Greenspan made the dramatic decision to increase interest rates despite inflation running at a modest level. To justify this step, he cited Milton Friedman’s complaint that the Federal Reserve always raised interest rates too late, and insisted instead on getting ‘ahead of the game’, pre-empting inflation rather than responding to it. Greenspan thus extinguished the nascent manufacturing revival which, as Robert Brenner writes, held out the possibility of a ‘break beyond stagnation’. When Greenspan eventually decided to loosen monetary policy, it was not to support the expansion of production and employment, but to inflate asset bubbles, starting with the so-called ‘Greenspan put’: an injection of liquidity into the financial system in response to the stock market crash of 1987. This policy (which was continued by Greenspan’s successors, such that it became known as the ‘Federal Reserve put’) generated speculative bonanzas for the rapidly deregulating financial sector and provided generous liquidity after each inevitable crash. It was rightly criticised for creating systemic moral hazard by inducing financial institutions to increase their risk exposure.
In the 2000s, asset bubbles grew by new orders of magnitude and loose monetary policy became a permanent strategy rather than an episodic fix. Yet, because not much of this money flowed into productive investment or translated into rising demand, its inflationary effect was negligible. Moreover, other secular trends kept inflation low: workers were too insecure to fight for wage increases, even amid relatively high employment; manufacturing supply chains extended to producers in lower-wage locations; immigration cheapened services; and income deflation in the Third World suppressed global demand and commodity prices. Dollar overvaluation was also deeply intertwined with the Federal Reserve’s bubbles. By diverting investible funds from productive to financial investment, these bubbles – the market stocks of the 1990s, housing and credit of the 2000s, the ‘everything bubble’ of the 2010s – attracted enough foreign funds to dollar denominated assets to counter the downward pressure of US current account deficits on the dollar. This, too, helped to subdue inflation.
Since Greenspan lowered interest rates to deal with the 2000 dot-com crash, they have never returned to their 1990s peak. Meanwhile, quantitative easing – effectively Federal Reserve asset purchases – has become a systemic imperative to keep both asset markets and the dollar high. With fiscal policy largely missing in action (aside from tax cuts for the rich), this monetary policy created a highly peculiar political economy. Thanks to declining industry, low investment and fiscal austerity, the consumption of a narrowing well-to-do layer, facilitated by the ‘wealth effects’ of asset bubbles, came to act as the country’s primary economic motor. As a result, anaemic growth and extreme inequality is all that contemporary US capitalism can manage.