VICE on HBO looks at factors that led to the 2008 financial crisis and the efforts made by then-Treasury Secretary Henry Paulson, Federal Reserve Bank of New York President Timothy Geithner, and Federal Reserve Chair Ben Bernanke to save the United States from an economic collapse. The feature-length documentary explores the challenges these men faced, as well as the consequences of their decisions.
The expansion is nine years old. An ill-timed end of fiscal stimulus, a corporate debt bubble and the trade war are the things that could most easily end it.
But at the same time, mainstream macroeconomic models have the economic lift from tax cuts fading sometime between 2020 and 2022. That means the Fed could be raising interest rates to slow the economy just as tax policy is also working to slow the economy.
Both affect the economy with unpredictable lags, so it could prove hard for the Fed to set policies that can prevent both overheating in 2019 and 2020 and a downturn in 2021 and 2022.
.. Ben Bernanke put it more colorfully at a conference in June. The stimulative benefit of the tax cut “is going to hit the economy in a big way this year and the next year,” he said. “And then in 2020, Wile E. Coyote is going to go off the cliff.”
.. Corporations have loaded up on debt over the last decade, spurred by low interest rates and the opportunity to increase returns for shareholders.
.. The rise in debt loads overseas, especially in emerging markets, is even greater
.. Essentially, businesses have been in a sweet spot for years, in which profits have gradually risen while interest rates have stayed low by historical measures. If either of those trends were to change, many companies with higher debt burdens might struggle to pay their bills and be at risk of bankruptcy.
.. The 2020 train wreck narrative could intersect with the corporate debt boom. If inflation were to get out of control and the Fed raised interest rates sharply, companies that can handle their debt payments at today’s low interest rates might become more strained. Moreover, with federal deficits on track to rise in the years ahead, the federal government’s borrowing needs could crowd out private borrowing, which would result in higher interest rates and even more challenges for indebted companies
the administration’s tax “plan” offers less detail than most supermarket receipts
.. The funny thing about that confidence surge, however, was that it was very much along partisan lines — a sharp decline among Democrats, but a huge rise among Republicans. This raises the obvious question: Were those reporting a huge increase in optimism really feeling that much better about their economic prospects, or were they simply using the survey as an opportunity to affirm the rightness of their vote?
.. almost nobody ever admits being wrong about anything
.. when Bloomberg surveyed a group of economists who had predicted that Ben Bernanke’s policies would cause runaway inflation, they literally couldn’t find a single person willing to admit, after years of low inflation, having been mistaken.
.. most voters probably got the message that the political/media establishment considered Trump ignorant and temperamentally unqualified to be president. So the Trump vote had a strong element of: “Ha! You elites think you’re so smart? We’ll show you!”
.. What will Trump’s Katrina moment look like? Will it be the collapse of health insurance due to administration sabotage? A recession this White House has no idea how to handle? A natural disaster or public health crisis? One way or another, it’s coming.
China faces the classic policy trilemma of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows.
.. An economy that is growing more slowly, and in which monetary easing is the principal macroeconomic response, is not an economy that offers high returns to domestic savers. Consequently, Chinese households and firms who are able to do so are spurning yuan-denominated investments and looking abroad for higher returns. However, increased private capital outflows also constitute a flight from the yuan toward the dollar and other currencies; that, in turn, puts downward pressure on China’s exchange rate.
.. Chinese reserves have fallen over $700 billion over the past year and a half. With more than $3 trillion in reserves yet remainin
.. a big yuan devaluation would likely be deflationary for the rest of the world. (Indeed, fairly or not, a devaluing China could face accusations of waging a “currency war,” that is, weakening its currency to “steal” exports and aggregate demand from other countries.)
.. A second possibility for China would be to stop or reverse the process of liberalizing capital flows, making it more difficult for Chinese households and businesses to invest outside the country.
.. It would sacrifice some of the progress that China has made in opening up its financial system—which is itself a prerequisite for achieving China’s goal of making the renminbi an international reserve currency. Moreover, the horse may be out of the proverbial barn, in that the effectiveness of new capital controls in China would be uncertain.
.. the lack of a strong social safety net—the fact that Chinese citizens are mostly on their own when it comes to covering costs of health care, education, and retirement—is an important motivation for China’s extraordinarily high household saving rate.
.. Fiscal policies aimed at increasing income security, such as strengthening the pension system, would help to promote consumer confidence and consumer spending.
.. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country. At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term
The most interesting lessons of The Courage to Act are not about Bernanke himself, but about the system in which he operated. The key revelation is that the way that the U.S. deals with macroeconomic challenges, and with monetary policy, is fundamentally flawed. In both academia and in politics, old ideas and prejudices are firmly entrenched, and not even the disasters of crisis and depression were enough to dislodge them
.. Most people who are forced to deal with momentous historical events do not have the luxury of preparing for the particular challenges they face. Franklin Roosevelt, for example, did not come into office expecting to fight World War II. Ben Bernanke is an exception to this rule. More than almost any other economist of his time, he had spent his career thinking about the Great Depression—the closest analogue for the crisis he would eventually face.
.. But Lucas showed that if the public was expecting the Fed to lower interest rates in an attempt to boost employment, the relationship broke down, and all you got was inflation with no boost to the real economy. The experience of the 1970s seemed to vindicate that prediction. The profession was thus in Lucas’s hands to reshape. He joined up with Edward Prescott and others to promote a school of thought known as Real Business Cycle (RBC) modeling, also known as New Classical economics.
.. Economic downturns were the natural and efficient result of fluctuations in the rate at which scientists and engineers discovered new technologies—or, possibly, the result of harmful government meddling in the economy
.. Unemployment was a purely voluntary response to lower wages—in effect, a vacation
.. New Keynesian models were not, in fact, very Keynesian. Instead, they codified the intuition of Milton Friedman, who believed that counteracting depressions with easy money was a key job of central bankers.
.. So it was eerily providential that when the Great Recession hit, America’s most powerful economic policymaker (Bernanke was appointed Fed chair in 2006) was the economist who had spent more time than almost anyone thinking about the main historical precedent for this sort of crisis. At a time when the financial sector threatened to collapse, the Fed was headed by one of the only macroeconomists who realized how dangerous a financial collapse could be. Nearly anyone else—for example, Martin Feldstein or Glenn Hubbard, who were widely mooted for the top Fed job—would have been more blase about letting the big banks collapse under the weight of their own bad decisions. Bernanke, on the other hand, bailed out big banks quickly and decisively.
.. Reading these sections, one comes to understand just how much Fed policy-making was constrained by the intellectual ghosts of the 1970s and 1980s.
.. Bernanke also appears to be one of the only Fed officials to have thought about the thread of deflation before 2008.
.. In other words, the anti-inflation firewalls that academic macroeconomics built after the 1970s held firm. Even as deep and lasting of an economic wound as the Great Recession failed to convince the most dovish of Fed officials that a 4% inflation rate was a risk worth running. Even the 2% target—enshrined in official Fed policy since 2012—looks more like a ceiling than a target
.. One example is the Senate’s refusal to confirm Peter Diamond to the Fed’s Board of Governors in 2010. Diamond, an enormously respected economist who won a Nobel Prize for his work on labor search theory in October of that same year, should © 2016 John Wiley & Sons Ltd Ben Bernanke’s The Courage to Act 115 by any reasonable criteria have been a shoo-in for the nomination. But Senate Republicans, deciding that Diamond’s politics were too liberal for their tastes, blocked his nomination twice, forcing him to withdraw on the third round. Anti-tax activist Grover Norquist even threatened Republicans to keep them from voting for Diamond.
.. Top congressional Republicans, for example, publicly opposed the second round of quantitative easing in late 2010. They wrote a letter warning that QE2 would generate “long-term inflation and … artificial asset bubbles.” Needless to say, none of these politicians were experts in the inflationary or financial consequences of asset purchase programs.
.. ” This sort of behavior by politicians, of course, serves to illustrate why central bank independence is a good idea in the first place
.. Even worse was the attempt by a few politicians to “audit the Fed”—a somewhat misnamed campaign, since the Fed is already audited quite thoroughly. The “audit the Fed” campaign was actually an attempt to end the central bank’s independence by allowing Congress to review monetary policy decisions through the Government Accountability Office
.. But the episodes illustrate how technocracy, which functioned effectively during the crisis, nevertheless became a target for political grandstanding and opportunism
.. If policy uncertainty is bad for the economy—and many studies indicate that it is—then it appears clear that partisan brinksmanship made central bank technocrats’ job harder in the early 2010s.
..” The worsening extremism of the Republican Party during and after the crisis caused Bernanke, a lifelong Republican, to leave his party and become an independent
Summers has proposed “secular stagnation” (pdf) as the explanation for economic weakness since the 2008 recession: Private investment is falling because firms see slow population growth and innovation as a sign that future returns aren’t likely, creating a self-fulfilling prophecy of slow growth. His answer is more government investment—to jump-start demand, and the economy... Bernanke, meanwhile, thinks recent slowdowns in private investment are merely a result of the recession’s economic hangover, and that the big, structural problem for advanced economies is a “global savings glut” that is forcing US interest rates lower than they otherwise would be—so in essence, blame Germany. In the former Fed chair’s view, better government policies on global capital flows and trade could solve this problem. Otherwise, efforts to keep interest rates low enough to maintain full employment will lead to more financial bubbles... The reports conclude, first, that the reason for slower growth isn’t the lingering effects of the crisis but the pressure from slowing population growth and innovation; and second, that private investment is falling because companies don’t see enough demand from their customers, not because of diminished returns from low interest rates.