21ST CENTURY MONETARY POLICY

The former chair of the Federal Reserve examines how and why that organization works to control financial crises.

There is a large distinction between monetary policy, which concerns how targeted money can be used to strengthen an economy generally, and fiscal policy, which concerns where funds are spent—for example, the CARES Act promulgated during the pandemic to fund public health measures but also to support workers and businesses most harmed by the crisis. “Unlike monetary policy,” writes Bernanke, “which can be adjusted quickly as needed, government spending and tax policies are not as easy to change.” The Fed has considerably more leverage in applying money as a tool for economic stimulus and relief—though, the author points out, there is a large political dimension to that enterprise. For example, the Trump administration was markedly hostile to the use of the strategy called quantitative easing, or flooding sectors of the economy with money in order to keep lines of credit open to businesses and local governments. “The most basic requirement for economic efficiency is that the economy’s resources, including the labor force, be fully employed,” writes Bernanke, noting the challenges that occurred when the 2008 fiscal crisis sent unemployment skyrocketing—among them the challenge of inflation, about which the Fed must strike a delicate balance between too much and too little. “Monetary policies that promote economic recovery have broad benefits,” writes the author, and can also help curtail inequality. One strategy involves raising tax rates on capital gains, always unpopular among the millionaires in Congress. While the Fed can’t control the course of a pandemic, it can certainly respond nimbly to “economic trauma.” One doesn’t need a strong background in economics to follow Bernanke’s arguments, but such a background certainly helps.

A clear explication of how money flows from the nation’s central banking system into the larger economy.