The Great Economic Leap Forward Experiment

While medical researchers race against time to find effective treatments for COVID-19, we have launched ourselves headlong into an economic experiment in federal policy on effectively treating a recession.

The experimental treatment so far is the recently signed $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. Money for big businesses. Money for small businesses. Money for individuals. Is it too much? Is it not enough? Will it prove to be – in a phrase now used in many contexts – “a cure that’s worse than the disease?” 

A primary mission of mine – as a writer – is provide language and categories around which we can discuss financial matters, as citizens. In vastly simplified terms, we could identify 3 theoretical approaches to fiscal and monetary policy in response to a COVID-induced recession, from the right, the middle, and the left. 

On the right, the Austrian School and its most famous 20th Century theoretician, the Nobel Prize-winning Freiderich Hayek, would encourage limited government spending and a cautious central bank, in favor of freedom, individual action, efficiency, and ever-vigilance around inflation. Writing in the middle part of the 20th Century, Hayek warned against creeping Socialism and the centralization of economic power as threats to humanity. Bank lending of fiat currency – rather than relying on the solidity of an anchor-currency like gold – tends to artificially lower interest rates and overly expand the money supply.

The policy implications of the Austrian school is to interfere the least in business cycles, as they will work themselves out over time.

In the middle, policy makers advocate along themes established by John Maynard Keynes, who argued for a combination of robust government spending and easy money from the Central Bank, originally in response to the Great Depression of the 1930s. Fed Chairman Ben Bernanke, a careful researcher of the Great Depression, followed that playbook in the 2008 Great Recession. And I would say – from a monetary policy standpoint when all was said and done – very successfully.

The left has recently coalesced around something known as Modern Monetary Theory (MMT). 

Just as the Austrian school of thought and Keynesianism have variations, so too does MMT. But simplifying a bit, the big unifying idea of MMT is that governments that print their own currency like the United States do not have to worry tremendously about the problem of paying back debt. Controlling an unlimited supply of money can free policy makers from worries about a finite source of capital, or the classical economists’ worry of “crowding out” private borrowing and private enterprise. Both fiscal policy (taxing and spending) and monetary policy (the supply of money and interest-rate setting) should respond to problems by making money much more available, aggressively where needed. In stark contrast to the Austrian school, MMT points to a massive intervention of the government in the economy.

A key point of MMT – a point in which I am in agreement – is that debt owed by a government is not exactly like debt owed by a household or a business. Households and businesses do not create their own currency, so must always have a reasonable plan for repayment, or risk being shut down or punished by having assets seized by creditors. Governments that create their own currency, by contrast, need not fear creditors in quite the same way as households and businesses.

MMT theorists, accused of disregarding inflation, have argued that in periods of low inflation – like we’ve seen in recent decades, and like we usually see in recessions – policy can focus on more immediate threats, like underinvestment and unemployment. 

I’ve been thinking about some of this in part because a conservative friend and reader handed me a copy of Freiderich Hayek’s The Road To Serfdom on March 18th, during what might be the last sit-down meal at a restaurant we will enjoy for months. Hayek’s worldview (or permit me to smoothly roll ‘Weltanschauung’ off my tongue) in simplest terms, is that the biggest enemy confronting society is government control of economic activity. 

So where are we currently on the spectrum of policies – from the Austrian right, the Keynesian center, or the MMT left?  As of this month we’re neck deep in a massive MMT experiment. That’s not what Congress and President Trump said out loud as they passed the CARES act. They would all deny it, if asked. But just to be clear: that’s what we’re all doing. The CARES Act was the most MMT experiment our country has ever tried. And it’s still early days yet in the COVID recession. As a betting man, I’d say more is coming.


And the weird thing was the near-unanimity of it all. Which also makes me nervous.

One reliable indicator of problematic policy in a democracy is unanimity, or near-unanimity of votes. Problematic because unanimity generally indicates votes forcibly taken, votes taken in fear, or votes taken under emergency conditions. 

Like elections in the old Soviet times, in which the winner would earn 99% of the vote. Or like the Patriot Act of 2001, which passed the Senate by a vote of 98-1 in October 2001, following the attacks of September 11th. 

We similarly saw the passage of the $2 trillion CARES Act by a 96-0 vote in the Senate, and the absence of anything other than a voice vote among a quorum in the House of Representatives, without a recording of who voted how. Friday March 27 was a weird day in Washington.

So Tea Party folks, just to clearly review. Your party – with a unified Republican Congress and Presidency – passed the 2017 Tax Cuts and Jobs Act, expected to increase the federal deficit by $1.4 trillion, according to the Congressional Budget Office. The CARES act just passed – by a divided Congress and Republican President – will cost $2 trillion. What we should all agree on right now is that there is no fiscal and monetary conservative party in the United States. It does not exist. We’re all unified MMT leftists right now. I guess we’ll find out in a few years how we like it.

Not that we necessarily had a choice.

Would I have voted yes for the CARES Act, were I in Congress that day? Yes.

Do I think we’ll be instituting a form of Universal Basic Income within 6 months? Yes.

Do I think our fiscal and monetary policy might be a ticking time bomb – both because of our debt levels and inflation – for the United States? Also yes.   [LINK to column on government debt spending:

Please see related posts:

We’re getting UBI and we’re never going back, after 2020

Government Debt – Ways to Think About it.

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I Miss The Great Recession Already

End of recessionI’m just going to come out and say it, ok?  I miss the Great Recession already.

I miss it for two reasons: first as an investor and second as a human.

The Investment Side of the Great Recession

As an investor, the Great Recession represented the good times, now past.[1]

Recessions – or at least their financial unfolding via changes in asset prices – cause not only wealth destruction, but also wealth creation.  For investors[2] in particular, a recession is often necessary in order to deploy capital at attractive prices.

Warren Buffett famously gets irritated about the lack of investment opportunities in his annual Berkshire Hathaway letters during boom times, like his 1999 letter[3] and 2007 letter,[4] because prices of public securities outpace intrinsic value.  Conversely, he gets very busy and active buying companies when prices drop and other investors flee.  Recessions for Buffett, as well as for many investors, represent the best time to accumulate wealth.  Which is why he famously says:

“Be fearful when others are greedy, and be greedy when others are fearful.”


Another famous value investor, Shelby Collum Davis,[5] said more pointedly:

“You make most of your money in a bear market.  You just don’t know it at the time.”

If you believe Buffett and Davis, as I do, then you too will think wistfully of the Great Recession because, as an investor, the good times are in the past.  Now, with US equity indexes up over 100% from their March 2009 lows, investing consists of purchasing expensive assets and hoping they get more expensive.  Which has a lot more to do with gambling than it does with investing.

The Human Side of the Great Recession

Of course this may sound awfully callous from a human perspective, and I don’t mean to diminish the real human suffering of the Great Recession.  In fact, on the contrary, it’s the humanity that emerged during the Great Recession that I want to call attention to, as the part I’m going to miss the most.

Remember when your 401K lost 5% of its value every month – month after month after month – between August 2008 and March 2009?  Remember that you just stopped regularly checking its value – or any part of your supposed net worth – by about December 2008, because the whole thing just became too painful to contemplate?

At that moment, falling into the Great Recession, we all confronted, in our own way, the painful reality that our human worth had to be something other than our financial net worth.  Because otherwise we just became half of who we were.

Remember when in the space of just a few short months either you – or someone you knew well – lost a job, a house, or a business?

As awful as that was, our collective acknowledgement of suffering changed the way we acted on a daily basis.  For people relatively well off, the new austerity forced a kind of back-to-basics approach to living.  Luxury consumption plummeted, and staycations soared in popularity, if only out of solidarity with those who suffered even more.

I personally lost money in the Great Recession.  But what turns out to be even more painful, as a fiduciary, is losing other people’s money.  I dreaded calling investors on the phone to report a loss, and I dreaded, worse yet, seeing them in person.  To make it more painful for me, my investors, unfortunately, were often my friends and family.  The thought of it kept me awake and tossing in bed in the 1-3am hours.  For a couple of years.  Not good times.

Would you like to know what reduced me tears, however?  It was the investors who told me it was going to be ok, that they still believed in me, and that the lost money didn’t mean they valued me less as a person.  Even as I write this now, it gets a little dusty in the room when I think of that.

There’s a human element that only reveals itself in the bad times.

Laissez Les Bons Temps Rouler

My sense is that sometime between Groundhog Day and Mardi Gras 2013, the Financial Infotainment Industrial Complex will peak out at the nation’s Great Recession shadow, and officially declare the long Winter finally over.

That declaration will signal it’s time for luxury living again and real vacations.  Masters of the Universe will know they can safely begin to channel their inner Patrick Bateman in public again.

In that smooth shift from Recovery to laissez les bons temps rouler I’m certain we’ll go back to checking our net worths in the mirror more often, and possibly our human worths less often.

But I hope we’ll hold on to the memory of what we had, and lost, and recovered, during the Great Recession.


[1] I acknowledge I’m being colloquial, not academic, about what I mean by a recession generally or the Great Recession in particular.  I don’t mean an economist’s definition of recession, which would refer to changes in GDP.  I also don’t mean to quibble about an US equity ‘bear market,’ as it’s been a few years since that occurred.  What I really mean is a holistic sense that, with unemployment below 8% nationally and the general level of stocks approaching their 2007 highs, the national mood has swung away from Recession and toward Recovery and I’m confident soon enough we’ll be in Boom Times.

[2] By “investor” I mean as distinct from “gambler,” which is what most of us do when we purchase public securities.

[3] Which I’ve helpfully linked to here, and would call your attention in particular to page 16, in which he anticipates the bursting of the tech bubble and the bursting of the equity bull market in general.

[4] Which is linked to here, and I’d call your attention to pages 18-20 in which Buffett tries to lower expectations for equity returns going forward.

[5] Whose son and grandsons run this firm, Davis Advisors.

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In Praise of SIGTARP, Part I –Truth in Government

As a recovering banker, a main obsessive question of mine remains “How did we get into this mess?”

By “mess,” I mean both the Credit Crunch itself and our collective response to it, at the government and personal levels.

My obsession drives me to read reports by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  As a first draft of financial history, the SIGTARP reports have become essential to understanding the bailouts of Citigroup, AIG, other TBTF[1] Banks, and smaller banks as well.

Perhaps it’s a function of my low expectations for a government-produced document on finance.  Perhaps it’s my contrarian nature.  I’m not sure.  But I do know there’s something refreshing and downright exciting about the reports coming from the office of the SIGTARP.

I love SIGTARP so much I want to highlight the key things everyone should know from the reports, on the off chance you aren’t as obsessed with reading government documents as I am.

Two great things, just for starters, to know about SIGTARP’s reports.  First, they’ve got the ring of honesty.  Second, they remind me why I do have faith in our system of government and finance, despite all the reasons to lose faith, and despite all the crazy fringe talk we get bombarded with on a regular basis.

In the April 2012 report, just to cite one happy example, you will find such pleasing curiosities as a Treasury official who tells you her colleagues in another part of Treasury are lying to you, to wit:

“It is a widely held misconception that TARP will make a profit.[2]  The most recent cost estimate for TARP is a loss of $60 Billion.  Taxpayers are still owed $118.5 billion”

Now that’s what I’m talking about!  Some straight talk from the federal government.[3]

Another example of facts cutting through the haze of political speak:

“TARP’s explicit goals of preserving homeownership and promoting jobs were evidence that Congress wanted to help homeowners during the crisis, not just banks.  However…Only 9% of the TARP funds set aside for mortgage modifications have been spent to help a fraction of eligible homeowners after more than three years…after two years, only 3% of the funds obligated [for the Hardest Hit Fund] have been spent to help only approximately 30,000 homeowners.”

In other words, the government’s largest federal programs for mortgage modification and homeowner relief are poorly designed or poorly implemented, or both.

I’m not happy about this.  But I don’t particularly care to blame Congress, or the President, or a bunch of nameless bureaucrats we’ve never heard of.

I am happy, however, to read a technocratic document like SIGTARP’s quarterly report that gives me the hstraight dope about what is working and what is not working in the financial bailout.  The honesty of the reporting gives me hope that people are willing to work on practical data, practical solutions, and do not seek to score points against the other side only for ideological reasons or political gamesmanship.

Too often we fall down the rabbit hole of financial discourse online, where the avatars of pitchfork wielding right-wing trolls do imaginary battle with the avatars of left-wing demagogues who make the Scarecrow’s Occupy Gotham scene seem like a plausible near-future alternative.  I’m pretty sure Dark Knight villains Two-Face, Bain, Joker, and the Scarecrow actually exist, because I feel like I read their stuff in the comments section of respectable online financial outlets.

It’s enough to induce despair, which is always the goal of the Dark Knight’s foes.  That forum has plenty of Gotham-City shouting and fear-mongering but precious little listening, and even less understanding or analysis.

Who can fight against the financial darkness?  SIGTARP can.

I love SIGTARP so much I created my first fictional comic book hero[4] in his honor.  I love SIGTARP so much because he makes me believe in my country’s government again, which is no small feat.

Would you like to feel better about our country and the government’s ability to self-criticize and therefore, possibly, learn from its mistakes?  I suggest you brew some tea and curl up with a nice SIGTARP report sometime.  You’ll feel a lot better.


[1] Too Big To Fail, but you knew that.

[2] Meaning: Please pay no attention to my Treasury colleagues quoted in the Wall Street Journal who wrote the following “Overall, the government is now expected to at least break even on its financial stability programs and may realize a positive return”

[3] Usually it’s the journalists who tell us the government is lying, so it’s nice to see the rare government official willing to make the same claim.

[4] You have to admit SIGTARP does sound like Norse God, no?



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