As the country looks forward to putting the pandemic behind us, it’s urgent we begin planning for a shift from stabilizing the economy to reining in the record asset and debt bubbles that have been compounded by a decades-long expansion of federal budget deficits.
Without action, there could be an economic catastrophe akin to that of 2008, a shock that would almost certainly undo much of the forecasted recovery from the coronavirus pandemic.
Knowing firsthand the events of the last financial crisis — as once head of
The Fed received much criticism for withholding liquidity from the struggling financial system in the crucial days leading up to the 2008 financial meltdown. Their inaction helped cause a freezing of the capital markets, setting in motion the system’s collapse.
To their credit, the Fed finally stabilized the economy by injecting massive liquidity via huge growth of the money supply, ultra-low interest rates, and extraordinary asset-purchase and guarantee programs. The Fed used the appropriate medicines at the time, but those medicines became addictive and their continued use over many years produced severe side effects.
Specifically, these Fed policies led consumers, businesses and governments to embrace record levels of debt. Rapid growth in student and auto loans have left individual households stretched. Corporations have borrowed heavily to finance acquisitions, share repurchases and expansions. The federal government debt
All the while, the availability of cheap money coupled with the
All combined, the nation is on the precipice of any number of massive debt or asset bubbles busting, the repercussions of which could easily lead to an economic downturn and potentially another financial crisis.
Predicting when and which bubbles will burst is nearly impossible. But government leaders can and must vigorously monitor these risks, and address the ones that can be controlled. That requires the Fed to acknowledge that its policies directly affect these bubbles, and that it has an important role to play in unwinding some of what it helped create.
Specifically, the Fed must gradually remove excess liquidity from the system, and significantly reduce its asset-purchase and guarantee programs. If the Fed does not accept responsibility for managing these bubbles, then who is ultimately responsible?
At the same time, the federal government needs to lower the annual budget deficit while still addressing issues in critical areas like healthcare, infrastructure, student lending and Social Security. It is also important for state and local politicians to fully address their unfunded pension liabilities.
While these actions are crucially important, they should not be initiated before the pandemic is under control. Innumerable individuals and organizations adversely affected by the pandemic and related shutdowns still need continued economic relief.
Instead, the nation’s leaders must be prepared to change their approach to spending as soon as the pandemic wanes. In the meantime, it would be wise to advance initiatives that precisely target those most severely impacted.
Several political leaders have expressed the view that the pandemic is a likely one-time occurrence — the kind that does not need to be factored into big-picture economic thinking. This is misguided.
The COVID-19 pandemic is simply one of many adverse scenarios capable of disrupting the economy and society at large. The events of the last year must reinforce the importance of accounting for such black-swan events when considering and advancing policy.
Reducing the leverage in the nation’s fragile economy is imperative to ensure that myriad asset and debt bubbles do not continue exposing the system to another financial crisis. By taking concrete actions to strengthen the U.S. economy, leaders can better ensure it can stand up to future calamitous events.
Kerry Killinger and Linda Killinger are the authors of the newly released “Nothing Is Too Big to Fail: How the Last Financial Crisis Informs Today."
