning surpluses to taxpayers may overlook the opportunity to invest in programs with high social returns, such as research and development, which could stimulate innovation and economic growth.
• The effectiveness of supply-side rhetoric should not be judged solely on its volume or frequency but also on the outcomes of the policies it promotes.
• Tax cuts can disproportionately benefit the wealthy, leading to increased income inequality, which may not be offset by the purported economic growth.
• If the tax cuts are not targeted towards those most likely to spend the additional income, such as low- and middle-income households, the stimulus effect on aggregate demand may be muted.

Ideological Conflicts Over Economic Policy

While pure economic reasoning might sometimes suggest clear policy prescriptions, those prescriptions may be rejected by those making policy decisions on the basis of ideological beliefs that are incompatible with mainstream economics. Blinder’s narrative highlights several examples.

Keynesian-Monetarist Debate: Implications For Inflation and Unemployment

The ideological divide between monetarism and Keynesianism, two rival doctrines about the role of government in managing the economy, plays a recurring role in Blinder’s narrative, dating back to the Kennedy-Johnson tax cuts. The rivalry concerned fiscal strategies more than monetary policy. The Fed, as we know, tended to act independently even when independence was not highly valued.

People who adhered to monetarism were generally politically conservative and skeptical of government intervention in the economy. They therefore favored tightly limiting the role of policies related to fiscal matters and leaving the task of managing aggregate demand to the Fed. Keynesians, by contrast, generally favored greater government involvement. They were therefore more likely to see an active role for government fiscal measures.

The debate also extended to policy recommendations. For example, as inflation increased from the late 1960s into the early 1970s, monetarists insisted the Federal Reserve should focus tightly on slowing the growth rate of the money supply. Keynesians, however, pointed out that inflation in this period resulted mainly from excess demand (the Vietnam War) and later from supply shocks (food and fuel). To Keynesians, these maladies required more nuanced responses than simply slowing monetary expansion.

Other Perspectives

• The focus on government's role in "managing" the economy might imply a level of control that neither doctrine fully endorses, as both recognize the limits of government intervention and the importance of market forces.
• Some monetarists may support government intervention under specific circumstances, such as during a financial crisis, where monetary policy alone may not be sufficient to stabilize the economy.
• The effectiveness of the Fed's management of aggregate demand can be constrained by global economic factors beyond its control, whereas fiscal policy can be more responsive to domestic needs.
• Critics of greater government involvement often cite the risk of political influence and corruption, which can result in favoritism and inefficient spending.
• Some analysts contend that the timing and targeting of fiscal measures are often off due to the lag in recognizing economic trends and implementing appropriate policies.
• Slowing the growth rate of the money supply could potentially lead to unintended consequences, such as stifling economic growth or increasing unemployment.
• Monetarists might argue that while excess demand and supply shocks contributed to inflation, the underlying cause was still an overly expansive monetary policy that allowed the excess demand to fuel inflation.
• There is an argument that over-reliance on fiscal policy could reduce the incentives for private sector adjustments and market-driven solutions.

Supply-Side Strategies and the "Free Lunch" Promise

Supply-side economics is another prominent example in Blinder’s narrative of an ideology that has had a profound effect on U.S. fiscal and monetary policy even though it never developed much credibility in academia Supply-side economics traces its origin to Arthur Laffer, who infamously argued in the late 1970s that cutting income tax rates would lead to such a dramatic acceleration of economic growth that tax revenue would rise despite lower tax rates. (A costless benefit for the state?)

This idea, which some still call “voodoo economics,” was enthusiastically embraced by Reagan, who incorporated it into a broad economic agenda in his 1980 presidential campaign. Reagan’s election ushered in a new era of fiscal policy focused on lowering taxes and thereby reducing the size and scope of government. The hoped-for economic miracle did not occur, however, as the budget deficit soared, the debt ratio relative to GDP increased, and real economic growth after 1981 remained about equal to the Carter years.

Context

• Reagan's adoption of supply-side policies marked a shift from Keynesian economics, which focused on demand-side solutions like government spending to manage economic cycles.

Other Perspectives

• The long-term effects of supply-side economics on U.S. fiscal and monetary policy are debatable, with some arguing that the initial impact was significant but that its influence has waned over time as new economic challenges have emerged.
• Laffer's role in supply-side economics is sometimes overstated, as the movement was also influenced by other economists and policymakers who contributed to the development and implementation of supply-side policies.
• Empirical evidence has shown that tax cuts do not always lead to increased revenue; for example, the Kansas state tax cuts in 2012 did not result in the promised economic boom and instead led to severe budget deficits.
• The enthusiasm for tax cuts may have been partly driven by political strategy, aiming to garner support from various voter groups that would benefit from lower taxes.
• The relationship between tax policy and government size is complex and can be influenced by a variety of factors, including economic conditions, demographic changes, and political priorities.
• The term "economic miracle" may set an unrealistically high bar for the outcomes of supply-side economics; moderate improvements in economic conditions or growth rates could still be considered successful outcomes of the policy.
• Economic growth, while not miraculous, did occur in the 1980s, and attributing the budget deficit solely to tax cuts ignores the complexity of economic outcomes.
• The increase in the debt ratio relative to GDP could be attributed to factors other than supply-side tax cuts, such as increased government spending in other areas or economic challenges unrelated to tax policy.
• The measure of real economic growth does not capture changes in the distribution of income and wealth, which could have been affected by the supply-side policies.

Anti-Government Sentiment Post-2008 Crisis and Tea Party Movement Resurgence

Blinder asserts that the political and ideological backlash against government intervention in economic matters that followed the 2007-2009 financial crash and subsequent Great Recession was both ironic and damaging. The crisis had resulted, after all, from an overabundance of greed, negligence, and fraud in the finance sector along with a widespread dereliction of duty by regulators who misplaced their faith in market forces. Yet, many observers in America and beyond directed their anger toward the government.

The bailout of Bear Stearns and the nationalization of AIG were widely denounced. The limited 2008 fiscal stimulus bill was labeled a failure long before its effects could have been felt. The TARP program and Obama's 2009 economic stimulus were also lambasted incessantly. Republican members of Congress, many of whom had been silent while George W. Bush ran trillion-dollar deficits, now insisted that deficits were a great danger to the nation. This hypocrisy, Blinder argues, fueled the resurgence of a powerful anti-government philosophy, a resurgence that became particularly evident in the Tea Party, which altered the political landscape of the U.S.

Practical Tips

• Write a letter to your local representative expressing your views on the importance of government intervention in economic crises, using personal experiences or local examples to illustrate your points. This personal touch can make your message more relatable and impactful, potentially influencing policy decisions.
• You can scrutinize the ethical practices of companies before investing by using online tools that rate businesses on their corporate responsibility. Look for platforms that evaluate companies based on their governance, social impact, and environmental practices, and choose to invest in those with high ethical ratings. This aligns your investment choices with companies that are less likely to engage in the negative behaviors that contribute to financial instability.
• Keep a personal journal where you track and analyze your own experiences with market forces. For instance, if you notice a price increase in your favorite products, try to investigate and write down the possible market forces at play, such as supply chain issues or changes in consumer demand. This hands-on approach will make you more aware of the practical implications of market dynamics in everyday life.
• Educate yourself on the mechanisms of government feedback, such as public comment periods, town hall meetings, and direct correspondence with representatives. Use these channels to express your concerns and propose alternatives, ensuring your voice is heard in the decision-making process. This empowers you to become an active participant in governance rather than just an observer.
• You can analyze the health of financial institutions by reviewing their public financial statements. By understanding the key indicators of financial stability, such as debt-to-equity ratios, liquidity ratios, and profit margins, you'll be better equipped to make informed decisions about which banks or financial services to trust with your investments or savings. For example, if a bank's debt is significantly higher than its equity, it might be a sign of potential instability.
• Create a personal "policy effectiveness" journal where you document and reflect on the long-term effects of specific economic policies on your community. Note observations like changes in local business growth, employment rates, or public services over time, which can provide a more nuanced view of a policy's success or failure.
• Track your own consistency by maintaining a decision journal. Whenever you take a stance on an issue, jot it down along with your reasoning. Periodically review your entries to check for consistency over time. If you find discrepancies, reflect on what caused your perspective to shift. This practice can help you become more aware of your own biases and ensure that your opinions are based on principles rather than the context of the moment.
• You can start a personal journal to track instances where you perceive hypocrisy in government actions and reflect on how it affects your views on governance. By regularly noting down specific events and your reactions to them, you'll develop a clearer understanding of your stance on government policies and the role of hypocrisy in shaping your political philosophy. For example, if a new policy is announced that contradicts previous statements by officials, jot down your thoughts and feelings about this discrepancy and how it influences your trust in government.
• Start a blog or social media page focused on a specific political issue you're passionate about to gauge and potentially influence public opinion. By consistently posting informed content and engaging with followers, you can create a digital version of a grassroots movement. Track the spread of your ideas and any feedback from local representatives to measure your impact.

Economic Crises and Recessions Shaping Macroeconomic Policy

Naturally, recessions and economic crises are the events that stabilization policy seeks to mitigate. The unprecedented depth and speed of the 2020 pandemic-induced recession naturally forced those shaping policy to reexamine their theories and tools. Blinder’s book details how crises and recessions, and the responses they evoke from policy makers, shape both thought and policy – sometimes for decades.

The Housing Bubble, Economic Crash, and Great Recession

Blinder traces the roots of the 2007-2009 financial crisis and the subsequent Great Recession, a crucial turning point in modern economic history, to the housing bubble plus the fixed-income bubble that inflated in the 2000s. As the crisis unfolded, monetary and fiscal strategies intervened in unprecedented ways to stem the economic and financial damage. Those interventions succeeded and thereby helped solidify the view that activist government policies can mitigate severe economic downturns.

The Causes and Consequences of the Housing Bubble

Blinder begins his discussion of the economic downturn by detailing the housing market bubble that both preceded and, in his view, contributed to the crisis. By one measure (Case-Shiller), U.S. house prices increased approximately 80 percent from January 2000 to January 2006 before the bubble burst; by another measure (FHFA), the increase was “only” about 60 percent. Neither index, obviously, was available live. Thus, it's challenging to say precisely when the rise in prices stopped being a rational response to fundamentals and turned into something called a bubble. Yet it was almost certain after the fact.

Irresponsible mortgage lending in the 2000s was a significant factor in both inflating the bubble and turning it into a financial disaster when prices started to fall. Blinder cites such practices as lax loan approval criteria, minimal upfront costs, and especially mortgages engineered to become delinquent if home prices slowed or reversed. When the housing market crashed, mortgage losses—especially those involving subprime loans—increased.

Practical Tips

• Create a simple spreadsheet to compare rental income versus property prices in your area over time. This can help you assess whether housing prices are outpacing the growth in rental income, which might suggest that the market is becoming overvalued. Input data from local listings and rental websites monthly to track these metrics.
• Engage in regular financial education to make informed decisions. Dedicate time each month to learn about mortgage products, interest rate trends, and housing market indicators. This ongoing education empowers you to make smarter choices about when to buy, sell, or refinance, based on more than just the current state of the market.

Other Perspectives

• Expert consensus and the analysis of market sentiment at the time can sometimes provide a more immediate indication that a market is entering bubble territory, even if the exact moment cannot be pinpointed.
• The global savings glut, where excess savings from countries like China were invested in U.S. assets, also helped fuel the housing bubble by providing an abundance of cheap credit.
• Lax loan approval criteria were not solely to blame; there was also a lack of understanding of the risks by borrowers, which contributed to the crisis.

Financial Crisis Triggered by Systemic Trust Collapse

Blinder contends that the financial crisis truly started on August 9, 2007, when BNP Paribas, a major bank from France, stopped allowing withdrawals from three investment funds tied to subprime mortgages. Investors read those actions as indicating: "You lost funds, we're uncertain about the amount, and you cannot..." Within days, fear began to spread throughout global financial markets.

Market participants globally reacted with a classic shift to safer investments as they dumped risky assets and scrambled to get their hands on more liquid assets. London's interbank rates soared as banks lost confidence in even their best counterparties and thus suddenly became unwilling to lend to one another. In short, trust, the essential bedrock of all financial markets, crumbled. The finance sector began to stall.

Practical Tips

• Set up alerts for news related to key sectors of your investments to stay informed about potential market shifts. Use a financial news app or website to track the performance and news of the industries you're invested in. If you have investments tied to real estate, for instance, set alerts for terms like "housing market," "interest rates," or "mortgage rates" to get timely updates that could indicate when to reassess your investment strategy.

Other Perspectives

• The decision by BNP Paribas could be seen as a response to extraordinary market conditions rather than an indication of systemic issues within the bank itself.
• Fear may not have spread uniformly across all global financial markets; some regions or sectors could have remained more stable due to stronger economic fundamentals or regulatory environments.
• Some banks might have continued lending but with increased interest rates to compensate for the higher perceived risk.
• Trust in financial markets is not static and can be rebuilt through policy measures, regulatory reforms, and the stabilization of the economy, suggesting that its collapse, while significant, is not irreversible.

Fed and Treasury's Unprecedented Joint Effort to Prevent Depression

Both the Federal Reserve led by Ben Bernanke and the Treasury Department steered by Hank Paulson worked with unusual vigor and creativity during the 2007-2009 financial crisis. It can be argued that the Federal Reserve, at least in the initial phases of the crisis, moved more rapidly and certainly more independently than the Treasury did. For example, in March of 2008, the Federal Reserve, after concluding that there were no willing buyers for the ailing investment bank Bear Stearns, brokered a deal in which JP Morgan Chase agreed to acquire the troubled firm, with the Fed kicking in $30 billion to make the purchase more palatable for Dimon's shareholders.

By contrast, Paulson seemed to see no need for Treasury involvement in such ad hockery, preferring to rely instead on the Fed's "unlimited" balance sheet. As the crisis worsened, however, and with the Fed becoming increasingly reluctant to commit taxpayer funds to rescuing institutions without explicit approval from Congress, Paulson realized that his “plan” had been no plan at all.

That realization prompted him to propose what became TARP. The program, conceived over a weekend shortly following Lehman's bankruptcy, would use $700 billion of taxpayer funds to purchase so-called troubled assets. Paulson believed that removing these assets from the records of struggling banks would bolster their capital and thereby stabilize the economy.

Practical Tips

• You can apply creative thinking to your personal finances by conducting a "financial health audit." Take a cue from how institutions assess and address risks by reviewing your own financial situation. Identify potential risks, such as high debt levels or inadequate savings, and brainstorm innovative ways to mitigate them, like starting a side hustle or refinancing loans. This approach can help you build resilience against personal financial crises.
• Create a personal crisis management plan that emphasizes rapid response and autonomy. Think about past situations where you had to make quick decisions and what the outcomes were. Use this reflection to outline a strategy for future personal or professional crises, ensuring that you have a clear action plan that doesn't rely heavily on external approval or assistance.
• Engage in community discussions or online forums focused on financial literacy to learn how others perceive and react to government interventions in the financial sector. Participating in these conversations can broaden your understanding of public sentiment and inform your own financial decisions.
• Engage in role-playing exercises with a friend or family member to practice negotiation and problem-solving skills during high-stress situations. Take turns presenting each other with a challenging scenario, such as a dispute with a landlord or a conflict at work, and work through the problem together. This strategy helps you build the confidence and communication skills necessary to navigate crises effectively, much like the strategic negotiations that were part of the TARP initiative.

The Great Recession's Impact on Employment, Output, and National Debt

The financial crisis and the deep recession that followed – dubbed the “Great Recession” – wreaked havoc on employment, output, and the federal budget. U.S. real GDP decreased by approximately 4.1 percent from its peak in 2007:4 to its trough in 2009:2. That sounds troubling, and it was. But by the new, post-COVID metric, it was mild.

Employment fared significantly worse. Unemployment skyrocketed from 4.4% in May 2007, reaching 10% in October 2009 and remaining above 8% for years thereafter. Altogether, the U.S. lost 8.7 million jobs between January 2008 and February 2010, leaving the labor market in its worst condition in decades.

The national budget naturally suffered both from the decline in revenues that always accompanies an economic downturn and from the numerous extraordinary expenses incurred in response to both the downturn and the financial crisis. The federal budget went from a modest deficit of 1.2% of GDP for fiscal year 2007 to a staggering 10% for fiscal 2009. A tenth of GDP! This was a peacetime record for the period after the war and more than triple what had been thought unthinkable before 2008.

Context

• Real GDP measures the value of all goods and services produced by an economy, adjusted for inflation. This adjustment allows for a more accurate comparison of economic output over time by accounting for changes in price levels.
• The Great Recession was triggered by the collapse of the housing bubble in the United States, which led to a severe financial crisis. This crisis was marked by the failure of major financial institutions and required government intervention.
• The job losses were not evenly distributed across all sectors. Industries such as construction, manufacturing, and finance were particularly hard hit, with construction losing a significant number of jobs due to the collapse of the housing market.
• The increase in the federal budget deficit was partly due to significant government spending on stimulus measures, such as the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, which aimed to stabilize the financial system and stimulate economic growth.
• The Troubled Asset Relief Program (TARP) was a significant extraordinary expense, involving the U.S. government purchasing toxic assets and equity from financial institutions to stabilize the financial sector.

The COVID-19 Pandemic and the Closure of the Economy

According to Blinder, the 2020-2021 pandemic forced policymakers focused on both fiscal and monetary matters, all over the world, to abandon their ideological proclivities and act expeditiously to deal with a national (global) emergency that no one had anticipated and whose ending was uncertain. The outcome was both dramatic and, by most assessments, successful in averting an even worse scenario. Ironically, however, these unprecedented actions by policymakers spawned intense and largely illogical government opposition.

Unprecedented Speed and Seriousness of Economic Decline

The COVID-driven recession of 2020 was the most severe economic downturn the U.S. had experienced since the 1930s and the most rapid contraction by a significant margin, surpassing even the most challenging quarter of the Great Depression. The precipitous drop in business activity came because fear of contracting or spreading the virus changed behavior dramatically, with people all over the world—not only in the United States—suddenly unwilling to work in proximity to one another or to shop in crowded stores. In effect, fear shut down large parts of the economy.

The rapidity of the decline was as remarkable as its extent. In the U.S., real GDP tumbled 10 percent in just two quarters, and over four-fifths of that decline occurred during the dreadful second quarter of 2020, when real GDP fell at the mind-numbing annual rate of 31.2 percent. Most of those losses, however, were recovered in Q3, and the data quickly bounced back, albeit not with a full recovery.

Context

• The 10 percent drop in real GDP over two quarters during 2020 was unprecedented in its speed. For context, during the Great Recession of 2007-2009, the U.S. GDP fell by about 4.3 percent over six quarters.
• The economic decline was not isolated to the U.S.; it was part of a global downturn as countries worldwide faced similar challenges, leading to synchronized economic contractions.
• The economic impact varied across different sectors, with some, like technology and healthcare, experiencing growth due to increased demand for digital services and medical supplies.

Other Perspectives

• The Great Depression lasted for a much longer period and had a more profound impact on the structure of the economy and society, which could be argued as a more severe downturn in terms of lasting effects.
• The use of "most rapid contraction" could be misleading without considering the percentage drop relative to the overall size of the economy at the time; the Great Depression saw a larger overall economic decline.
• Economic factors, such as job security and financial stability, may have influenced behavior changes as much as fear, with individuals reducing consumption and changing their habits to adapt to the uncertain economic environment.
• Online shopping and remote work were already on the rise before the pandemic, suggesting that a transition away from crowded workplaces and stores was in progress independent of the pandemic-induced fear.
• It wasn't just fear that changed behavior; it was also a shift in social responsibility and collective action to protect public health.
• The recovery in the third quarter may have been driven by temporary factors, such as government stimulus and relief efforts, which may not be sustainable in the long term.
• The notion of a bounce back does not consider the potential for permanent scarring effects on the economy, such as long-term unemployment, business closures, and increased public debt.

Fear and Uncertainty in Economic Behavior

Blinder emphasizes that the 2020 recession differed from previous recessions in its cause, speed, severity, and concentration in sectors previously believed to be immune to business cycles. In America and beyond, the economy tanked due to people becoming fearful of contracting or spreading the deadly virus, rather than because of policy errors or financial misjudgments. With no effective medicines or vaccines, behavior shifted significantly.

People stopped going to restaurants, movies, Broadway shows, sporting events, and on vacations. They curtailed shopping, especially for boxed items. Many companies, both large and small, either shut or drastically curtailed their production. Millions of employees were either laid off or forced to work from home. There was nothing subtle about it: the engine of economic activity suddenly sputtered and in many cases simply stopped.

Context

• The pandemic affected economies worldwide, leading to widespread lockdowns and restrictions as governments attempted to control the virus's spread.
• Governments and central banks implemented large-scale fiscal and monetary interventions more quickly and aggressively than in past recessions, reflecting the unique nature of the crisis.
• Many businesses adopted remote work policies to continue operations, leading to a significant shift in work culture and technology use.
• The pandemic shifted consumer preferences towards fresh and locally sourced products, impacting the demand for pre-packaged, boxed items.
• Workforce availability was affected as employees faced health risks, caregiving responsibilities, or quarantine requirements, further complicating production efforts.
• Governments around the world implemented various economic relief measures, such as stimulus checks and unemployment benefits, to support individuals who lost their jobs or faced reduced hours.
• The situation highlighted the interconnectedness of global economies, as disruptions in one region had ripple effects worldwide.

Enormous and Unusual Economic Responses

The severity of the COVID-19 recession and the urgency of taking action to cushion its impact forced policymakers to abandon ideology, past practice, and fears of large deficits and exhaust every possible measure.

Fiscal policies under both the Trump administration (CARES Act and a December 2020 relief package) and the Biden administration (the American Rescue Plan) pumped roughly $6 trillion of new spending into the U.S. economy through a variety of policies that included “rebates” on previous taxes, enhanced unemployment benefits, multiple tranches of funding for the Paycheck Protection Program, stimulus checks, support for municipal and state authorities, and more. It was deficit spending on a scale that hadn't been observed in the U.S. since the Second World War.

The Federal Reserve responded with similar alacrity. The FOMC slashed the federal funds rate to 0-0.25 percent in March 2020 and immediately turned to quantitative easing on a massive scale, buying more than $4 trillion of Treasury securities and agency mortgage-backed securities over the next year. The Fed also made copious use of its Section 13(3) lending powers to create new lending facilities – several of them highly unorthodox – that stretched the central bank’s scope and authority.

Practical Tips

• Track your personal spending like a government budget to understand your own deficit spending patterns. Create a simple spreadsheet where you categorize your expenses as either 'essential' or 'non-essential' and track them over a period of three months. This will give you a clear picture of where you might be overspending, similar to how a government reviews its expenditures.
• You can explore refinancing your mortgage to take advantage of lower interest rates, potentially reducing your monthly payments and overall interest paid over the life of the loan. When the Federal Reserve cuts rates, mortgage rates often follow suit. Contact a mortgage broker or use online calculators to compare current rates with your existing mortgage to see if refinancing could save you money.
• You can explore the flexibility of existing rules in your field to innovate solutions. Just as the Fed used its lending powers creatively, look at the regulations or guidelines in your profession and brainstorm ways they could be interpreted to allow for new, beneficial practices. For example, if you work in education, you might find a way to use classroom resources in a manner that enhances learning experiences but stays within the bounds of educational standards.

The Political and Ideological Backlash Against Government Intervention

Blinder notes that the massive measures taken in response to the COVID-19 pandemic produced a powerful – and profoundly illogical – political backlash. Part of it was familiar; for example, congressional Republicans who had cheered the tax cuts under Trump in 2017 suddenly "remembered" that deficits matter. Additional aspects of the backlash were novel and surprising. Opposition to vaccines became a potent, albeit perplexing, political movement.

Practical Tips

• You can foster informed discussions by starting a non-partisan newsletter that summarizes different perspectives on government intervention. This newsletter could include easy-to-understand breakdowns of policies, their intended effects, and actual outcomes, without taking a political stance. By providing a balanced view, you encourage readers to form their own opinions based on facts rather than partisan rhetoric.
• Volunteer with local public health outreach programs to assist in disseminating factual information about vaccines. By contributing your time to help these organizations, you can support efforts to educate the community, which may counteract the spread of misinformation that fuels opposition movements.