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They were offering nearly unlimited cheap debt to keep the wheels of finance turning, and when that didn’t help, the Fed began purchasing massive quantities of government debt outright.

Investors dumped whatever they could, including ostensibly “risk-free” U.S. Treasury securities. As a global dash for dollars unfolded, Treasurys were no longer serving as the market’s traditional shock absorbers, amplifying extreme turmoil on Wall Street.

By week’s end, the Dow had plunged more than 10,000 points since mid-February as investors struggled to get their arms around what a halt to global commerce would mean for businesses that would soon have no revenue.

“It was sheer, unadulterated panic, of a magnitude that was far worse than in 2008 and 2009. Far worse,”

The idea of shutting down markets was especially discouraging: “It was a profoundly un-American thing to contemplate, to just shut everything down, and almost fatalistic—that we’re not going to get out of this.”

nearly two years later, most agree that the Fed’s actions helped to save the economy from going into a pandemic-induced tailspin.

“My thought was—I remember this very clearly—‘O.K. We have a four-or-five-day chance to really get our act together and get ahead of this. We’re gonna try to get ahead of this,’” Mr. Powell recalled later. “And we were going to do that by just announcing a ton of stuff on Monday morning.”

It worked. The Fed’s pledges to backstop an array of lending, announced on Monday, March 23, would unleash a torrent of private borrowing based on the mere promise of central bank action—together with a massive assist by Congress, which authorized hundreds of billions of dollars that would cover any losses.

If the hardest-hit companies like Carnival, with its fleet of 104 ships docked indefinitely, could raise money in capital markets, who couldn’t?

on April 9, where he shed an earlier reluctance to express an opinion about government spending policies, which are set by elected officials and not the Fed. He spoke in unusually moral terms. “All of us are affected,” he said. “But the burdens are falling most heavily on those least able to carry them…. They didn’t cause this. Their business isn’t closed because of anything they did wrong. This is what the great fiscal power of the United States is for—to protect these people as best we can from the hardships they are facing.”

They were extraordinary words from a Fed chair who during earlier, hot-button policy debates said the central bank needed to “stay in its lane” and avoid providing specific advice.

To avoid a widening rift between the market haves (who had been given access to Fed backstops) and the market have-nots (who had been left out because their debt was deemed too risky), Mr. Powell had supported a decision to extend the Fed’s lending to include companies that were being downgraded to “junk” status in the days after it agreed to backstop their bonds.

Most controversially, Mr. Powell recommended that the Fed purchase investment vehicles known as exchange-traded funds, or ETFs, that invest in junk debt. He and his colleagues feared that these “high-yield” bonds might buckle, creating a wave of bankruptcies that would cause long-term scarring in the economy.

Mr. Powell decided that it was better to err on the side of doing too much than not doing enough.

, Paul Singer, who runs the hedge-fund firm Elliott Management, warned that the Fed was sowing the seeds of a bigger crisis by absolving markets of any discipline. “Sadly, when people (including those who should know better) do something stupid and reckless and are not punished,” he wrote, “it is human nature that, far from thinking that they were lucky to have gotten away with something, they are encouraged to keep doing the stupid thing.”

The breathtaking speed with which the Fed moved and with which Wall Street rallied after the Fed’s announcements infuriated Dennis Kelleher, a former corporate lawyer and high-ranking Senate aide who runs Better Markets, an advocacy group lobbying for tighter financial regulations.

This is a ridiculous discussion no matter how heartfelt Powell is about ‘we can’t pick winners and losers’—to which my answer is, ‘So instead you just make them all winners?’”

“Literally, not only has no one in finance lost money, but they’ve all made more money than they could have dreamed,” said Mr. Kelleher. “It just can’t be the case that the only thing the Fed can do is open the fire hydrants wide for everybody

Mr. Powell later defended his decision to purchase ETFs that had invested in junk debt. “We wanted to find a surgical way to get in and support that market because it’s a huge market, and it’s a lot of people’s jobs… What were we supposed to do? Just let them die and lose all those jobs?” he said. “If that’s the biggest mistake we made, stipulating it as a mistake, I’m fine with that. It wasn’t time to be making finely crafted judgments,” Mr. Powell said. He hesitated for a moment before concluding. “Do I regret it? I don’t—not really.”

“We didn’t know there was a vaccine coming. The pandemic is just raging. And we don’t have a plan,” said Mr. Powell. “Nobody in the world has a plan. And in hindsight, the worry was, ‘What if we can’t really fully open the economy for a long time because the pandemic is just out there killing people?’”

Mr. Powell never saw this as a particularly likely outcome, “but it was around the edges of the conversation, and we were very eager to do everything we could to avoid that outcome,”

The Fed’s initial response in 2020 received mostly high marks—a notable contrast with the populist ire that greeted Wall Street bailouts following the 2008 financial crisis. North Carolina Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, gave Mr. Powell an “A-plus for 2020,” he said. “On a one-to-10 scale? It was an 11. He gets the highest, highest marks, and deserves them. The Fed as an institution deserves them.”

The pandemic was the most severe disruption of the U.S. economy since the Great Depression. Economists, financial-market professionals and historians are only beginning to wrestle with the implications of the aggressive response by fiscal and monetary policy makers.

Altogether, Congress approved nearly $5.9 trillion in spending in 2020 and 2021. Adjusted for inflation, that compares with approximately $1.8 trillion in 2008 and 2009.

By late 2021, it was clear that many private-sector forecasters and economists at the Fed had misjudged both the speed of the recovery and the ways in which the crisis had upset the economy’s equilibrium. Washington soon faced a different problem. Disoriented supply chains and strong demand—boosted by government stimulus—had produced inflation running above 7%.

because the pandemic shock was akin to a natural disaster, it allowed Mr. Powell and the Fed to sidestep concerns about moral hazard—that is, the possibility that their policies would encourage people to take greater risks knowing that they were protected against larger losses. If a future crisis is caused instead by greed or carelessness, the Fed would have to take such concerns more seriously.

The high inflation that followed in 2021 might have been worse if the U.S. had seen more widespread bankruptcies or permanent job losses in the early months of the pandemic.

an additional burst of stimulus spending in 2021, as vaccines hastened the reopening of the economy, raised the risk that monetary and fiscal policy together would flood the economy with money and further fuel inflation.

The surge in federal borrowing since 2020 creates other risks. It is manageable for now but could become very expensive if the Fed has to lift interest rates aggressively to cool the economy and reduce high inflation.

The Congressional Budget Office forecast in December 2020 that if rates rose by just 0.1 percentage point more than projected in each year of the decade, debt-service costs in 2030 would rise by $235 billion—more than the Pentagon had requested to spend in 2022 on the Navy.

its low-rate policies have coincided with—and critics say it has contributed to—a longer-running widening of wealth inequality.

In 2008, household wealth fell by $8 trillion. It rose by $13.5 trillion in 2020, and in the process, spotlighted the unequal distribution of wealth-building assets such as houses and stocks.

Without heavy spending from Washington, focused on the needs of the least well-off, these disparities might have attracted more negative scrutiny.

Finally, the Fed is a technocratic body that can move quickly because it operates under few political constraints. Turning to it as the first line of defense in this and future crises could compromise its institutional independence.

Step one, he said, was to get in the fight and try to win. Figuring out how to exit would be a better problem to have, because it would mean they had succeeded.

“We have a recovery that looks completely unlike other recoveries that we’ve had because we’ve put so much support behind the recovery,” Mr. Powell said last month. “Was it too much? I’m going to leave that to the historians.”

The final verdict on the 2020 crisis response may turn on whether Mr. Powell is able to bring inflation under control without a painful recession—either as sharp price increases from 2021 reverse on their own accord, as officials initially anticipated, or because the Fed cools down the economy by raising interest rates.

By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered

The picture that is emerging is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems, even as they were raised by Fed supervisors. For instance, according to a person familiar with the matter, executives at the firm were told of cybersecurity problems both by internal employees and by the Fed — but ignored the concerns.

Still, the extent of known issues at the bank raises questions about whether Fed bank examiners or the Fed’s Board of Governors in Washington could have done more to force the institution to address weaknesses

Other worries center on whether Jerome H. Powell, the Fed chair, allowed too much deregulation during the Trump administration. Randal K. Quarles, who was the Fed’s vice chair for supervision from 2017 to 2021, carried out a 2018 regulatory rollback law in an expansive way that some onlookers at the time warned would weaken the banking system.

Typically, banks with fewer than $250 billion in assets are excluded from the most onerous parts of bank oversight — and that has been even more true since a “tailoring” law that passed in 2018 during the Trump administration and was put in place by the Fed in 2019. Those changes left smaller banks with less stringent rules.

Silicon Valley Bank was still below that threshold, and its collapse underlined that even banks that are not large enough to be deemed globally systemic can cause sweeping problems in the American banking system.

Some of the concerns center on the fact that the bank’s chief executive, Greg Becker, sat on the Federal Reserve Bank of San Francisco’s board of directors until March 10. While board members do not play a role in bank supervision, the optics of the situation are bad.

“One of the most absurd aspects of the Silicon Valley bank failure is that its CEO was a director of the same body in charge of regulating it,” Senator Bernie Sanders, a Vermont independent, wrote on Twitter on Saturday, announcing that he would be “introducing a bill to end this conflict of interest by banning big bank CEOs from serving on Fed boards.

“It’s a failure of supervision,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania. “The thing we don’t know is if it was a failure of supervisors.”

Mr. Powell typically defers to the Fed’s supervisory vice chair on regulatory matters, and he did not vote against those changes. Lael Brainard, then a Fed governor and now a top White House economic adviser, did vote against some of the tweaks — and flagged them as potentially dangerous in dissenting statements.

“If the world is to cope with climate change, policymakers will need to pull every lever at their disposal,” he writes. “Faced with this threat, to indulge in the idea that central banks, as key agencies of the state, can limit themselves to worrying about financial stability … is its own form of denial.”

In England, by contrast, Carney has convened 33 central banks to investigate how to “green the financial system.” According to Axios, every powerful central bank is working with him—except for Banco do Brasil and the Fed.

Mark Carney, the governor of the Bank of England, in 2015, in a speech which has subsequently received massive coverage—and he is a man, after all, absolutely of the global financial establishment—coined the idea of a climate Minsky moment. [Editor’s note: A Minsky moment is when an asset’s price suddenly collapses after a long period of growth.]

We would need [fossil-fuel assets] to be on the balance sheet of actors who were under huge pressure in a fire-sale situation and who couldn’t deal with a sudden revaluation. We would need an entire network of causation to be there, which is what produced the unique crisis of 2007 to 2008.

So imagine that we stay on our current path, and we’re headed toward 3 or 4 degrees’ [Celsius] temperature change. And then imagine some of the nonlinearities kick in, which the climate scientists tell us about, and we face a Fukushima-style event.

What happens next? You then get nervous democratic politicians—and not necessarily those who are known for their populism, but just nervous democratic politicians—suddenly deciding that we have to stop doing one or another part of our carbon-based economy. It has to stop, and it has to stop immediately. And then you get big shocks. Then you get sudden revaluations.

In other words, the success of the delaying tactics of the carbon lobby create a situation in which we’re then faced with the possibility of a sudden regulatory shock

“One-third of equity and fixed income assets issued in global financial markets can be classified as belonging to the natural resource and extraction sectors, as well as carbon-intensive power utilities, chemicals, construction, and industrial goods firms.”

Whether that will, in fact, ease the formation of majorities in Congress is another question. Because, after all, it does somehow have to get through the Senate, you know.

Germany is far, far more exposed. A huge slice of their economy is basically all about internal combustion engines, and so that number includes all of those stocks, for sure.

If we saw a huge shock to, say, European equity [exchange-traded funds], which were heavily in German automotive, that’s the sort of trigger that we might be looking at.

This is not simply a zero-sum game; this is a structural transformation that has many very attractive properties. There’s loads of excellent jobs that could be created in this kind of transition.There’s no reason why, even by conventional GDP-type metrics, it need even be associated with the kind of feel-bad factor of slow GDP growth. Then [you could] also link it to a revival of social democracy for the United States. From a progressive political point of view, that’s obviously extremely attractive.

there’s also a deeper view: that climate change is the situation within which all other politics will happen for the next several generations, at least.

ever since the 1990s that’s been the logjam on any serious American commitment.

When you look at a third of securities tied up in the carbon economy and the evidence for decoupling GDP growth from carbon emissions maybe not being as strong as we’d like, do you think the change that needs to happen is realistic?

Tooze: Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent. That’s the only good purpose that the war analogies serve

Meyer: In your piece, you write: “Those in the United States who call for a Green New Deal or a Green Marshall Plan are, if anything, understating the scale of what is needed.”

Do you think climate action needs to be larger than, say, the U.S. mobilization for World War II?

Tooze: Well, less large in absolute terms. Because even the U.S. was spending almost 40 percent of GDP on World War II. And if you’re the Soviet Union, you’re spending 55 to 60 percent in 1940. We don’t need to do anything like that. It needs to be much bigger than the New Deal, which in fiscal-policy terms was really quite trivial.

Crucially, what makes it totally unlike the war is that there’s no happy end. There’s no moment where you win and then everything goes back to the way it was before, but just better. That’s a misunderstanding

This isn’t crash dieting; this is a permanent change in lifestyle, and we need to love that and we need to live it and we need to own it and we need to reconcile ourselves to the fact that this is for us and for all subsequent generations of humans.

It isn’t just the oil and gas majors, because they wouldn’t get you to 30 percent. Exxon isn’t big enough to get you to that kind of percentage. It’s Exxon, and [the major automakers] Daimler and BMW, and the entire carbon-exposed complex.

all the really hard choices need to be made by people like China and India and Pakistan and Bangladesh and Indonesia

You don’t have that very much in Germany. There isn’t anyone in Germany saying, “Which bit of mid-20th-century history is this most like?,” mercifully. The one analogy that has popped up in Germany is reunification, which I actually think is quite a good one, because that’s still an ongoing problem

in the American case, it would be civil rights and Reconstruction, which isn’t a particularly optimistic comparison to draw. It’s an ongoing problem, it’s a deep historic problem, it only happened once, we still haven’t fixed it, and we’re not at peace.

Meyer: There’s a kind of shallow view of climate change: that it is something we need to avert or stop. And that’s somewhat true

furthermore—and much more fundamentally than any of those things—this isn’t really about America. I mean, America can be an obstacle and get in the way, but none of the really hard choices needs to be made by Americ

like Reconstruction or the civil-rights movement, it needs to be something that people take on like a moral commitment, in the same way they take on genocide prevention as a moral commitment

problems that we thought we’d fixed, like the Green Revolution and the feeding of the world population, for instance—totally not obvious that those fixes cope with the next 20 years of what’s ahead of us. The food problem that was such an oppressive issue globally in the 1970s may resurge in an absolutely dramatic way.

Meyer: Given all that, if Jerome Powell decided that he wanted to intervene on the side of climate action, what could he do? What could the Fed do?

Tooze: What I think the Fed should announce is that it enthusiastically supports the idea of a bipartisan infrastructure push focused on the American electrical network, first and foremost, so that we can actually hook up the renewable-generating capacity—which is now eminently, you know, realistic in economic terms. Setting a backstop to a a fiscal-side-led investment push is the obvious thing.

It is indeed a highly appropriate response to an environment of extremely low interest rates, and [former Treasury Secretary] Larry Summers & Co. would argue that it might help, as it were, to suck us out of the state of secular stagnation that we’re in.

another avenue to go down—for the Fed to take a role in helping develop a classification of green bonds, of green financing, with a view also to rolling out comprehensive demands for disclosure on the part of American firms, for climate risks to be fully declared on balance sheets, and for due recognition to be given to firms that are in the business of proactively preparing themselves for decarbonization.

You could, for instance, declare that the Fed views with disfavor the role of several large American banks in continuing to fund coal investment. Some of the carbon-tracking NGOs have done very good work showing and exposing the way in which some of the largest, the most reputable American banks are still in the business of lending to Big Coal. Banking regulation could be tweaked in a way that would produce a tilt against that.

the classic role of the Fed is to support government-issued debt. Insofar as the Green New Deal is a government-issued business, the Fed has just an absolutely historical warrant for supporting fiscal action.

with regards to the broader economy, the entire federal-government apparatus essentially stood behind the spread of home ownership in the United States and the promotion of suburbanization through the credit system. And kind of what we need is a Fannie Mae and Freddie Mac for the energy transition.

if the question is, Is there historical warrant for the financial agencies of government in the United States biasing the property structure in the economy in a certain way?, the answer is emphatically yes—all the way down to the grotesque role of the New Deal financial apparatus in enshrining the racial segregation of the American urban space, with massive effects from the 1930s onward.

The idea of neutrality should not even be allowed in the room in this argument. It’s a question of where we want to be biased. If you look at QE, especially in the U.K. and the EU, it was effectively fossil-biased.

monetary policy is not neutral with regards to the environment. There’s no safe space here. The only question is whether you’re going to lead in the right way

Meyer: Last question. With any of this, is there a role for interested Americans to play if they are not particularly tied to the financial- or monetary-policy elite?

Tooze: Support your congressperson in doing exactly what AOC did in the hearings with Powell a couple of weeks ago

[Editor’s Note: Representative Alexandria Ocasio-Cortez asked Powell whether inflation and unemployment are still closely connected, as the Fed has long argued.]

Applaud, follow with interest, raise questions. That’s exactly what needs to be happening. The politicization of monetary policy is a fact.

If we don’t raise these questions, the de facto politics is, more often than not, conservative and status quo–oriented. So this, like any other area, is one where citizens—whether they’re educated and informed or not—need to wise up, get involved, and follow the arguments and develop positions.

So applaud your congresspeople when they do exactly what AOC was doing in that situation. In many ways, I thought it was one of the most hopeful scenes I’ve seen in that kind of hearing in a long time.

Then, in March 2022, the Fed changed course, first tightening the money supply by increasing the federal-funds rate and then introducing quantitative tightening. Between July 2022 and August 2023, the M2 supply contracted by 3.9%, the most extreme contraction since 1933.

The first factor contributing to the contraction of the money supply is the Fed’s quantitative tightening

Quantitative tightening has already produced a dramatic selloff in the bond market. But just as they did ahead of the September 2019 crunch in the repurchase-agreement market, Fed officials keep repeating their mistaken mantras that quantitative tightening can operate “in the background” and “on autopilot,” implying minimal market effect

But basic balance-sheet accounting shows that unless commercial banks are creating enough “new money” through their lending activity to offset the Fed’s balance-sheet shrinkage, quantitative tightening has a contractionary effect on the money supply.

The second factor contributing to shrinking M2 is the decreased availability of commercial bank credit—the sum of loans and bank holdings of securities. With the steep rise in rates, bank lending has slowed, and banks have been selling off securities.

This brings us to the stock-market crash of 1987. In that year the key 10-year bond yield rose steeply from January onward (from 7% in January to 10% by Black Monday in October) and the money supply slowed sharply.

In 1987 growth of M2 declined by almost half, from 9.7% year-on-year in January to 4.9% in September, while M3—no longer published by the Fed—slowed from 8.7% to 3.6% over the same period

A bond-market crunch and monetary squeeze together led to a sudden, drastic reassessment of equity-market valuations. The same could happen today, particularly since the current jump in bond yields and monetary squeeze are much more pronounced than in 1987.

So far, only the remaining excess money the Fed created between 2020 and 2021—the cumulative excess savings from the Covid handouts—has been keeping businesses hiring and consumers spending. The effects of the excess money are still giving the economy a lift, but that extra fuel is almost exhausted. When it dries up, the economy will run on fumes.

In all of this, an appreciation for time lags is critical. The Fed ignored the huge acceleration in the quantity of money and thus failed to anticipate the ensuing inflation. When inflation struck in early 2021, Fed officials tried to argue it was “transitory,” caused by supply-chain disruptions.

The Fed continues to ignore the money supply, and we now face the opposite problem. The money supply has been contracting for 18 months, and soon, after the overhanging extra money from 2020-21 has been used up, spending will plunge and inflation will fall, not simply to 2%, but below—and perhaps even into deflation in 2025.

Since Fed officials pay no attention to either monetary aggregates or their credit counterparts, they are overlooking these signals

Monetary analysis tells a very different story than the measures the Fed follows. The first effect of a monetary contraction is higher market interest rates for a brief period. Then comes an economic slump. The economy goes into recession and inflation falls. This results in a second and more permanent effect of subpar money growth, namely lower interest rates and a weaker currency.

the economic security of most Americans dwindled, and the legitimacy of the system was called into question. One consequence has been the rise of the far right; another is Donald Trump.

Germany insisted that the struggling countries had to practice austerity in order to restore the confidence of private financial markets. In a deep recession, even orthodox economists at the International Monetary Fund soon recognized that austerity was a perverse recipe for economic recovery.

Europe, because of Germany’s worries that these policies would lead to inflation, had no way to extend credit to struggling nations or to raise money through the sale of bonds, which would have allowed the ECB to provide debt relief or to invest in public services.

The political result was the same on both sides of the Atlantic—declining prospects for ordinary people, animus toward elites, and the rise of ultra-nationalism

Not so in Europe. Parties such as the German Social Democratic Party, the British Labour Party, and the French Socialists disgraced themselves as co-sponsors of the neoliberal formula that brought down the economy.

In nation after nation, the main opposition to the party of Davos is neofascism.

In his masterful narrative, the economic historian Adam Tooze achieves several things that no other single author has quite accomplished. Tooze has managed to explain a hugely complex global crisis in its multiple dimensions, and his book combines cogent analysis with a fascinating history of the political and economic particulars

when the collapse came, it was “a financial crisis triggered by the humdrum market for American real estate.”

the collapse reinforced the financial supremacy of Washington and New York. “Far from withering away,” he writes, “the Fed’s response gave an entirely new dimension to the global dollar.”

When the entire structure of borrowed money collapsed, the losses more than wiped out all the capital of the banking system—not just in the US but in Europe, because of the intimate interconnection (and contagion) of American and European banks. Had the authorities just stood by, Tooze writes, the collapse would have been far more severe than the Great Depression:

While insisting to Congress that the emergency response was mainly to shore up US finance, Bernanke turned the Fed into the world’s central bank. “Through so-called liquidity swap lines, the Fed licensed a hand-picked group of core central banks to issue dollar credits on demand,” Tooze writes. In other words, the Fed simply created enough dollars, running well into the trillions, to prevent the global economy from collapsing for lack of credit.

Bernanke instigated government action on an unimagined scale to prop up a private system that supposedly did not need the state

Using deposit guarantees, loans to banks, outright capital transfers, and purchases of nearly worthless securities, the Fed and the Treasury recapitalized the banking system. To camouflage what was at work, officials invented unlimited credit pipelines with disarmingly technical names.

The blandly named policy of quantitative easing, which drove interest rates down to almost zero, was a euphemism for Fed purchases of immense quantities of private and government securities.

The crisis, Tooze writes, “was a devastating blow to the complacent belief in the great moderation, a shocking overturning of the prevailing laissez-faire ideology.” And yet the ideology prevailed

In a reversal of New Deal priorities, most of the relief went to the biggest banks, while smaller banks and homeowners were allowed to go under

Banks were permitted to invent complex provisional loan “modifications” with opaque terms that favored lenders, rather than using their government subsidies to provide refinancing to reduce homeowner debts

How did a nominally center-left administration, elected during a financial crisis caused by right-wing economic ideology and policy, end up in this situation?

Turning to Europe, Tooze explores the fatal combination of Germany’s demands for austerity with the structural weakness of the ECB and the vulnerability of the euro.

Portugal or Greece now enjoyed interest rates that were only slightly higher than Germany’s, and markets failed to take account of the risk of default, which was more serious than that of devaluation.

instead of treating the Greek situation as a crisis to be contained and helping a genuinely reformist new government find its footing, Brussels and Berlin treated Greece as an object lesson in profligacy and an opportunity to insist on punitive terms for financial aid

A central player in this tragedy was the European Central Bank. Tooze does a fine job of explaining the delicate dance between the bank’s leaders and its real masters in Germany. Since Germany opposed continent-wide recovery spending, the bank could only pursue monetary policy. The model was the Fed. Yet while the Fed has a congressional “dual mandate” to target both price stability and high employment, the ECB’s charter allowed for price stability only

The ECB, with the consent of the Germans, came up with one of those bland-sounding names, Outright Monetary Transactions, for its direct purchases of government bonds. But the program, at the insistence of the Germans, was restricted to nations in compliance with Merkel’s rigid fiscal terms, which limited national deficits and debts. In other words, the money could not go to the very nations where it was needed most, since the hardest-hit countries had to borrow heavily to get themselves out of the recession

Reading Tooze, you realize that it’s a miracle that the EU and the euro survived at all—but they did so at terrible human cost.

the ideal of liberalized trade, and the use of trade treaties to promote deregulation or privatized regulation of finance, is a major element of the story of how neoliberal hegemony promoted the eventual collapse. But except for a passing reference, trade and globalized deregulation get little mention here.

he has almost nothing to say about Janet Yellen. Her nomination as Fed chair in 2013 to succeed Bernanke was an epochal event and an improbable defeat for the proponents of austerity, deregulation, and bank bailouts who influenced Obama’s policymaking. Yellen, a left-liberal economist specializing in labor markets, was the only left-of-center Fed chair other then FDR’s chairman Marriner Eccles. She also believed in tough regulation of banks. The extension of quantitative easing well beyond its intended end was substantially due to Yellen’s concern about wages and employment, and not just price stability, since low interest rates can also help promote recovery.

Tooze ends the book with a short chapter called “The Shape of Things to Come,” mainly on the ascent of China, the one nation that avoided all the shibboleths of economic and political liberalism, though it also, of course, does not have a political democracy.

The two share many of the same ideas on monetary policy and the potential direction of the Fed in the next few years.

today’s monetary policymakers understand that as we wait for supply constraints to ease, which they will eventually, the Fed can help reduce inflation by slowing growth in demand. Drawing on the lessons of the past, they also understand that by doing what is needed to get inflation under control, they can help the economy and the job market avoid much more serious instability in the future.

Markets and the public appear to understand how the Fed’s approach has changed from the earlier era I described

they suggest continued confidence that, over the longer term, the Fed will be able to bring inflation down close to its 2 percent target.

This confidence in turn makes the Fed’s job easier, by limiting the risk of an “inflationary psychology,” as Burns once put it, on the part of the public.

The degree to which the central bank will have to tighten monetary policy to control our currently high inflation, and the associated risk of an economic slowdown or recession, depends on several factors: how quickly the supply-side problems (high oil prices, supply-chain snarls) subside, how aggregate spending reacts to the tighter financial conditions engineered by the Fed and whether the Fed retains its credibility as an inflation fighter even if inflation takes a while to subside.

In 2011, Mr. Bernanke, a staunch proponent of transparency as a tenet of monetary policy, gave the first scheduled news conference by a chairman in Fed history. His comments to reporters went beyond mere openness; he expressed remarkable candor and established, albeit tentatively, the basis for a regular rapport with the public.

By the late 1990s a vast majority of the central banks had begun to incorporate elements of inflation targeting. The aim is to shape the expectations around the most fundamental dynamic of market economies: the evolution of prices. The experiments relied on theories going back decades. As far back as the 1930s, the economists Knut Wicksell, Irving Fisher and John Maynard Keynes proposed that price behavior was based in large part on expectations.

A senior official of the European Central Bank, Benoît Coeuré, said in a speech last year that monetary stability was “a cornerstone of the social contract.” Fed officials who remember the high inflation of the 1970s, brought under control by Mr. Greenspan’s predecessor, Paul A. Volcker, pretty much agree.

Simply being in touch throughout the government’s planning was good for BlackRock, potentially burnishing its image over the longer run, Mr. Birdthistle said. BlackRock would have benefited through “tons of information, tons of secondary financial benefits,” he said.

Mr. Fink’s firm is a huge player across many stock and debt markets, and its advisory arm helped to execute some of the Fed’s crisis response during the 2008 financial meltdown. That market insight and experience got him a front-row seat at a pivotal moment, one that may have put him in a position to influence a rescue with huge ramifications for households, businesses and the entire U.S. economy.

They’re about as close to a government arm as you can be, without being the Federal Reserve,” said William Birdthistle, a professor at the Chicago-Kent College of Law and the author of a book on funds.

On March 24, 2020, the New York Fed announced that it had again hired BlackRock’s advisory arm, which operates separately from the company’s asset-management business but which Mr. Fink oversees, this time to carry out the Fed’s purchases of commercial mortgage-backed securities and corporate bonds.

The company makes a profit by managing money for clients in an array of funds, generally charging a preset fee. It earns more when assets under its management grow. In the early days of the coronavirus crisis, as people converted financial holdings into cash, parts of its asset base were contracting and its business outlook hinged on what happened in certain markets.

Mr. Mnuchin held 60 recorded calls over the frantic Saturday and Sunday leading up to the Fed’s unveiling on Monday, March 23, of a policy package that included its first-ever program to buy corporate bonds, which were becoming nearly impossible to sell as investors sprinted to convert their holdings to cash. Mr. Mnuchin spoke to Mr. Fink five times that weekend, more than anyone other than the Fed chair, whom he spoke with nine times. Mr. Fink joined Mr. Mnuchin, Mr. Powell and Larry Kudlow, who was the White House National Economic Council director, for a brief call at 7:25 the evening before the Fed’s big announcement, based on Mr. Mnuchin’s calendars.

BlackRock’s connections to Washington are not new. It was a critical player in the 2008 crisis response, when the New York Fed retained the firm’s advisory arm to manage the mortgage assets of the insurance giant American International Group and Bear Stearns.

Several former BlackRock employees have been named to top roles in President Biden’s administration, including Brian Deese, who heads the White House National Economic Council, and Wally Adeyemo, who was Mr. Fink’s chief of staff and is now the No. 2 official at the Treasury.

The firm has grown rapidly: Its assets under management swelled from $1.3 trillion in early 2009 to $7.4 trillion in 2019.

As it expanded, it has stepped up its lobbying. In 2004, BlackRock Inc. registered two lobbyists and spent less than $200,000 on its efforts. By 2019 it had 20 lobbyists and spent nearly $2.5 million, though that declined slightly last year, based on OpenSecrets data. Campaign contributions tied to the firm also jumped, touching $1.7 million in 2020 (80 percent to Democrats, 20 percent to Republicans) from next to nothing as recently as 2004.

People could still pull their money from E.T.F.s, which both the industry and several outside academics have heralded as a sign of their resiliency. But investors would have had to take a financial hit to do so, relative to the quoted value of the underlying bonds. That could have bruised the product’s reputation in the eyes of some retail savers.

The Fed’s programs helped to turn that around. The central bank supported the corporate bond market on March 23, 2020, by pledging to buy both already issued debt and new bonds. The program for existing bonds promised to also buy E.T.F.s, because they are a quick way to get access to a wide swath of the market. The bond market and fund recovery was nearly instant.

“We hired BlackRock for their expertise in these markets,” Mr. Powell has since said in defense of the rapid move. “It was done very quickly due to the urgency and need for their expertise.”

The corporate assets are in addition to another $7 trillion worth of government debt that the Fed said it will continue to purchase to keep the economic recovery humming.

"Portfolio sales will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning," the Fed said.

The Fed currently holds $13.7 billion worth of corporate assets, including more than $5 billion of corporate bonds and another $8.5 billion worth of exchange-traded funds.

The Federal Reserve announced Wednesday that it will begin winding down a program that purchased tens of billions of dollars of corporate assets to shore up the economy during the pandemic.

"The process is likely to proceed gradually," Yellen said, a hint that further hikes will be slow in coming.

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent.

Now, you might say that the explanation for the right’s about-face on monetary policy is the same as the explanation of its about-face on deficits. That is, Republicans want pain and suffering when there’s a Democratic president, but a nonstop party when one of their own sits in the White House. And that is indeed how it looks now.

I’ve learned that the issue of whether it sometimes makes sense to print money stirs more visceral emotions on the right than anything else.

A lot of people on the right just go crazy at any suggestion that money is something to be managed, not treated as a sacred trust with which mortals must not meddle.

And the right’s emotional response to Fed policy — its hatred for using the printing press to boost the economy, no matter what the circumstances — always seemed real to me

Furthermore, the view that printing money is always a terrible thing seemed extremely durable, despite an uninterrupted track record of predictive failure. People who warned about looming inflation in 2009 continued to warn about it year after year, even as it kept not happening

Then Trump decided to pressure the Fed, and many of the erstwhile hard-money men became easy-money men overnight. I mean that more or less literally

There is, by the way, a reasonable case (which I accept) that the Fed should, indeed, pause its campaign of raising rates, and even that this week’s hike was a mistake. But this case should be made on the basis of fundamental economic principles, not in pursuit of short-term political advantage, and least of all because it’s what Donald Trump wants.

Yet that’s how it’s going. These days the G.O.P. is all about power; there are no principles it will adhere to if they involve any political cost. And it’s a party that belongs to Trump: What he says is the party line, on any and every issue.

For those wondering how an alphabet soup of emergency financial measures that can be turned off by a lame duck cabinet member’s whim came to be so important: No, it’s not supposed to work this way. On paper, Congress should have seen that the ongoing crisis — including the roughly one million teachers and many other public workers in education who have been laid off because state and local budgets are in shambles — was getting worse, and that it required them to pass renewed direct fiscal aid.

Only two loans have been made: one to the State of Illinois and another to the Metropolitan Transportation Authority of New York for a total of $1.7 billion, which is 0.3 percent of the $500 billion Congress authorized for facilitating such loans in the CARES Act. And for the M.T.A., those loans remain inadequate, as New York City still plans to lay off subway workers and drastically cut service.

President-elect Biden’s pick for Treasury secretary will be much more likely to work with, not against, the Fed in more generously supporting state and local governments. Many of the prominent names being floated have already worked closely with Chairman Powell and expressed sympathy for a more aggressive use of recovery tools.

We have a long way to go until Inauguration Day, yet the Fed can begin to prepare itself now to act as more than a backstop. Based on the prospects for action from Congress, our states and local communities will need it.

The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

The future is bleak. The greatest construction boom in recorded history — China’s money dump on infrastructure over the last 15 years — is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too.

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation.

If this sounds like advice to get out of the markets and hide out in cash, it is.

What this means for monetary policy, I think, is that while straight economics says that the Fed should try to get ahead of the curve, the political trap Trump has created argues that it should hold off — that it should insist that its policy is “data-dependent,” and wait for clear evidence of a serious slowdown before acting.

Both forecasts, however, assumed that disinflation would require a substantial rise in unemployment. The professional forecasters predicted 4.4 percent unemployment by the fourth quarter, the Fed 4.6 percent. Since the actual unemployment rate in July was only 3.5 percent, to meet those predictions would require that the economy fall off a cliff starting just about now — and there are no signs that this is happening.

Getting inflation down, a chorus of economists insisted, would require much bigger increases in unemployment. Most famously, Larry Summers declared that we would need something like two years of 7.5 percent unemployment to get inflation down to 2 percent, but others offered broadly similar if less extreme diagnoses.

I’m still seeing a lot of excuses — two, in particular

One is the claim that much of the progress against inflation is in some sense illusory, that underlying inflation is still well above 4 percent

the preponderance of the evidence — plus the results of hands-free algorithms that use a consistent procedure to extract the signal from the noise — suggests underlying inflation around 3 percent and dropping.

The other is the claim that disinflation pessimists were simply applying standard economic models, so that the fault lay in the models, not themselves.

that’s simply not true. Standard models say that disinflation is very costly if persistent high inflation has become entrenched in expectations.

inflation pessimists really need to do what inflation optimists did a year ago, and ask how they got it so wrong, effectively calling for policies that would have put millions out of work.

it wasn’t partisanship; America’s right has become so divorced from empirical reality that it has played no role in this debate

What I do suspect, however, is that some very good economists got caught up in a version of the Very Serious People problem of the 2010s, in which the desire to seem hardheaded led many elite voices to obsess over budget deficits when they should have been focused on inadequate job creation.

The good news is that while the Fed did, in effect, try to engineer a recession to control inflation, it didn’t succeed: Despite rising interest rates, the economy just kept chugging along. Why that happened is another question. But pessimists really need to grapple with the fact that disinflation happened anyway.

Liberal activists and economists pressed hard for the latest postponement, arguing that the economic recovery remains incomplete.

But I wouldn’t be so sure. True, a new president who looked at the evidence and listened to the experts wouldn’t go down that path. But evidence and expertise have a well-known liberal bias.

The interesting question is what will happen to monetary policy if a Republican wins next year’s election. As best as I can tell, most economists believe that it’s all talk, that once in the White House someone like Mr. Rubio or even Mr. Cruz would return to Bush-style monetary pragmatism.

Financial markets seem to believe the same. At any rate, there’s no sign in current asset prices that investors see a significant chance of the catastrophe that would follow a return to gold.

this hard-money orthodoxy is relatively new. Republicans used to base their monetary recommendations on the ideas of Milton Friedman, who opposed Keynesian policies to fight depressions, but only because he thought easy money could do the job better, and who called on Japan to adopt the same strategy of “quantitative easing” that today’s Republicans denounce.

George W. Bush’s economists praised the “aggressive monetary policy” that, they declared, had helped the economy recover from the 2001 recession. And Mr. Bush appointed Ben Bernanke, who used to consider himself a Republican, to lead the Fed.

Tooze calls it a problem in “Western capitalism” intentionally. It was not just an American problem.

One of the great strengths of Tooze’s book is to demonstrate the deeply intertwined nature of the European and American financial systems.

In 2006, European banks generated a third of America’s riskiest privately issued mortgage-backed securities. By 2007, two-thirds of commercial paper issued was sponsored by a European financial entity.

“Between 2001 and 2006,” Tooze writes, “Greece, Finland, Sweden, Belgium, Denmark, the U.K., France, Ireland and Spain all experienced real estate booms more severe than those that energized the United States.”

while the crisis may have been caused in both America and Europe, it was solved largely by Washington. Partly, this reflected the post-Cold War financial system, in which the dollar had become the hyperdominant global currency and, as a result, the Federal Reserve had truly become the world’s central bank.

therein lies the unique feature of the crash of 2008. Unlike that of 1929, it was not followed by a Great Depression. It was not so much the crisis as the rescue and its economic, political and social consequences that mattered most

The Fed acted aggressively and also in highly ingenious ways, becoming a guarantor of last resort to the battered balance sheets of American but also European banks. About half the liquidity support the Fed provided during the crisis went to European banks

Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent

But Tooze also convincingly shows that the European Central Bank mismanaged things from the start

China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.

The rescue worked better than almost anyone imagined

The governing elite did not anticipate the crisis — as few elites have over hundreds of years of capitalism. But once it happened, many of them — particularly in America — acted quickly and intelligently, and as a result another Great Depression was averted. The system worked

The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall.

On the left, the entire episode discredited the market-friendly policies of Tony Blair, Bill Clinton and Gerhard Schroeder, disheartening the center-left and emboldening those who want more government intervention in the economy

On the right, it became a rallying cry against bailouts and the Fed, buoying an imaginary free-market alternative to government intervention. Unlike in the 1930s, when the libertarian strategy was tried and only deepened the Depression, in the last 10 years it has been possible for the right to argue against the bailouts, secure in the knowledge that their proposed policies will never actually be implemented.

The crash brought together many forces that were around anyway — stagnant wages, widening inequality, anger about immigration and, above all, a deep distrust of elites and government — and supercharged them. The result has been a wave of nationalism, protectionism and populism in the West today.

confirmation of this can be found in the one major Western country that did not have a financial crisis and has little populism in its wake — Canada.

No government handled the crisis better than that of the United States, which acted in a surprisingly bipartisan fashion in late 2008 and almost seamlessly coordinated policy between the outgoing Bush and incoming Obama administrations. And yet, the backlash to the bailouts has produced the most consequential result in the United States.

experts are considering the new vulnerabilities of a global economy

we are confronting a quite different problem — an erratic, unpredictable United States led by a president who seems inclined to redo or even scrap the basic architecture of the system that America has painstakingly built since 1945. How will the world handle this unexpected development? What will be its outcome? This is the current crisis that we will live through and that historians will soon analyze.