This book drilled into the evolution of state intervention and inflation through the past century in the US, linking it to many aspects of economic theory. Keynesian policy and derivatives thereof are the main focus and their conflict with more orthodox, free market policies.

Most recently, the bailout state has gone into overdrive. First the Global Financial Crisis then Covid brought new rounds of large-scale bailouts which are proving hard if not impossible to unwind. Earlier the 1980s savings and loan sector tensions also led to a wave of bailouts. Governments ultimately accept that private financial risk should be underwritten to prevent economic shocks damaging selected segments of society. As the financial system has grown, the reach of this approach has extended. Bank regulation has loosened and the Fed financial safety net widened. Eventually the bailout concept has become ‘untethered’ from its political objectives and has developed its own momentum. Meanwhile, downside risk has been spread, allowing inflationary pressures to emerge.

Inflation generally results in contractionary monetary policy that creates losers. The losers tend to be the least well off. Hence inequality worsens. After a long period of decent growth, where inflationary pressures were largely subdued as post-war economies returned to full capacity, by the 1970s inflationary pressures were proving hard to contain. Free market theorists were gaining credence and theoretical alternatives to Keynesian demand management were developing, particularly monetarism. And the financial system was growing rapidly as middle class households were able to use credit to buy assets. Leverage increased. Asset appreciation and capital gains replaced wage growth as the driver of demand. This in turn further enlarged the banks and the financial sector. The concept of Too Big To Fail emerged. Bailouts became selective and systemic risk became their driver.

Expectations of Fed intervention progressively deepened. Fed Chair Paul Volcker’s answer after 1979 was to control monetary growth and let interest rates adjust as necessary – which they did, reaching 20%. Hence another recession and more bank and corporate failures. Greenspan took over the Fed in 1987, and he systematically further extended the financial safety net.

In the Clinton era, the policy stance reverted to growth, but led by micro-economic measures on the supply side rather than macroeconomic. Some may argue that Keynes underemphasised the supply side, his advocated measures principally demand management. Clinton combined the two and thereby facilitated generalised growth without inflationary pressures. What it also did, though, was to pump up asset values, creating new sets of winners and losers and adding to leverage. When the global financial crisis of 2007-9 hit, the Fed again stepped in to bail out the banks. But this came at huge cost, requiring offsetting public spending cuts to restore fiscal stability. Interest rates dropped to near zero and the Fed shifted to buying up assets to ensure bank portfolios remained liquid, again boosting leverage and benefitting asset owners. Nonetheless, growth stayed low and unemployment high. Then Covid hit, requiring a different policy mix.

The repo market was extended, including sales to non-banks. The Fed balance sheet expanded – more than doubling from even the post financial crisis scale and encapsulating corporate bonds as well as financial sector and sovereign paper. Asset prices snowballed – again benefitting some segments of society and disadvantaging others. House prices rose 45% between 2019 and 2022. Unsurprisingly inflation took off again, boosted too by Biden’s various – generous – stimulus measures. Rather than being transitory, inflation was now more entrenched, requiring new monetary discipline that again threatened general living standards. Credit growth had to be stemmed and leverage reduced.

As the Global Financial Crisis hit, the bailout state kicked in big time. But the gains went to Wall Street and the wealthy not average households whose incomes fell. This trend worsened with the policy response to Covid, but that was followed by a substantial surge in inflation. The interest rate hikes which followed further hit households while the higher asset prices again benefitted the wealthy. Especially as economies moved towards services from manufacturing, confidence became fundamental. (Arguably it always was.)

Quantitative Easing exacerbated this – though while preventing a second Great Depression, QE failed to trigger rapid economic growth. Hence, the Fed was unable to unwind its ultra-loose monetary stance. And the Covid crisis required even more direct monetary intervention, with the repo system widening to encompass non-banks and monetary funds, hitherto outside the financial insurance umbrella. Leverage escalated further. Policy-makers had more discretion over when to act. Hence the assertion that banks not governments drive policy.

The argument is that Keynes underestimated the central role of leveraged investment. Financial Keynesianism was not developed. Rather the inherent tension between maintaining price stability and full employment persists, spawning competing theoretical responses.

Overall this was a difficult and very disappointing read. Not least its focus on the US narrowed the scope – albeit the US dominates the world economy. But the style is not transparent and a touch polemic.

There is no obvious conclusion other than that average households tend to bear the brunt of corrective policies to stem inflation while banks are routinely bailed out, benefitting the wealthy. Though hard to disagree with, it is far from clear that the narrative is well argued.

It states that the only way to exit the bailout logic is to challenge the monetary drivers at the heart of capitalist society. But the financial sector is at the heart of the modern economy. There’s fat chance then that the monetary drivers can be challenged.