Nick Timiraos, a Wall Street Journal reporter, has written what’s known in the journalism trade as a “tick-tock” — a chronological view of some momentous event — of the Federal Reserve’s response to the COVID-19 crisis. As for what the enormous support operations the Fed has mounted over the last decade or four all means, there are a few pages of that in an epilogue. Timiraos’s book, Trillion-Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — and Prevented Economic Disaster, is proof of Megan Garber’s observation in the Columbia Journalism Review back in 2008 that: “Under most circumstances, tick-tocks in news stories have an air of cop-out, being, as they generally are, data-dumps masquerading as news stories. Timeline-driven narratives are the ultimate show-don’t-tell conceit, and, as such, they’re particularly convenient as a format for writers who’d prefer to avoid, you know, making a point.”
That’s not entirely fair. If Timiraos has a point, it’s that Fed chair Jerome “Jay” Powell and some of his principal colleagues, like vice chair Lael Brainard and former vice chair Richard Clarida, were heroes who kept everything from falling completely apart in the spring and summer of 2020. He’s not entirely wrong. In a society that has experienced a general decline in competence and, in particular, a major erosion in state capacity (aside from its ability to jail and kill), our central bank is a notable exception. You may not like its class loyalties, but it does its job with some skill. That leaves it performing tasks it was never meant to perform. Timiraos touches on some of that but not much.
This prominence and centrality are a strange turn for the Fed, given its role in our state structure. “A slight acquaintance with American constitutional theory and practice demonstrates that, constitutionally, the Federal Reserve is a pretty queer duck,” William Greider quoted the Texas populist Wright Patman, who served twenty-four terms in the House of Representatives from 1929 to 1976, as saying, in his 1989 book on the Fed, Secrets of the Temple: How the Federal Reserve Runs the Country. Patman, a relentless critic of the central bank, had a point. Almost a fourth branch of government, it’s entirely self-financing; when you can buy interest-bearing bonds with money you create out of thin air, you can make a nice profit. It turns most of that profit over to the US Department of the Treasury — $107 billion in 2021 — but only after deducting the expenses it deems reasonable to its operation. That means it never needs to go to Congress for an appropriation.
The Federal Reserve System is an oddly hybrid public–private entity, with a board in Washington at its center and a dozen regional branches scattered across the country. The branches are technically owned by the banks in their home region, and the presidents of those branches often reflect more conventional bankerly views than the board members in Washington do. Monetary policy is set by the Federal Open Market Committee, which consists of the seven members of the board (who are nominated by the president and confirmed by the Senate) and five of the regional branch presidents (New York’s, the branch that relates most closely to Wall Street, plus four of the other eleven serving in rotation). The “private” side of the system doesn’t dominate policymaking, but it’s certainly heard.
It’s surrounded by a thick mystique of expertise; it makes decisions that affect almost everyone, but almost no one knows how or why. Part of the reason for this is that most people, even sophisticated ones, find economics incomprehensible. But it’s also partly by design — the Fed is a profoundly political institution that’s contrived to appear above politics, operating in the best interests of all and not some interest group or other. That’s true if you don’t consider big capital to be an interest group.
It’s not as shrouded in mystery as it used to be, though. The Fed has opened up considerably over the last decade or two, disclosing interest rate and other policy decisions as they are made (it used to simply make the change, and Wall Street Fed watchers would try to figure out what the new regime was). But there’s still an air of high priesthood about it, which is the root of Greider’s title.
There haven’t been many critical looks at the Fed in the thirty-three years since Greider’s massive book (and Timiraos’s isn’t very critical). Secrets of the Temple was mostly a study of the institution under Paul Volcker’s leadership, which ran from 1979 to 1987, whose main feature was crushing the inflation of the 1970s with a brutal round of austerity, enforced through historically high interest rates. That’s not how things have gone for the last thirty-five years, but that view of the Fed still has a hold on much of the US left — though it’s looking like Powell is now communing with the spirit of Volcker.
Since 1987, when Volcker was succeeded by the Ayn Rand protégé Alan Greenspan, the Fed’s principal responsibility has been bailing out the financial system after reckless and unsupervised financiers drove it into a ditch every five or ten years. We’ve had a stock market crash in 1987, financial crises in Asia and Russia in the late 1990s, the bursting of the dot-com bubble in 2000, and the subprime mortgage crisis of 2008, just to name a few. Each threatened to lead to a meltdown of the financial system and a rerun of the Great Depression, which the authorities, for understandable reasons, wished to avoid. But after each rescue, there were no serious reforms, and Wall Street quickly went back to business as usual. Market players became convinced that, should they revisit the ditch, the Fed would tow them out. And they were right.
The COVID-19 crisis didn’t fit this template. It was “exogenous,” to use economic jargon — originating outside the financial system, not within it. It threatened a financial meltdown, of course, but it also threatened what financial types strangely call the “real sector,” the worlds of production and consumption, as everything shut down in a mass panic. Given the profound dysfunction of the Trump administration — and the thin staffing of the Treasury Department, which in previous regimes would have played a prominent role in dealing with the crisis — Powell and the Fed took center stage.
Unlike recent Fed chairs and most of the staff, Powell wasn’t a PhD economist, and he often felt dissed by his underlings. (“They talk to me like I’m a golden retriever,” he said.) Before Barack Obama nominated him to the Federal Reserve in 2012, Powell had spent most of his career as a lawyer and investment banker, though he was no stranger to Washington. Politically, he was an old-style Republican. Obama appointed him, in his aspirationally bipartisan fashion, to outflank reflexive Senate GOP opposition to his other nominees. In 2017, Donald Trump nominated him to the post of chair, refusing to reappoint Janet Yellen, who, despite being highly regarded by nearly everyone, was either too female, too Democratic, or too short for him.
Trump soon came to regret the appointment. Powell was eager to raise interest rates, and Trump, the serial debtor, hated that idea. Powell (the institution is dominated by its chair, though there’s usually an effort to build a consensus among the other board members) kept nudging rates higher through 2018 and early 2019. Powell had been skeptical of the Fed’s earlier moves to boost the economy in the wake of the 2008 financial crisis — not just the near-zero interest rate policy it pursued from 2009 through 2015 (and below 1 percent into mid-2017) but also its purchases of trillions of dollars in Treasury securities in the hopes of stimulating the economy. There’s little evidence that these policies did much to stimulate the real sector, but they did make for a grand time in the financial markets, as the stock market and other speculative assets roared higher.
Powell had wanted to end the regime of near-perpetual monetary indulgence and bring things back to a semblance of normality. Besides nudging interest rates higher early in his tenure as chair, Powell dialed back on the Fed’s holdings of Treasury securities, which had quintupled between 2008 and 2018. While a recession didn’t seem imminent, the expansion was maturing, and a president facing reelection in 2020, especially one who made what he liked to claim were billions of dollars through borrowed money, wouldn’t have been happy to see things turning south as the campaign heated up. Powell, who looks like a central banker out of central casting (a favorite Trump qualification for office), was acting like one. But under pressure from a sagging stock market and personal attacks from Trump (“Here’s a guy — nobody ever heard of him before, and now I made him, and he wants to show how tough he is! Okay, let him show how tough he is. He’s not doing a good job”), he pulled back on the modest monetary tightening in mid-2019. And then COVID hit.
Spiking the Punch
Days into the crisis, Powell commanded, “This is like Dunkirk — get in the boats and go.” The Battle of Dunkirk may not be the most inspiring model; it was a mass retreat with heavy losses of people and equipment. Apt or not, it was an expression of Powell’s sense of urgency, trying to kick a slow-moving, formal institution into something more nimble. His exigency reflected a new spirit of central banking, symbolized by Mario Draghi, then president of the European Central Bank, who said in a 2012 speech, in the heat of the eurozone crisis: “[T]he ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” In the old days, the spirit of central banking was summarized in a quote from William McChesney Martin, Fed chair from 1951 to 1970, which was the economic golden age to some: “The Federal Reserve, as one writer put it . . . is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” Powell was in the position of the chaperone who put $4.8 trillion on the tab (the amount of securities the Fed bought from January 2020 through May 2022), doing whatever it takes.
More than half of Timiraos’s book is devoted to a fine-grained detailing of what that meant: Zoom calls with Fed colleagues, emails with vice chair Richard Clarida and board member Lael Brainard (now vice chair), squabbles with the comptroller of the currency, meetings with Treasury secretary Steve Mnuchin. Mnuchin, a Goldman Sachs alum, was an important partner in the rescue planning, but he had few significant institutional resources behind him at the depleted Treasury. Trump, of course, contributed nothing but aggravation.
Powell was crucial to getting Congress to move. In a short time, that even more slow-moving body passed the CARES Act, a $2.2 trillion aid package that was a mix of some dodgy corporate subsidies and a flawed scheme, the Paycheck Protection Program, to encourage companies to retain employees, with the most generous social spending in US history — $1,200 checks and vast expansion of unemployment insurance. It didn’t last, of course, though there were later rounds, but it kept millions from ruin. With the passage of the CARES Act, and reassuring actions and words from the Fed, the COVID crisis was over for the markets by the end of March 2020, when there were only about fifty thousand COVID cases and six hundred deaths.
Jay the Woke
Although Timiraos’s reporting on this takes a back seat to the journalistic tick-tock, Powell has transformed the Fed’s mission in ways that have prompted both centrist Democrat Larry Summers and libertarian eccentric Ron Paul to denounce it as “woke.” He’s shown a surprising concern for distribution. The front page of the Fed’s website in June 2022 featured a box promoting its work on economic disparities. Powell set in motion a “Fed Listens” tour of events around the country and heard about what the state of the job market means to poor and working-class people. “It was just riveting,” he said after an event in Chicago in 2019. “To hear them talk about what a tight labor market means in their communities was something that none of us will forget.” (He now seems worried about the inflationary consequences of labor market tightness.) In April 2021, he spoke of a homeless encampment near Fed headquarters and reminded his audience “that even though some parts of the economy are just doing great here, there’s a very large group of people who are not. I really want to finish the job.” That isn’t the kind of thing you normally hear from a man of his class — his house overlooks the tenth hole of the Chevy Chase Club — or occupation.
It wasn’t just Powell. Timiraos says of the staff’s understanding: “Fed officials had a clear appreciation of income and wealth disparities, and the shock would exacerbate them by falling hardest on low-income service workers — those who couldn’t work from home and relied on public transportation.” Of course, few would go so far as this footnote from a September 2021 paper on inflation expectations by longtime Fed economist Jeremy Rudd: “I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.” An outlier for sure, but it’s clearly not the institution it was thirty or forty years ago, and what exactly is going on is worth a book in itself.
But perhaps the Fed’s sensitive moment, as admirable as it was, was an aberration. Powell is now faced with a class duty to get inflation down, and if that means creating a recession, that’s fine with him. While interest rates remain very low, they’ve increased sharply; money has become less available; and speculative markets — stocks, crypto, IPOs — are collapsing. Not only are rates up, but the Fed has been draining some of the money it pumped into the markets during the crisis. The tightening has been quick and tough. Powell may want to end the post-Greenspan model of perpetual indulgence, but if the financial system creaks monstrously, he’d be sure to step in.
It’s understandable that liberal and left critics of Powell are hammering him for creating recession and unemployment, given the human damage they do. But capitalism can’t live with perpetually low unemployment, and recessions have been among its regular features for centuries. Busts have followed booms since the dawn of capitalism. If there’s not a recession soon, there will be one soon after. Hating this pattern is a good reason to be a socialist.