Back when I was still young and ignorant enough to think that socialism was a pretty good idea, I was astonished by Ronald Reagan’s aphorism that: The nine most terrifying words in the English launguage are, “I’m from the Government and I’m here to help.”
He really is senile and crazy, I thought. That’s what the government is for: to help.
Nearly 40 years later, and the wisdom of Reagan’s observation is brutally obvious. For the slow kids who are still catching on, consider the two big financial shocks of the past two decades, the Global Financial Crisis and the 2022 inflation crisis — and the role of government in both. We all know how the first ended.
We’re still living through the second: how it ends, is anybody’s guess. The only certainty is that we don’t want to ask the government to help.
The Federal Reserve has made two major policy blunders in the last 25 years.
The first was being unaware that the foundation of the U.S. banking system had been eroded away by complex mortgage securities that carried high credit ratings but turned out to be toxic during a broad housing downturn. The resulting meltdown in valuations caused the global financial crisis in 2008 that hobbled the U.S. economy for years.
More recently, a misreading of the strength of the labor market and the persistence of price shocks sparked by the pandemic led to the highest inflation rate in 40 years and the final chapter of this saga is still to be written. The policy error paved the way to make 2022 the worst year in financial markets arguably since the 1930s. Both stocks and bonds have plummeted and Federal Reserve Chairman Jerome “Jay” Powell is at the center of the financial turmoil, landing him on the MarketWatch 50 list of the most influential people in markets.
He’s from the government and he’s here to help.
How Powell, who is not a trained economist, is ultimately remembered will depend on whether he’s able to tame inflation without driving the U.S. into a deep recession. It could still all end relatively well, but the debate about what signs the U.S. central bank ignored and why will be studied and debated for years to come.
Remember that the deep economic shock of Covid was not because of the virus, but because of government policies enacted in a panicked rush.
They were here to help.
Instead, as even the legacy media are waking up, they made it all worse.
They’re still helping.
In August 2020, as the nation was emerging from COVID-19 lockdowns, Jay Powell’s Federal Reserve announced a monumental shift. For more than a year prior to the pandemic, the Fed had been working on a new policy framework and the pandemic wasn’t about to stop the U.S. central bank from implementing what it had been putting together.
The only problem was that, like generals fighting the last war, the policy was designed for the low inflation world that had existed for two decades — until the economic belting of lockdowns happened.
Stephen Stanley, chief economist at Amherst Pierpont Stanley […said] “By the time the Fed realized that policy was too easy, the inflation genie will be out of the bottle. By the way, this is exactly the approach that got the Fed in so much trouble in the late 1960s and 1970s.”
Today, both Rosengren and Stanley believe the new framework contributed to the current inflation outbreak […]
Lou Crandall, chief economist at Wrightson ICAP, a research firm that analyzes Federal Reserve operations, said that Powell and his Fed collegauges, like many economists, didn’t keep up with the rapidly changing economic outlook.
When confronted with high inflation, “they were determined not to overreact to what seemed like a special event,” he said.
So, the Fed coasted along, blithely doing what they had since the GFC: keeping interest rates low and buying hundreds of billions in Treasurys and mortgaged-backed securities each month.
In the meantime, the economy was running away from them, gathering more and more inflationary steam. Powell said he was sure it wasn’t a big deal. The Biden administration insisted, bizarrely, that, if you ignored food, fuel and power prices, inflation was still low.
And the government poured rivers of freshly-printed money into the economy.
The rapid economic recovery from the COVID-19 lockdowns led to a burst in demand, fueled by government stimulus payments to consumers and businesses, but also complicated by supply-chain disruptions related to the pandemic. The war in Ukraine was another major factor that pushed up oil prices, and “you can’t blame the Fed for not foreseeing that,” [Mark Gertler, a professor of economics at New York University] said. Meanwhile, the slow return to work, retirements and resignations from unpleasant work during the pandemic meant that labor-market shortages pushed up wages […]
“They just didn’t see this coming,” Gertler said.
MarketWatch
And they just kept printing more money and calling it “stimulus”. In an economy where inflation was already reaching 40-year highs.
They’re here to help, after all.
