Rearguard Battle

The award of the Nobel Prize in Economic Sciences to Ben Bernanke last month unleashed a wave of indignation among those who view the former chair of the Federal Reserve as the epitome of unoriginal establishment thinking. Bernanke received the prize for work demonstrating that bank runs were possible and that they could impact real economic activity. Both of those things had been perfectly obvious since at least the 1930s. But the Keynesian models that the economics profession built during the post-war era were unable to account for such events, having no real explanation for the volatile dynamics of debt and finance.

This aporia became more obvious when the era of ‘fiscal dominance’ came to an end and financial instability made a comeback from the second half of the 1960s, challenging the Keynesian paradigm and lending credibility to rival strands of thought. Rational expectations theorists underscored the inherent futility of government attempts to interfere with the inner workings of the market, while Milton Friedman’s monetarism fostered the notion that Keynesian inflationism was responsible for the corruption of America’s monetary standard.

Bernanke and other New Keynesians didn’t buy the idea that the problems of the present could be solved by returning to a pure free market. Yet the shallowness of their take on the problem of capitalism’s instability was evident in the subsequent evolution of Bernanke’s work into a framework for inflation targeting and monetary fine-tuning that looked with suspicion on any attempts to manage stock markets or asset prices. In 2004, while serving on the board of governors of the Federal Reserve, he brought the notion of ‘the Great Moderation’ into mainstream circulation, expressing his conviction that through rule-driven fine-tuning, the Federal Reserve would be able to ensure stable, non-inflationary growth. Above all, Bernanke maintained the illusion that, with the right minds at the helm of the economy, money could be the thing of neoclassical fantasy – neutral, stable, unobtrusive. As his memoir makes clear, this fully neoliberalized Keynesianism comfortably survived Bernanke’s own involvement in the enormous rescue operations that followed the near-collapse of the American financial system in 2007-08.

Alan Blinder’s A Monetary and Fiscal History of the United States, 1961-2021, was published in the US in the same week the Nobel Prize was announced. Following a doctorate at MIT with Robert Solow, Blinder has enjoyed a long and distinguished career in Princeton’s economics department, his alma mater. In the mid-1980s he was instrumental in recruiting Bernanke to Princeton based on the work that would eventually earn him the Nobel. But although Blinder and Bernanke share an intellectual agenda and are apparently good friends to this day, their political orientations are different. Bernanke is a Republican – or at least he was, until he realized how uncivil they can be – and he would not claim the Keynesian label as more than a purely technical description of his conceptual framework, which in any case he sees as largely compatible with the insights of New Classical and monetarist economics.

Blinder, by contrast, is a committed liberal (a self-proclaimed ‘centre-left Democrat’, as he says in the book’s introduction). During an extended hiatus from the academy in the nineties, he served as a member of Clinton’s Council of Economic Advisers, followed by a stint as Vice Chair of the Federal Reserve Board, in which capacity he objected to Alan Greenspan’s eagerness to combat inflation by raising interest rates and inducing higher levels of unemployment. His oeuvre, which stretches from the 1970s to the present, is a sustained attempt to resist the neoliberal dilution of Keynesianism. It aims to preserve both the spirit of its original post-war iteration and its practical relevance as a policy manual, defending deficit spending and fiscal stimulus as means to stabilize the economy and bring it as close to full employment as possible.

Blinder’s new book offers a synthetic account of sixty years of economic policymaking in the US, spanning roughly the period of his own career, and picks up exactly where Friedman and Anna Schwartz left off in their influential 1963 work A Monetary History of the United States, 1867–1960 (Blinder maintains his text ‘is in no sense a sequel’ despite the ‘intentional homage’ of his title). It begins with ‘the New Economics’ enshrined in the Kennedy-Johnson tax cut passed in 1964, which he describes as ‘a watershed event’ – ‘the first deliberate and avowedly Keynesian fiscal policy action ever undertaken by the US government’ – and continues through the rise of monetarism, the Volcker disinflation of the 1980s, the rise of central bank independence during the booming 1990s (‘an important and almost worldwide revolution’ in monetary policy), responses to the 2007-08 financial crisis, and ‘Trumponomics’, before and after the pandemic.

Central to Blinder’s old-fashioned Keynesian project is the famous ‘Phillips curve’, which depicts an inverse relationship between inflation and unemployment. That curve occupied a pivotal but paradoxical place in post-war Keynesian thought. On the one hand, it formalized an unfortunate existential condition: the inevitable trade-off between the need to ensure stable money and the wish to make sure that everyone who wants a decent job has one. On the other hand, it was within this trade-off that Keynesians always identified a certain political agency: we may not like the fact that the trade-off exists, but we do have a choice about how to strike the balance – there is always something policymakers can do.

This was the prized possession of post-war Keynesianism that monetarists and rational expectations theorists sought to undermine. Friedman drew the Phillips curve as a straight vertical line, indicating that there is a non-negotiable, natural rate of unemployment and that attempts to interfere with it will inevitably backfire. Notwithstanding his attempts to ‘relegate my personal political views to second or third fiddle’, the clear purpose of Blinder’s book is to rescue the logic of the Phillips curve from the clutches of neoliberal reaction. For him, ‘being a Keynesian sometimes means worrying more about unemployment than about inflation’ – caring more about the welfare of those who need to sell their labour than the income streams of the rentier. That’s a nice sentiment, but what does it amount to?

Writing with such a defensive and pre-committed intellectual agenda can make it difficult to put one’s finger on the pulse of history. Yet some of Blinder’s previous writings have nonetheless been useful. His 2001 book The Fabulous Decade, co-written with Janet Yellen, presents a lucid though not particularly critical account of the 1990s boom. His study of the 2007-08 financial crisis, After the Music Stopped (2013), ranks among the more helpful mainstream perspectives. And compared to the opportunistic provocations of Larry Summers and other nominal Keynesians, Blinder’s op-ed interventions in the Wall Street Journal are always balanced and level-headed. But his new book makes clear how little intellectual substance there is to back up his normative investments.


Blinder’s most conspicuous lacuna is the same as Bernanke’s: an understanding of financial instability as an active force in the making of history. In their world, banks are institutions that take deposits and channel them into longer-term loans – neutral intermediators that work to even out financial flows that might otherwise not be well-matched, a prime example of the market solving its own problems. This ignores the possibility that the creation of money and credit might be tied up with uncertainty and volatility in a way that is systemic rather than accidental. It occludes the fact that financial institutions produce volatility in the course of their normal operations. Instability – loss of liquidity, non-payment, outright failure – is endemic, not exceptional.

Without an understanding of finance as a real force, the drama of the 1970s is impossible to comprehend. Until the early 1960s, financial institutions worked in ways that were still somewhat explicable from the view of banks as ‘channellers’. This reflected the relative stability of the post-war order and the low interest rates guaranteed by the Federal Reserve’s subordination to the Treasury’s debt-financing needs. But as the post-war economy matured and the Kennedy and Johnson administrations bet on maintaining economic growth through tax cuts, demand for credit grew. Banks were unable to take advantage of these lending opportunities because of the interest rate ceilings put in place during the New Deal. In this context, banks discovered that their business was not in fact dependent on receiving deposits. They could make loans first, and then go into the market and ‘buy money’ – that is, borrow the deposit liabilities they needed to satisfy regulatory requirements.

‘Liability management’ flipped the script, making it almost impossible for the Fed to control inflation. Every time the central bank tried to tighten, it provoked another wave of ‘disintermediation’ – banks repudiating the ‘channelling’ model and actively finding deposit liabilities. Policy responses to contain inflationary pressures slowed down growth and pushed up unemployment, particularly among people of colour and other minorities who were less likely to enjoy the protection of powerful unions. But these measures did little to check inflation, rendering Keynesian models increasingly useless.

None of these crucial developments is on Blinder’s radar. Instead, his aim is to prove that Keynesianism should have emerged from the 1970s intact. In its attempt to defend the validity of the Phillips curve, his account of the decade becomes a search for external events on which to pin the misery – escalating wars, oil shocks, and poorly timed or implemented policies. The reasoning seems to be that if only we could acknowledge the reality of supply shocks, the problem of unrelenting inflationary pressures would dissolve, and we would establish the needlessness of Volcker’s intervention.

But the Volcker shock did happen, and Blinder has only a tenuous grasp of how it worked. At one point, he recalls asking Volcker how he thought the Fed had conquered inflation: ‘by causing bankruptcies’. Some people might take that as a striking data point that you could do something with – but not Blinder. He is interested in it only insofar as it appears to refute monetarist claims about how inflation was defeated. Nor is Blinder convinced that monetary policy made a significant contribution to the Great Moderation, the prolonged period of steady growth and low inflation that the US experienced from the mid-1980s, which he instead considers ‘mainly a long streak of good luck’. Could all the bankruptcies have had something to do with it?

Beneath the superficial narrative of non-inflationary growth is a story of scarce liquidity here and abundant liquidity there, volatile asset prices, bankruptcies, bailouts for some and austerity for others. Yet, as A Monetary History of the United States shows, none of this is explicable from a New Keynesian perspective. When Volcker’s Federal Reserve abruptly stopped accommodating inflationary dynamics, the result was predictable: financial strain and failure. How this would play out was never going to be left to the impersonal judgement of ‘the market’. The savings and loans crisis of the 1980s and 90s confirmed that systemically important financial institutions would not be allowed to go under, and demonstrated the extent to which the American public at large had become embroiled in the gyrations of high finance and dependent on bailouts.


When Blinder turns to the Clinton administration, he seems confused as to why an economic team that consisted predominantly of Keynesians was so reluctant to rehabilitate his preferred brand of Keynesianism by pushing for active fiscal policy and demand stimulus. No love seems to have been lost between Blinder and Robert Rubin (chair of Clinton’s National Economic Council and later Secretary of the Treasury), who is described as a former ‘prince of Wall Street’ and representative of ‘bond market vigilantes’. In Blinder’s telling, Treasury Secretary Lloyd Bentsen was schmoozing with Greenspan who was coordinating his policies with Clinton – and soon enough, the ‘profoundly anti-Keynesian’ idea that deficit reduction was the key to economic growth and job creation had gained a firm foothold in the administration. At this point, more traditional Keynesians like Blinder were pushed out of Clinton’s inner circle.

For someone who experienced the Democrats’ neoliberal groupthink up close during the Clinton administration, however, Blinder is remarkably credulous about Obama’s presidency. The latter is credited for attempting to restart Keynesian demand stimulus, before this project was supposedly railroaded by Republican sabotage and Tea Party populism. Of course, the reality is somewhat different. Clinton had at least been genuinely upset about the ways ‘a bunch of f-ing bond traders’ upended his plans for a Third Way alternative to supply-side economics. But it’s not clear that Obama’s mind was ever in a similar space. The economists he hired were both intuitively comfortable giving Wall Street what it wanted and instinctively opposed to alleviating financial pressures on ordinary people. Right from the start, their interventions were geared not to boosting demand or employment, but to pegging asset values and keeping financial firms afloat. In the administration’s view, the former was bound to be inflationary; the latter was pure, non-negotiable necessity.

Clinton was able to ride the roaring 90s, but no similar wave came to Obama’s rescue. Instead, the Obama administrations reinforced the Great Recession by combining the institutionalization of an elaborate bailout state with prolonged fiscal austerity. This is disappointing to Blinder, but he does not view it as the upshot of any conscious political programme. For him, ‘quantitative easing’ was simply the result of technocrats doing their jobs under trying circumstances. He laments the inability of the Obama government to understand that demand stimulus is the solution to economic stagnation. And he is even more regretful that Democrats are so often devoted to fiscal rectitude while Republicans have no compunction about cutting taxes for the wealthy. But his account of the failure of a more old-fashioned, social-democratic version of Keynesianism to carry the day is soaked in studied ignorance and wilful obfuscation. Ultimately, Blinder cannot accept the possibility that opposition to his favourite kind of Keynesianism was powered by a more or less coherent political agenda – that is, by neoliberal reason.

In recent months, Blinder has maintained a tortuously balanced perspective on the post-pandemic return of inflation: from ‘Don’t worry too much about the inflation surge’ to ‘The Fed should raise interest rates, but gently’ to ‘Inflation isn’t transitory, but it isn’t permanent either’ (all titles of his Wall Street Journal columns). Bernanke, meanwhile, felt that the Fed should have gone in sooner and harder – echoing the calls by Larry Summers and Jason Furman to increase unemployment and raise interest rates. Blinder’s reluctance to jump on the hawkish bandwagon is admirable. Yet, by the logic of his own beloved Phillips curve, what the Summers and Furmans of this world are advocating makes perfect sense: the way to reduce inflation is by increasing unemployment.

Bernanke’s trajectory suggests that when Keynesian concerns with economic instability are embraced by establishment interests and thinkers, they are likely to be used ‘to give life to rentiers rather than to abet their euthanasia’, as Hyman Minsky put it. That is the essence of the fully neoliberalized Keynesianism that Blinder fails to reckon with. It entails a commitment to stabilization as the overriding imperative of economic policymaking, which, rather than being constrained by traditional, social-democratic interpretations of Keynes, instead flexibly adapts his ideas to the requirements of an asset-driven economic system.

In the present context, however, it is becoming increasingly difficult to divert people’s attention from the sprawling infrastructure of the bailout state, which provides the owners of capital with a wide range of subsidies just so they don’t get worried, start selling, provoke each other into panic and destabilize the system. As the US and other countries try to give this asset economy a new lease of life by escalating the repression of wages, political difficulties are bound to intensify, opening up prospects for progressive change. For all its wholesome intentions, Blinder’s narrative of the past few decades obscures the society-wide blackmail of the bailout state and legitimates the impoverished policymaking discourse that has allowed it to survive. Not quite the courageous rearguard battle he takes himself to be fighting.

Read on: Cédric Durand, ‘In the Crisis Cockpit’, NLR 116/117