Trillion Dollar Triage by Nick Timiraos
The book is an account of the actions taken by Jay Powell and the Fed to deal with the economic fallout caused by the pandemic in 2020-21. The author is Nick Timiraos (pronounced tim-uh-roase). He is the chief economics correspondent for the Wall Street Journal. He is a great reporter and I have long been a reader of his and follow him on Twitter. The book is a great read. You do not have to take my word for it, just ask Warren Buffett.
It is a comprehensive read (Timiraos did more than 100 interviews) and covers in detail many of the decisions that were made and the thinking that went on in the Fed during what was the most disruptive time since the Great Depression. Long story short, the actions taken by Powell saved the US and world economy from going through a financial crisis that would have been much worse than what happened in 2008.
I definitely count myself as an admirer of Powell and his leadership since he took over at the Fed in 2018. The book is roughly 300 pages long, with the first third covering the time before the pandemic. Powell’s actions during the pandemic were unprecedented, but so were some of his actions before the pandemic.
The most notable action he took pre-pandemic was to cut interest rates in 2019 when the economy was doing well. Virtually all economists would have done the opposite. Standard economic models say that when unemployment gets below a certain point, inflation picks up and that there is a tradeoff between the two (see the Phillips Curve). There is disagreement over what that rate is, but the idea has widespread support in the economics field. Unemployment in 2019 was below 4% when Powell cut interest rates, but inflation did not increase. As it turns out, economists had underestimated how low the unemployment rate could go without triggering higher inflation. Before the pandemic, it was at 3.5% and decreasing and there was no inflation increase. Over the course of a few months, Powell disproved what had been an article of faith among economists for decades.
Why that is important is because lower interest rates boost the economy by making borrowing cheaper, which spurs investment and consumption, which means more hiring. Powell proved that the economy had been underutilized for many years, which was part of the reason why the recovery from the financial crisis was so slow. The Fed had tried to stimulate the economy during the 2010s, but by the middle of the decade decided it had done all it could do and began to raise interest rates. Powell proved that to be wrong, which will be important going forward.
What Powell also did pre-pandemic was change the focus of the Fed from an emphasis on fighting inflation to an emphasis on fighting unemployment. The Fed had been focused on the former since the 1980s. Focusing on the latter meant the Fed would be less eager to raise interest rates when unemployment went lower. Rather than pre-emptively trying to stop inflation, the Fed would wait to see if it began to pick up.
The third major change Powell enacted pre-pandemic was to shift the Fed’s inflation focus from having inflation be at 2% each year to having it average 2% over many years. The Fed had struggled throughout the 2010s to get inflation to 2%. Powell’s new approach would mean the Fed would sometimes tolerate inflation above 2% some of the time to get a 2% average.
Unlike most everyone at the Fed, including past Fed Chairs, Powell is not an economist. He is a lawyer by training who spent a short time in the first Bush Administration working in the Treasury Department. After that, he spent time in private equity where he made a good deal of money. He grew up well-off and went to the Georgetown Jesuit preparatory school in Washington, DC. He is a patrician if there ever was one, but has done more for workers than any Fed Chair by far. Biography does not necessarily correlate to policy.
Powell got appointed to run the Fed almost by accident. He had his first contact with congressional Republicans during 2011 when he helped talk them out of breaching the debt ceiling. The next year, he was appointed to the Federal Reserve Board of Governors by Obama as part of a compromise. When Trump decided not to reappoint Janet Yellen, Powell was one of three candidates for the job. It is only a slight exaggeration to say he got the job because Trump thought he looked like someone out of central casting.
To say the least, I am very glad Trump made the appointment. That was by far the best appointment he made. The crap Powell had to put up with every time Trump got upset at him requires some grade A stoicism and keeping one’s cool. The president is supposed to keep the Fed Chair at arms-length and not to publicly criticize them. Trump, of course, could not care any less about that. Luckily for Powell, his lowering of interest rates just so happened to not only be good policy, but also coincided with Trump’s general aversion to high interest rates.
When the pandemic hit, the Fed was keenly aware of the dangers it would pose to the economy. Unlike the health agencies, they really seemed to have a good grasp as to how big of a deal it would be. When the economy began to fall apart, the Fed cut interest rates down to zero. That was the end of traditional monetary policy. Much more would be needed.
During the 2010s, the Fed had pursued quantitative easing where it purchased government-backed mortgage securities. Traditionally, the only kinds of debt it had purchased were that and treasury bonds because they are extremely safe. Under Powell, the Fed still did that, but vastly expanded which kinds of debt it bought, which is much more risky. Given that the pandemic was shuttering businesses, many of which had issued bonds and were at risk of not being able to pay them and were facing bankruptcy. Bankruptcies on a nationwide scale would have guaranteed a huge depression and massive unemployment.
The Fed agreed to buy corporate debt, including junk bonds. That announcement by itself arguably did more to avert a wave of bankruptcies and an economic collapse than any other action taken. In the end, the Fed did not need to buy very much corporate debt. By announcing they were willing to do it, private lenders had the confidence that they could lend out money and it would be paid back. The most notable example of the Fed’s successful effort was the case of Carnival Cruise Line.
The Fed also agreed to buy municipal bonds. There was controversy over that effort because not every city was eligible, but that was quelled after eligibility was expanded. In the end, there were no municipal bankruptcies. Contrary to what most everyone thought during early 2020, cities and states have done amazingly well. In fact, their budgets are in surpluses that are largely unprecedented. California just announced that is has a budget surplus of nearly $100 billion. No governmental entity in the US besides the federal government has ever had a surplus that big.
Powell did not just take action as Fed Chair to deal with the pandemic. He also urged Congress to enact aggressive stimulus measures. The CARES Act was one of several such efforts. Powell also emphasized that the dangers of doing too little were greater than the dangers of doing too much. That was true, he argued, for fiscal and monetary policy. The economy was facing a potentially massive loss of jobs and it was no time for caution or obsessing over small technicalities or legalities. During the financial crisis, both fiscal and monetary policy were used, but were inadequate and Powell did not want a repeat of that.
To be clear, although Powell is Fed Chair, he was not the only actor involved at the Fed. It was very much a group decision-making process. Other major players involved included Vice Chair Richard Clarida, Lael Brainard (now Vice Chair), New York Fed Chair John Williams and Vice Chair for Supervision Randal Quarles. All of them were involved in every major decision that was made and all come off looking good.
Although he was president, Trump does not get a whole lot of page time. Mostly, that is because he just signed bills and tweeted. His interest in dealing with the pandemic and the economy, like everything else not concerning himself, was minimal. His involvement in negotiations over stimulus measures was almost non-existent. Timiraos does not portray Trump as a villain so much as a bystander and occasional tantrum thrower.
The Trump official most involved in shaping stimulus legislation and working with the Fed was Steve Mnuchin, the Treasury Secretary. I admit even at the time, I thought he was doing a pretty good job. His background was not partisan and he had made donations to Democrats before jumping on the Trump train. He is not an ideologue and probably does not have many strongly held policy views, like most of us.
Republicans in Congress did not care for Mnuchin because they thought he gave away the store in negotiations. Nancy Pelosi is another major player involved as she was Speaker of the House during 2020. She had previously helped Bush as Speaker of the House in 2008 with TARP and so had experience dealing with a major economic emergency. She did her job well and shepherded the CARES Act through the House along with subsequent stimulus measures. Mitch McConnell largely did the same in the Senate. The CARES Act passed Congress with unanimous support after fast, strenuous negotiations.
The book is overall unabashedly favorable towards Powell and rightfully so. Almost everyone agrees that he handled the situation in 2020 extraordinarily well. He has bipartisan credibility like few others do. Yesterday, he was confirmed to a second term as Fed Chair by a vote of 80-19. That is slightly narrower than his first confirmation, but still overwhelming. I cannot help but notice the huge contrast in how he has been treated by Republicans compared to how Ben Bernanke was treated last decade. My guess is that is because last decade Republicans were pretending to care about “big government,” but now have dropped that pretense and prefer to ignore economics so they can fight culture war battles.
The book ends covering the period around early 2021. That was before inflation took off and became a big issue. Powell has now pivoted to focusing on dealing with it and has raised interest rates twice. He will likely continue to do so for the next few months. What happens after that is unknown right now. For good or ill, we are in uncharted waters.
Powell handled the pandemic amazingly well. Now, he has to help get inflation down without causing a recession. That is not an easy task historically, but, then again, the sample size of such efforts is very small. It is true that historically, high inflation has been followed by a recession, but, historically, we do not have pandemics or labor shortages on a large scale. I have no idea whether a “soft landing” will happen. Even if we do have a recession in the traditional sense of the term, it may look very different from previous ones given the uniqueness of the labor market situation right now. Ultimately, predicting anything about this economy is plain foolhardy. I do not think that historical examples are very helpful even if they have some parallels here and there.
We are very lucky to have Powell in charge. Few people have the kind of credibility that he does. He has more self-awareness than almost anyone. He is very well-aware that he is a patrician, but that his job affects regular people. One thing he did before the pandemic was go on listening tours and visit congressional districts where he interacted with regular people. I hope he resumes doing that. Too often, elite institutions are inhabited by bubble dwellers who forget that they live in a different world from most everyone else. It is good for them to be reminded that what they are doing has huge effects on people’s lives.
Regardless of what happens with inflation, Powell’s actions in preventing another depression will go down in history as some of the best actions any individual has ever taken. Because of what he did, we are not staring at 20% unemployment or worse nor are we staring at a mass graveyard of business failures. The Fed cannot do every last thing, but on the things it can do, Powell did an amazing job and deserves an A+ for his efforts.
To be sure, there are legitimate questions raised by the extraordinary actions Powell took. Buying up corporate debt is far beyond what the Fed normally does. That authority was authorized temporarily and has since expired, but what happens if Congress decides to give more authority to the Fed in the future and not because of an emergency? For example, there have been some demanding that the Fed take action on climate change even though that has nothing to do with monetary policy. Such efforts would risk politicizing the Fed and putting its independence in danger. That would be a real tragedy. For now, though, that is not going to happen and Powell certainly has the credibility to push back on efforts by the left or the right to give the Fed powers it should not have.
What is very clear is that being Fed Chair is incredibly difficult and often thankless job. Powell is lucky in that he has gotten so much of the credit he deserves. Ben Bernanke was nowhere near as fortunate nor was Paul Volcker.
Any major policy decision maker during a crisis is going to have to deal with immediate problems with incomplete information. They will not have the luxury of waiting to get all the information they need. Powell was confronted with a crisis no Fed Chair had ever had to deal with. It was not just economic information that mattered, but health information, too, and arguably even more so. No Fed Chair had ever had to confront an economic crisis driven by a health crisis. It is hard enough to deal with a traditional economic downturn. Dealing with one caused by a new virus that nobody has ever seen before presents a vastly more pressing challenge. Because the situation with the virus changed so much, the economic situation changed a lot, too. Trying to predict that with any sort of precision is near impossible.
Getting things wrong is inevitable. The Fed, like most everyone, underestimated how quickly the economy would bounce back. That is in part because of the success of their efforts that their own pessimistic predictions turned out to be wrong. One downside of that is inflation caused in part by supply chain issues related to the pandemic, but also because the government succeeded through fiscal and monetary policy in solving the problem of collapsing demand. It is debatable how much of the stimulus efforts were needed and whether there was enough information in 2021 for the Fed to begin raising interest rates. I did not take a position on that because it is way beyond my expertise.
Still, even if the Fed erred, Powell’s efforts to prevent another depression alone make his tenure 100% worthwhile. People are going to make mistakes. There is nobody alive who would have handled the pandemic with anything close to perfection. Powell is probably as close to that as anyone can get. I am very glad that he has been confirmed to a second term. He has a good team to work with. They know what their job is now and I have no doubt they will do everything they can to steer us away from the high inflation we are experiencing now while still keeping people employed and the economy moving forward.