Looking at the Fed, banks, inflation, and recessions since the 1950s

After running through the ups and downs of Fed actions and inactions, here is the conclusion.

So what is to be done?

We see two routes for long-term solutions:

  1. Continue to embrace the free market. Reduce government-provided backstops. Continue to rely on monetary policy for aggregate demand management: raise rates to fight inflation, and then lower them to ease the damage of recession. Allow the bank failures that rate hikes inevitably generate. Learn to live with periodic financial crises. And expect a great depression every generation—which was the norm before the New Deal with its regulation of financial institutions and tremendous increase of the size of government.

  2. Stabilize interest rates—stop using them for demand management and instead focus on financial stability. Regulate and supervise financial institutions. Retain backstops like deposit insurance and lender of last resort when necessary to stop crises from spreading. And restore a proper role for fiscal policy in managing aggregate demand.


Well, this is another hit piece on the Federal Reserve Bank. They say so right up front:

Before we turn to the story about how the Federal Reserve helped to blow up Silicon Valley Bank (SVB),

SVB blew up because the bank took excessive risks chasing profits, followed by bad and slow decision making when things started to go bad. The Fed’s actions, while working against SVB, were well telegraphed ahead of time. SVB bank execs chose to ignore what the Fed was saying and continue to take excessive risks to increase their profits rather than reduce risks to make sure the bank remained solvent.

Having just glanced through the article, the conclusions seem a bit narrow for me. They boil down to:

  1. de-regulate, let banks fail, have financial crises, or
  2. force the Fed to hold steady interest rates, add a bit more regulation, and wait for the miracle of Congress managing fiscal policy like rational adults.

But I think there’s a third option. Restore some banking regulations at the federal level, such as Glass-Steagall, and Frank-Dodd which helped keep the banking sector stable. Restore local banking by bringing back Savings and Loans (with a bit better regulation for them as well), allowing them to operate only in a single state, with all customers - both depositors and borrowers - being residents of the state or doing business in the state. That would re-create the need for the FSLIC or a similar Federal-level insurer. Then continue to allow the Fed to manage monetary policy via interest rates.

Of course, this suggestion also involved the magical thinking of getting Congress to act like adults. But it does have slightly better odds (rather than a snowball’s chance in Hades, more like a snowball’s chance in a desert), as it only requires Congress to act like adults once to reinstate banking laws rather than constantly being adults by controlling fiscal policy on an on-going basis.



Seriously? The Great Depression cost an entire generation their livelihoods, and led directly or indirectly to the resentment that brought you WWII and 50 million dead people.

The 2008 Depression was shallower, but only because the government stepped in with a variety of programs to try to ameliorate the damage. Not all were successful (not all of FDRs were either, obviously), but overall they helped forestall the kind of serious damage inflicted across the world in the 1930’s.

Ha. Much of that increase came about not in the 1940’s, where you might expect it, but in the 1970s as a result of Medicare (LBJ), the EPA (Nixon), and equal rights for minorities and women (all of the above and Bush Sr., Clinton, etc.)

The gargantuan increase in the budget is thanks to the military, whose budget is now 50% the cost of WWII (inflation adjusted) every year .


If it is a hit piece, it is a hit piece on using the wrong tool for the job. Using the Fed to control fiscal policy is like trying to push a brick with a string.

It is a hit piece with a poor explanation. Half witted nonsense.

It was not shallower. The mortgage crisis was allowed. Individuals paid the price. The great depression averted. People who had very little borrowed and lost. A tax write off. The government debt soared into WW II levels by 2022.

In the 1930s corporates also paid the price. That is the difference. Corporations do not have feelings. But roughly the same number of people were affected yet more often were employed in 2010.

Why on earth would they know anything at all. I do not care if they have Ph.Ds in econ.

The real conclusion! In the 1950s interest rates were low and taxes were high but only on the wealthy. This time rates will be health for the longer term and taxes will be reasonable on the wealthy. Both fiscal and monetary tools will work well. In this climate the industrials, manufacturing, will grow very fast from 2024 onward. Inflation will be in check by 2024 and our factories will put a huge deflationary pressure into the global economy. Mexico hand in hand with us.

Yes, and no. I think we agree that to the extent that current inflation is a result of fiscal policy, the Fed can’t do anything about that. Fiscal policy is up to Congress, not the Fed.

But the Fed can do a little to control inflation even when the problem is fiscal and not monetary. It doesn’t work as well, and it has some side effects (recession) but it will still eventually work to control inflation. And since the Fed is not nearly as bound to politics as Congress, the Fed can act when Congress can’t or won’t. So the Fed is acting.

If Congress wants to slow inflation faster than the Fed can - and without the side effect of risking a recession - they can raise taxes and then spent part of that tax increase on supporting folks at the bottom of the economic ladder so they can continue spending, while spending by those higher up the ladder is curtailed. The economy keeps going - no recession - but inflation is slowed.

All very basic macroeconomics. But not at all easy to accomplish in the real world.



I kept trying to give this more ‘thumbs up’ but my mouse broke with the repeated clicking!



Beat before you start. To the Shiny faction, that is Socalism (shock, horror, alarm) The Shiny thing to do is what we kept seeing in Michigan for years, raise taxes and take services away from working people, and give the money to the “JCs”.


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I will admit that I’m wearing my rose colored glasses when I talk like this. But I do think it’s a good idea to start with basic macroeconomics and negotiate from there. It’s not a perfect world, but we can only get as close as we start asking. So start asking for the right thing and then see how close you can get. Most importantly, don’t let the opportunity for improvement get away just because it isn’t perfect.

In this case, I’d settle for any fiscal policy that is better than the current one. Get some improvement now, then ask for further improvement when you next get the chance.

For example, I’d settle for any tax increase that is progressive rather than across the board.

In other obvious macroeconomic news, the central bank’s typical target interest rate needs to be something more than zero. We are at least getting that after almost two decades of rates much too close to zero.



This is one of Kelton’s major points in her book The Deficit Myth.

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That is actually much more indirect and not worth it. The only way to bring down global inflation and US inflation is for a country to export a manufacturing deflationary force for the globe. That can be whatever country makes sense. It was China for a few decades. We can do it from here. It takes time to get the infrastructure, education, and factories in place. But every inch of the way is progress and less inflation.

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