The Power of the Fed (2021) Movie Script
1
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The coronavirus pandemic
has left millions of Americans
out of work...
People have gone now without
four, five, or six, or seven
paychecks and it's starting to
catch up-- they need food, it's
the most basic thing.
JACOBY: Over the past year,
we've seen how many Americans
are living on the edge.
Have you got any income at
the moment?
No, no-- and we have kids
too, so.
So you're not making any
money at the moment?
No.
JACOBY: But while businesses
were shuttered, and millions
were left unemployed, one place
has been thriving like never
before.
Stocks surging even as
America enters its darkest
chapter yet of this pandemic.
JACOBY: On Wall Street, it
was a banner year.
The market has been open for
30 minutes and we've gone
straight up.
The Dow rising nearly 18%,
its best performance since 1987.
JACOBY: After a major dive,
markets reached record highs.
The pandemic would turn out to
be a blip in the longest bull
market ever.
The price of stocks have
skyrocketed-- and so has the
wealth of those who own them.
Elon Musk has added over
$10 billion to his wealth-- just
this week!
JACOBY: Some see signs of
mania...
This GameStop situation, we
will never encounter a setup
like this again.
JACOBY: As more Americans try
to get in on the party.
Right now we're in a
raging mania.
JACOBY: Some worry a crash
is to come.
It's the burst of euphoria
that typically brings these
things to an end.
JACOBY: As the financial
world has been diverging from
the real world, I've been
trying to understand the many
forces at play.
And I found one institution has
been at the center of it all:
the Federal Reserve-- the
nation's central bank.
It is the most powerful and
least understood institution in
the country.
It really is difficult to
overstate how important this
story is, and how big this story
is, and how much it matters.
JACOBY: I've been speaking
to current and former Fed
officials...
Is that really the first
time you're in a suit since
COVID?
From the waist down.
Can I take my mask off?
JACOBY: ...Economists, and
titans of finance.
Nobody knows how this is
gonna turn out.
This is an experiment.
JACOBY: I've heard that over
and over-- that we're living
through an epic experiment run
by the Fed.
I believe this is the
economic story of our time.
JACOBY: An experiment that's
been dramatically changing the
American economy.
(overlapping news reports)
Right now, breaking news
here, stocks all around the
world are tanking.
JACOBY: If you want to
understand how today's financial
world has grown so far removed
from the real world-- and the
role of the Federal Reserve--
you need to go back to 2008,
when investors, speculators, and
Wall Street bankers nearly
brought down the global economy.
Get on the train!
Otherwise it is gonna leave
the station without you.
Wall Street shaken to its
very foundation today.
We will need to stabilize,
repair, and reform our banking
system and get credit flowing
again to families and
businesses.
JACOBY: The new president and
Congress spent hundreds of
billions of dollars to restart
the economy, but at the center
of the rescue effort was the
Federal Reserve.
Richard Fisher was the head of
the Fed's bank in Dallas at
the time.
What the Federal Reserve
does is provide the blood supply
for the body of our capitalist
economy.
And what happened in 2008 is all
the veins and the capillaries
and the arteries collapsed.
So every financial function had
failed.
It had collapsed and we had to
restore them.
JACOBY: That's when the Fed
stepped in.
Its job is to promote employment
and keep inflation in check,
primarily by raising and
lowering short-term interest
rates.
In 2008, Fed officials decided
to do something they hadn't done
in half a century-- they began
dropping rates, eventually to
almost zero.
Those massive rate cuts have
not been stimulating the
economy.
JACOBY: With Americans still
suffering and the banking system
on the verge of collapse, Fed
officials there at the time
told me they felt compelled to
go even further.
And then the question was,
"What else can we do?"
And the committee came up with
the idea of quantitative easing.
Quantitative easing, what in
the world is it that?
Quantitative easing, that's
just a Greek term to a lot of
people.
A lot of people want to know
what they're gonna say about
what we call quantitative
easing, what are some of the...
JACOBY: Quantitative easing,
or QE, was championed by Ben
Bernanke, then the Fed chairman.
Mr. Bernanke, what does this
do to the financial crisis?
The Federal Reserve has been
putting the pedal to the metal.
So we're doing everything we
can to support the economy, and
we hope that that's going to,
you know, get us going next year
sometime.
JACOBY: QE was an
experimental way for the Fed to
inject money into the financial
system and lower long-term
interest rates.
The way they did it was to
literally create new money and
use it to buy huge amounts of
things like mortgage-backed
securities and government debt
from banks and other
institutions.
Their hope was that the lower
rates would spark more spending
and borrowing throughout the
economy.
It's almost like alchemy.
You can create money out of thin
air if you're at the Central
Bank.
So creating more money puts
more money in the banking
system, put more money out there
for the economy to take it and
put it to work and to grow, and
to restore itself.
JACOBY: As news of the Fed's
actions spread throughout the
financial world, Andrew Huszar,
a former Fed official who'd left
to work on Wall Street, got the
offer of a lifetime.
I was sitting in a cafeteria
in Stamford, Connecticut, when I
got the call.
I was eating a sandwich, I
almost choked on it at the time
(laughs)
Basically I realized very
quickly what I was being asked.
I was being asked if I would
manage the largest financial
markets intervention by a
government in world history.
JACOBY: The job was to join
the Fed office in Manhattan and
manage a massive expansion of
its power in the financial
markets under QE-- buying more
than a trillion dollars in
mortgage bonds from the banks
as quickly as possible.
The idea was that the Fed
was trying to get more credit
and cheaper credit into the
hands of the average American.
There were millions of people
losing their jobs, millions of
people in mortgages that they
couldn't afford, and how could
the Fed use its financial tools
to actually help the average
American?
JACOBY: Is this something
that had ever been attempted
before?
No.
You have to realize we were in
the midst of the next Great
Depression, this was an
incredible collapse of the
fundamental structure of the
U.S. economy in a very short
period of time and we were
building the plane while we
were flying it.
Everything in the markets
is a confidence game.
So, the Fed exists to restore
confidence when all confidence
is lost.
JACOBY: William Cohan is a
writer and former banker who
worked with us during our
months reporting this story.
JACOBY: The idea of lowering
interest rates and the idea of
quantitative easing was
basically pulling out all the
stops to make it cheaper to
borrow.
Basically by making money
so inexpensive, by suddenly it
being abundant and cheap and
easy to get, they just flooded
the zone with capital.
JACOBY: Easy money.
Easy money-- trillions of
dollars of easy money.
Like, the greatest experiment in
easy money in history.
(indistinct chatter)
JACOBY: All that easy money
sparked a rally in the stock
market.
We saw it take its effect
almost immediately.
The market reacted.
I was a little bit surprised
it took off that fast.
JACOBY: How is that viewed
inside of the boardroom?
Was that seen as success?
Yes, it validated what we
thought would happen-- that's
what we thought would happen.
When you drive interest rates
down all the way out, it forces
investors into taking bigger
steps on the risk spectrum.
Cheap money is the fuel for a
financial speculator and for a
financial investor.
JACOBY: What Fisher and other
former Fed insiders told me is
that the stock market rally was
no accident.
By design, the Fed's QE program
effectively lowered long-term
interest rates, making safer
investments like bonds less
attractive, and riskier assets
like stocks more attractive.
It was hard to argue with the
results.
Stock prices kept going up.
The old saying is don't fight
the Fed.
Don't fight the Fed.
Don't fight the Fed.
Rule number one as a young
trader you're taught is don't
fight the Fed.
I don't know what the
hangover's gonna look like down
the road from all this
extraordinary stimulus, but for
now, the markets love it.
Don't fight the Fed.
A cam roll one...
JACOBY: You look at me.
So we're approximating an
in-person interview.
It'll work, it'll work.
Mohamed El-Erian remembers it
well.
He was running the largest bond
fund in the world at the time,
and made a fortune for his firm
following the Fed's lead.
Don't fight the Fed.
The Fed is the one institution
that has a printing press in the
basement, and there's no limits
to how much it can use.
That is what makes the Fed such
an influential player in the
marketplace.
Keep an eye on the treasury
market...
JACOBY: El-Erian's firm
helped advise the Fed on it's QE
experiment.
He told me the expectation was
that the low interest rates and
QE would have a strong knock-on
effect on the wider economy.
That was the theory.
In practice, the Fed was very
successful, in terms of moving
asset prices.
It was much less successful in
moving the economy and the
result of that is we got the
largest disconnect ever between
Main Street and Wall Street,
between the economy and finance.
The banks are sitting on
their butts and they're still
not lending money.
JACOBY: One of the problems
was that the banks were holding
on to the money instead of
making it available to
borrowers.
The banking sector is broken.
JACOBY: At the Fed, Andrew
Huszer was disappointed by what
he was seeing.
I have great respect for the
Fed.
I never questioned, and I, to
this day, I will never question
the intention.
What I question, rather, is
whether their tools are able to
help the American people in the
way that they believe.
I came out of QE1 100 percent
believing that it was necessary,
because we had actually helped
to stabilize the economy, but
wondering if there wasn't a
fundamental problem with the
approach, in that the tools of
the Fed worked through the Wall
Street banks, and in so doing,
were disproportionately
benefiting the wrong people--
the people who didn't really
need the help.
JACOBY: So basically, what
you're saying is that you were
seeing, in practice, something
very different than what was
supposed to happen,
theoretically.
Yeah, I saw that Wall Street
is a private sector actor, and
Wall Street has its own
interests, and Wall Street can
do what Wall Street wants.
And the Fed was, on some level,
at the mercy of, of Wall Street.
JACOBY: Huszar and others
inside the Fed had been counting
on Congress to step in and help
correct the imbalance-- target
more money to Main Street and
the wider economy.
But then politics took a sharp
turn.
We've come to take our
government back!
JACOBY: Tea Party supporters
put Republicans in charge of the
House...
We need to restore fiscal
sanity to this nation.
JACOBY: ...dimming prospects
for Congress and the White House
to work together to stimulate
the economy.
The Fed was on its own.
Was it palpable that the Fed was
sort of the only game in town
here?
Yes.
The fact was we were carrying
the load all by ourselves.
JACOBY: The day after the
midterm elections, the Fed
announced it would do another
round of quantitative easing--
not just to stabilize the
economy but boost it.
Fed Chair Bernanke promoted the
plan, writing that it would
create a "virtuous" circle, with
with lower mortgage rates making
housing more affordable, and
higher stock prices boosting
consumer wealth.
He went on television to counter
critics who were warning the
decision risked causing
inflation.
They're looking at some of
the risks and uncertainties
associated with doing this
policy action.
What I think they're not doing
is looking at the risk of not
acting.
JACOBY: I wanted to talk to
Bernanke but he wouldn't agree
to an interview.
But I did speak to Sarah Bloom
Raskin, who was on the Board of
Governors at the time.
So, many of these tools had
not been tried before.
They were definitely like break
the glass kind of tools.
Like, what are we going to do in
order to restart the economy
here?
JACOBY: You voted for
quantitative easing two.
What was your thinking there?
Right, so, my thinking was
that we still had an economy
that was far from its potential.
As QE began, it showed great
promise.
We started to see that people's
sense of economic wellbeing was
ticking up somewhat.
People were finding jobs, people
were finding homes.
The foreclosure rate had slowed.
So there was a sense that
something was working.
And for that reason it was, in
my mind, worth supporting.
JACOBY: But outside the Fed,
some were saying that the costs
of quantitative easing might
already outweigh the benefits.
A lot of talk about
quantitative easing, QE2-- the
likelihood that that will have a
significant effect is close to
zero.
But the markets love it.
JACOBY: Joseph Stiglitz is
one of the most well-known
economists in America and a
winner of the Nobel Prize.
So you're doing a documentary
on the Fed and monetary policy?
JACOBY: We are trying to.
(laughing): Okay.
JACOBY: Are we insane?
No, no, no, I think it's a
great idea.
JACOBY: Okay.
Stiglitz told me that while the
Fed was doing some good, he also
had concerns at the time.
The main thing I was
concerned about was that the way
they were trying to revive the
economy was a kind of trickle
down economics.
The way quantitative easing
works is that it's a lowering of
the interest rates that leads
stocks to go up.
And so who owns the stocks?
It's the people in the top.
Not just the top ten percent,
one percent, one-tenth of one
percent.
And so it increases enormously
wealth inequality.
We had had increasing inequality
really since the late '70s and
this was putting that on
steroids.
So the immediate objective of
saving the banking system was
achieved, but the broader
objective, which was helping the
economy recovery quickly in a
robust way, in a way with shared
prosperity, total failure.
JACOBY: What sort of response
did you get from folks at the
Fed to what you were saying at
the time?
"Our mandate is to do what we
can to increase employment, to
use the tools that we have, and
that's what we're doing."
JACOBY: Was that even part of
the discussion at the time in
the boardroom, whether there was
any risk of exacerbating wealth
inequality?
There were strands of that, I
would... I recall.
The... these kind of costs were
considered speculative, because
again, the tools hadn't been
used before.
So there wasn't a clear sense as
to what would... you know, sort
of what the impact would be.
There was some discussion of it,
but nothing definitive.
JACOBY: Some saw wealth
inequality as a trade-off.
There was nothing you could
really do about it.
But it was, in my mind, in my
discussion, what I would present
at the table, it would be one of
the consequences we just had
to be mindful of.
That doesn't mean we shouldn't
have done what we did.
JACOBY: For Andrew Huszar, it
was time to walk away from the
Fed.
It was a while ago, but
whenever I come back here, it's
a very special feeling.
JACOBY: I bet.
You were still working in this
building when the second round
of quantitative easing happened.
What was your reaction to it
when that happened?
I was not surprised by the
announcement, but I was
incredibly demoralized.
What I was seeing outside of the
Fed was rising demands from Wall
Street that the Fed continue its
stimulus-- the idea that the
sky was gonna fall if the Fed
didn't continue to print money
and give it to the Wall Street
banks.
And yet, nobody was giving a
coherent explanation as to how
the Fed showering trillions of
dollars onto Wall Street banks
was actually directly benefiting
the average American.
And I'll tell you why they
weren't talking about it,
because it doesn't.
We did not see the knock-on
benefits that we had hoped for
the average American, as much
as we wanted to.
JACOBY: Why is this kind of
an emotional issue for you?
Well, perhaps it's because I
was a true believer of the Fed.
And I worried about what this
meant, in terms of the future,
about how much more the Fed
would double down, and how
addicted the, the... Washington
and the markets would become
to this extraordinary stimulus.
JACOBY: The Fed would keep
the money flowing under
successive rounds of
quantitative easing, injecting
more than $2 trillion into the
financial system.
And by 2013, unemployment was
continuing to fall, and the Fed
saw signs that its policies were
having a positive impact on the
economy.
Fed Chairman Bernanke signaled
that the easy money might start
to taper off.
If we see continued
improvement, and we have
confidence that that is going to
be sustained, then we could, in
the next few meetings, we could
take a step down in our pace of
purchases.
I was on the trade floor.
I remember Chairman Bernanke
saying that he would taper.
First we had to figure out what
does taper mean?
And the minute people realized
what taper meant, which is that
the Fed would step back from
buying all these securities, and
even though the Fed said it's
gonna be gradual, it's gonna be
measured, the markets had a
massive tantrum.
The markets selling off as
the Federal Reserve Chairman
Ben Bernanke said that the
central bank could start
tapering.
The markets went into a fit.
Became dysfunctional.
It was known as the taper
tantrum.
We all know it, when Ben
Bernanke talks, if the Federal
Reserve speaks, the markets
listen.
Taper tantrum!
Markets are like little kids.
They want candy, and the minute
you try to take the candy away,
they have a tantrum.
You have big Wall Street
reaction, right?
You have extreme volatility
where Wall Street says, "Whoa,
whoa, no, no!
No, unacceptable!" and values
plunge.
And of course the Fed doesn't
like that, nobody likes that,
that's a... that's a precursor
to instability, right?
But it put the Fed in a real
bind.
Chairman Bernanke.
And Chairman Bernanke had to
go in a conference in Boston
and say, "No, no, no, we're not
tapering."
You can only conclude that
highly accommodative monetary
policy for the foreseeable
future is what's needed in the
U.S. economy.
JACOBY: Bernanke's successor,
Janet Yellen, had better luck
the following year.
She was able to pause
quantitative easing without a
tantrum, in part, by promising
to maintain the Fed's massive
balance sheet of assets it had
bought-- and to keep short-term
interest rates low.
The F.O.M.C. reaffirmed its
view that the current zero to
one-quarter percent target
range for the federal funds
rate remains appropriate.
JACOBY: Low rates spurred
companies and individuals to
borrow in record amounts.
And the Federal government took
full advantage of the low
interest rates as well, running
the national debt up a trillion
dollars a year, to new highs.
Good afternoon, everyone,
and welcome.
JACOBY: By 2018, the new Fed
chair, Jerome Powell, was
saying the economy was in a
good place, citing historically
low unemployment numbers and the
fact that concerns about
inflation hadn't materialized.
The U.S. economy is in a good
place, and we will continue to
use our monetary policy tools to
help keep it there.
JACOBY: There was a growing
debate about whether the Fed
should raise interest rates and
slow the flow of easy money.
For those who were saying
during that period of time, you
know, you should've been
concerned about other
side-effects of keeping rates
so low.
Tell me what the downside of
raising rates would've been.
The downside is keeping
Americans on the side-line who
want to work.
JACOBY: I raised these issues
with Neel Kashkari, president
of the Minneapolis Fed.
He's been outspoken about how
the Fed's policies have helped
lower unemployment and improved
the economy overall.
The Fed has been on a
mission, I've been on a mission
to put Americans back to work
and help them get their wages
up, especially for those lowest
income Americans.
And if it has had some effect
on Wall Street, to me, the
trade off is well worth it if we
can put Americans back to work,
so that they can put food on the
table, they can take care of
themselves.
That is profoundly beneficial to
society.
JACOBY: One of the things
that we have seen in this
country is a widening wealth
gap.
The question is what role, if
any, the Fed has played in
widening that wealth gap.
Well, this is a great point,
and I'm glad you raised it.
Most people who make this
argument ignore the fact that
for many Americans, they don't
own a house, they don't own
stocks, they don't have a 401K,
the most valuable asset they
have is their job.
So by putting people back to
work and helping to boost their
wages, we are actually making
their most valuable asset more
valuable.
JACOBY: But the critics I
spoke to questioned the Fed's
success and pointed to other
indicators.
Wealth was becoming
increasingly unevenly shared; in
that quote "good place" the one
percent held 32 percent of the
nation's wealth and the
majority of Americans said they
were financially anxious.
40 percent of Americans didn't
have more than a $400 rainy day
fund.
Most Americans were tremendously
fragile economically speaking.
JACOBY: Karen Petrou is an
unlikely critic of the central
bank-- she spent her career as
an adviser to banks and large
investors, analyzing how
financial policy played out in
the real world.
Despite the quote, "record
employment," when you break
those numbers down, you can see
that more people had jobs and
that's great, but the wages and
the growth in the economy
remained very tepid and very
unequal.
JACOBY: When you speak to
the folks from the Fed about the
idea of raising interest rates,
they'll say, "What was the
alternative?"
And you say what to that?
I'd say, "What you were doing
wasn't working."
We'll never know whether
lowering rates would have
dampened growth.
We do know that keeping rates
ultra, ultra low didn't raise
growth.
It raised markets.
JACOBY: Petrou and other
critics were concerned that the
Fed's low rates and easy money
policies were fueling troubling
trends on Wall Street and in
corporate America.
One in particular was the amount
of corporate borrowing.
Valuations are generally
elevated, especially corporate
debt.
We have flagged the rise in
corporate debt.
We have entirely too much
corporate debt out there.
JACOBY: Taking advantage of
low interest rates, corporations
were selling bonds to big
investors.
I saw numerous studies and
reports detailing the extent of
the debt-- and how even marquee
companies were so leveraged,
their credit ratings plummeted.
The Fed had hoped that
companies would put all that
borrowed money to good use and
invest in their workforce and
their infrastructure.
But in reality it was playing
out differently.
Buybacks.
Buying back stock.
Stock buybacks...
Stock buybacks...
JACOBY: Companies were often
borrowing money to buy back
their own stock, making the
remaining shares more valuable
and the prices higher.
As a corporation, you realize
all that matters is the stock
price.
So what do we have to do to
increase the stock price?
And more often that is buying
back the stock.
JACOBY: Financial reporter
Dion Rabouin covered the growing
trend.
So it used to be that the
Fed would lower interest rates,
businesses would then take on
more debt, they would use that
debt to hire more workers,
build more machines and more
factories.
Now what happens is the
Federal Reserve lowers interest
rates, businesses use that to go
out and borrow more money, but
they use that money to buy back
stock and invest in technology
that will eliminate workers and
reduce employee head counts.
They use that money to give the
CEO and other corporate officers
big bonuses and then eventually
issue more debt and buy back
more stock.
So it's this endless cycle of
things that are designed to
increase the stock price, rather
than improve the actual company.
G.E. just authorized a $50
billion stock buyback.
JACOBY: The numbers were
astounding-- more than
$6 trillion in corporate
buybacks in the decade after
the financial crisis.
Warren Buffett likes Apple's
buybacks.
Well, why wouldn't he, he's
a shareholder and they're
buying back a hundred billion
dollars in stock.
Buybacks used to-- it's
just another example of things
that used to be viewed as kind
of, ugh, you know, just going
mainstream.
JACOBY: Sheila Bair, a former
top banking regulator, was
issuing public warnings at the
time that the Fed was
incentivizing bad behavior on
Wall Street despite its best
intentions.
I can't fault the companies
so much, because these interest
rate-- this interest rate
environment creates very strong
economic incentives to do
exactly what they're doing.
It's hard to create a new
product, it's hard to come up
with a new idea for a service,
it's hard to build a plant and
hire people and run the
organization.
It's real easy to issue some
debt and pay it out to your
shareholders to goose your share
price.
That's real easy to do, but it
doesn't create real wealth, it
doesn't create real
opportunity, it doesn't create
jobs, it doesn't improve the
labor market.
It's just another example of how
these very low interest rates
have really distorted economic
activity and frankly been a drag
on our economic growth, not a
benefit.
JACOBY: Corporate buybacks,
the elevation of corporate debt,
how was that viewed by you and
others at the Fed?
Something we pay a lot of
attention to, but when
companies are buying back their
stock, one of the things they're
telling us is we don't have
profitable places to invest,
and it's easier for us to just
to buy back our stock.
That's concerning in terms of
the future of our economy.
But that's not because of the
Fed, so we pay attention to it,
it really matters, but in my
view, we don't, it's not
something we control.
JACOBY: In our conversation,
Kashkari was also quick to
dispute the criticism that the
Fed is really just boosting
financial markets and helping
Wall Street.
There is this idea on Wall
Street that the Fed kind of
has our back and that because
you may have well-intentioned
policies that are trying to get
everybody to work, there is this
side effect, this unintended
side effect of just, kind of,
really helping the rich.
That argument ignores the
benefit to the poor.
And if... sure, if you're gonna
ignore the benefit to the poor,
then we're only helping the
rich but, of course, that's an
incomplete analysis.
When you actually sit down and
say, well, let's go through the
trade-offs of the choices that
the Fed has, whether it's
interest rates or it's
quantitative easing, it's not
just about Wall Street, it's not
just about asset prices, it's
also about thinking about the
men and women in America who are
trying to find work and who
want to have higher earnings and
who deserve higher earnings.
If we are benefiting them by
helping them find work and
helping them have higher wages,
I will take that trade off.
JACOBY: There's an ongoing
disagreement among people I
spoke to about how much the Fed
has been helping Main Street.
But what most do agree on is
that it's fueled the massive
growth of the financial sector--
a "golden age" for Wall Street,
as some have called it.
Even some of the largest
beneficiaries of this trend told
me it made them uncomfortable,
like legendary investor Jeremy
Grantham.
In my career in America,
the percentage of GDP that goes
to finance has gone from
three-and-a-half to
eight-and-a-half.
(laughs) Where in a way, we're
like a giant bloodsucker and we
we have more than doubled in
size and sucking more than twice
the blood out of the rest of the
economy.
And we do not generate any
widgets, we do not generate any
real increase in income.
We are just a cost.
JACOBY: When you say "we,"
you mean you and other members
of the financial community have
been this kind of bloodsucker on
the economy?
Is that what you're saying?
Yes, collectively we fulfill
a completely necessary service,
but what we have done is created
layers upon layers of more and
more convoluted, expensive
financial instruments.
And that's what makes all the
profits for the financial
industry, and it's taken a lot
of ingenuity and salesmanship to
make this happen and a lot of
lobbying in Congress, etc.,
etc., and we have imposed on the
rest of the economy the idea
that banking and finance are
utterly important at all times.
If you do anything wrong to us,
the entire economy will collapse
in ragged disarray.
JACOBY: As finance grew, so
did the risks.
One concern was what would
happen to all those companies
that had gone into debt if there
was a downturn-- and what would
happen to the trillions of
dollars in corporate bonds that
had been sold to investors.
There were also increasing
warnings about a key player in
all the borrowing going on,
little known and unregulated
financial companies that had
been flourishing in the easy
money economy, known as shadow
banks.
Shadow banks are large
financial institutions that
don't have bank charters.
So they don't have a special
relationship to the government.
They have other financial
licenses to conduct other types
of financial businesses.
JACOBY: Lev Menand, who'd
been an economic advisor to the
Fed and the Treasury Department,
said the biggest source of
worry about the shadow banks was
their lack of a cushion in the
event of a downturn.
The core of the problem of
the shadow banking system is
that it's extremely fragile.
Anybody who is an investor in
a shadow bank, who has their
money in a shadow bank, instead
of a real bank, is going to have
an incentive to withdraw in the
face of any uncertainty.
So little economic shocks that
cause asset prices to fall have
the potential to trigger runs
and panics.
And so what we've, what we've
done is, by allowing this shadow
banking system to develop, is
we've inserted a source of
instability in our entire
economic system that doesn't
need to be there and that has
the potential of throwing us
all off course.
Let me start by saying that
my colleagues and I...
JACOBY: That potential
instability posed by the shadow
banking system was on the Fed's
radar.
How are you thinking about
potential risks bubbling up in
the broader shadow banking
system?
You know, this is a project
that the Financial Stability
Oversight Council is working on
now, and also the Financial
Stability Board globally is
looking carefully at leveraged
lending and, you know, we think
it is something that requires
serious monitoring.
JACOBY: Despite those
concerns, little action was
taken by the Fed, other
regulators, or Congress, and
the system remained vulnerable
to a shock.
It would arrive in early 2020.
A preliminary investigation
into a mysterious pneumonia
outbreak in Wuhan, China, has
identified an previously
unknown coronavirus.
When the pandemic hit, it was
so unlike anything any of us
have experienced in our
lifetimes.
We'd been paying attention to
what was happening in China for
a few months.
I was calling my contacts,
global businesses that had big
operations in China, to
understand what their employees
and staffs were seeing.
And we were all trying to learn
as much as we can about
pandemics and what it's likely
gonna mean.
Major selloff across Europe
this morning...
I think we all figured out
very quickly the pandemic and
the virus would drive the
economy.
Investors are spooked by the
growing number of infections
outside China.
But how fast would it hit us?
How widespread?
What would the health care
response be?
It was maximum uncertainty.
And you were seeing that
uncertainty manifest in
financial markets.
What you have here are
concerns, fears, worries, and
deep uncertainties about what's
likely to happen next.
People were scared.
Investors were scared.
Individuals were scared.
And they said, you know what, I
just want cash.
Markets giving us the worst
two-day point drop ever in
history.
I don't even want treasury
bonds, I don't even want
corporate bonds, I don't want
stocks, I just want cash.
And when everybody in the
economy says "I want cash" at
the same time, that leads to
potentially a collapse of
financial markets.
On the bell, on the bell!
It's the first circuit
breaker, has been triggered.
Market functioning was
starting to cascade into
failure.
The Dow plunging again
today, the 11-year bull market
has ended.
Stocks were just on a
downward freefall.
You had credit markets seizing
up.
People were selling anything
that wasn't nailed down.
Investors are really growing
incredibly pessimistic.
The U.S. economy, the biggest
economy in the world, is in
freefall.
Then comes the realization
that we have to lock down.
The list of closings and
activities being suspended is
growing from coast to coast.
JACOBY: COVID hit the global
economy hard and fast, but it
wasn't just the pandemic that
was causing a financial crisis--
it was the vulnerabilities of a
now highly leveraged financial
system.
Attention focused on the shadow
banks.
What we saw in March of last
year was a full-blown panic in
the shadow banking system.
It wasn't something that you
have when you have a pandemic,
you have a bank panic.
It was, you have a bank panic
because you had some exogenous
shock in the economy and you
have these underlying
vulnerabilities in your monetary
system that you haven't
resolved.
JACOBY: The Fed sprang into
action.
They turned back to quantitative
easing-- buying hundreds of
billions in debt from financial
institutions.
By mid-March they made more than
a trillion dollars available to
the shadow banks.
And they cut interest rates back
down to near zero.
The Federal Reserve cut
interest rates to near zero.
What that tells all of us is
that the economic impact of the
coronavirus is going to be
crippling.
The Federal Reserve lent half
a trillion dollars to securities
dealers, half a trillion dollars
to foreign central banks, bought
$2 trillion of treasury
securities, another trillion
dollars of mortgage-backed
securities.
It flooded the zone with new
government cash to stabilize
this system.
JACOBY: But it wasn't enough
to stop the panic.
The emergency rate cut failed
to calm investors; in fact, it
did the opposite.
JACOBY: The corporate debt
market had frozen up, and
companies were unable to finance
themselves, putting the wider
financial system at risk.
There's just this corporate
debt picture out there and we're
just beginning to see how those
dominoes are gonna fall.
JACOBY: So, on March 23,
the Fed took its economic
experimentation to a whole new
level.
With Congress' backing, Fed
Chair Powell announced a range
of new loan programs.
He said the Fed, for the first
time, would be willing to buy up
corporate debt.
We often talk about the
Federal Reserve using a bazooka
to tackle markets and the
economy.
This is bazooka, cannons, and
tanks all at once.
So this was huge, this was
the Fed stepping in on an
unprecedented scale, and saying
to the market, "We will do
whatever it takes."
The motion is adopted.
(cheers and applause)
JACOBY: By the end of March,
Congress would also act, passing
the largest economic stimulus
bill ever-- the $2.2 trillion
CARES Act.
The bill rushed to the
president after clearing the
House in a voice vote.
JACOBY: It provided support
for individuals and small
businesses.
I wanted that to be a nice
signature.
(applause)
JACOBY: A big portion of the
bill-- nearly half a trillion
dollars-- was earmarked to go to
the Fed to support its lending
programs.
I don't think most people are
aware that we came this close to
a bona fide financial crisis.
Yeah, I think a lot of it is
missed for two reasons.
One: there was a lot of other
stuff going on in the news at
the time.
And the other is the Federal
Reserve did an amazingly good
job at putting out the flames of
this panic.
And even though the panic in
March 2020 was more severe along
many metrics than anything we
saw in 2008, the government's
response was more powerful in
certain respects.
And we're lucky that-that the
government was successful or we
could be living through a true
depression.
(bell ringing)
And there's the opening bell.
Looks like markets are set to
rally...
JACOBY: But in staving off
unemployment and economic
disaster, the Fed had also used
its powers to rescue some of the
riskiest parts of the financial
system, like the junk bond
market.
Is this just like a high
yield junk bond bailout?
I mean I don't get...
We've got to live with it
now, Tom.
...why is this an emergency?
We've got to live with it.
JACOBY: To the critics, the
Fed was sending the wrong
message, rewarding the wrong
people.
Over the years, we've been
trained to believe that the Fed
is on our side.
What the Fed has trained us to
believe is that if we make a bet
in the market and we win, we're
on our own, we get to keep the
profits.
If we lose, they will bend every
effort and every dollar they can
get their hands on, one way or
another, to bail us out.
This is asymmetry of the most
splendid kind.
A speeds, go ahead and clap
it off please.
JACOBY: Billionaire bond
investor Howard Marks called the
Fed out at the time, saying it
was undercutting the way the
free market is supposed to work.
There are negative
ramifications to this.
One called moral hazard, which
means conditioning people to
believe that if there's a
problem, the government will
bail you out.
And, if people really believe
that, then there's no downside
to risky behavior.
Because if there's a problem, it
won't fall on you, you'll get
bailed out.
If you, if you play it
aggressively and-and succeed,
you make money, if you play it
aggressively and fail you'll get
bailed out.
JACOBY: So has moral hazard
gotten worse as a result of this
bailout?
There's no barometer of moral
hazard, so I can't give you a
reading.
All I can say is that for the
last year or so, risk-taking has
been rewarded, and that tends to
bring on more risk-taking.
JACOBY: Do you see moral
hazard in what has just
happened?
Oh, absolutely.
I-I think now, you know, the
entire business community is...
has had a taste of bailouts,
you know.
And-and, boy, doesn't it work
really, really nicely?
Yeah.
So, I-I fear that now, the Fed
stepping in, not just to bail
out Wall Street, but the entire,
you know, corporate America
is-is starting to be embedded
into people's thinking.
People talk about the survival
of capitalism, but this is the
biggest threat to capitalism.
In good times when anybody can
make money you reap those
profits.
In bad times, the Fed, the Fed
just keeps stepping in.
You have this never-ending
ratchet up.
The markets never correct.
JACOBY: It's like a no-lose
casino.
It is, it is a no-lose
casino.
That's exactly right.
JACOBY: This is the second
time in 12 years that you and
your institution have had to
funnel into the financial system
trillions of dollars and there
is this sense that the financial
markets have an iron-clad
backstop from the Fed.
Well, I completely agree that
it is unacceptable that 12 years
after 2008, we had to do this
again.
I am proud that we did what we
did, it was the right thing to
do, it was necessary.
But it is unacceptable as an
American citizen that we have a
financial system that is this
risky and this vulnerable.
JACOBY: What, if any,
responsibility or accountability
does the Fed have for the
financial system having been so
risky and so vulnerable to a
shock?
Well, I think all financial
regulators that have a seat at
the table have a... have
responsibility for what was left
incomplete after 2008, and where
we go from here.
We need to use this crisis to
finish the work that we did not
finish after '08.
JACOBY: With all due respect,
I just I wonder if you could be
a little bit more explicit with
me.
What will the Fed own when it
comes to the vulnerability of
the system?
Well, I reject the thesis.
I actually don't think it's been
the Fed's monetary policy that
has led to these
vulnerabilities.
I think it's been incomplete
regulatory policy that has led
to these vulnerabilities.
JACOBY: That's an idea
Kashkari expressed repeatedly to
me: that there are other actors
responsible and larger economic
forces at play beyond the Fed's
decisions.
The shadow of the pandemic is
going to be extremely long.
JACOBY: With unemployment
still high, the Fed and Congress
have continued to pump money
into the economy.
Let's keep 'em coming this
way.
JACOBY: Trillions to
struggling individuals and small
businesses.
And, once again, quantitative
easing to keep the interest
rates low and the cost of
borrowing down.
Last March, the Fed announced
that they've just decided it's
gonna be the right thing to do
to drive 100 miles an hour.
Okay, your judgment call.
A year later, they're still
driving 100 miles an hour.
(chuckling)
And you ask them, "Why exactly
are you driving 100 miles an
hour now?"
They say, "Well, you know it was
a good idea last March and we
don't wanna change things too
quickly and so, yeah, we just
think it's a really good idea."
JACOBY: Peter Fisher spent
years at the New York Federal
Reserve, and at Blackrock, the
largest asset management firm in
the world.
It's pretty basic in-in
medicine that our doctor may
give us a drug, which in a small
punchy dose, for a brief period
of time, might help us recover
from whatever ails us.
But that the same medicine, the
same drug, taken in massive
doses over long periods of time
might kill us, or make us ill,
or have perverse side effects.
JACOBY: Corporate America has
taken on yet more debt, and
investors are gobbling it up.
The housing market and the
millions of people who own some
stocks and bonds are seeing a
boom.
Elon Musk has added over
$10 billion to his wealth just this
week.
JACOBY: And for the richest
Americans, it's been a bonanza.
Just the billionaires in the
United States, from March 2020
to February 2021, have grown
their wealth by $1.3 trillion.
$1.3 trillion.
Billionaires now hold
two-thirds more in wealth than
the bottom half of the U.S.
population.
The thing about wealth is
what creates wealth is wealth.
When you have $100 million
to invest, it's much more easy to
become a billionaire than
when you have $100 to invest.
You ever think about trading
stocks?
JACOBY: But that hasn't
stopped many $100 investors from
trying to get a piece of the
action.
People like us can trade just
like the big guys.
With Robinhood.
All these brokerage platforms
saw the largest growth of new
users they'd ever seen because
people said, "Now is my
opportunity, I'm gonna invest my
money in the stock market.
I may not understand what the
Fed's doing, or how it works,
or what exactly is going on..."
The Dow rising nearly 18%,
its best performance since
1987...
"But I understand the Fed
takes action, stock prices go
up, these people get rich."
And it became a very clear
mandate for people, "If I wanna
get in on this economic recovery
we're having, I've gotta buy
stocks."
I'm gonna take my stimulus
check and I'm gonna put it in
the stock market.
So they're online, they're
trading stocks, they're buying
and selling, and putting money
into these stock accounts.
They started creating their own
communities
Welcome Declan, Michael Lee,
so many people, Bob Smith...
JACOBY: Jerome Powell has
become a kind of cult figure,
master of the money printer.
Money printer go brr...
Invest in these four tickers,
I'll put them right above.
JACOBY: Billions have been
piling into so-called meme
stocks.
This GameStop situation, we
will never encounter a set-up
like this again.
JACOBY: New financial assets
like NFTs-- non-fungible tokens.
From art to music to sports,
it's a new phenomenon that is
moving quickly, and
with big numbers.
JACOBY: And cryptocurrencies.
Bitcoin has been on a wild
ride during the past few months.
It doesn't really matter if
something is a good buy or if
it's fundamentally sound.
The money is crazy
and awesome and I think...
There's been so much money
injected into the economy that
people just need things to buy.
JACOBY: I mean, what
you're describing is mania.
(laughing)
Yeah, yeah, you could call it
mania.
I mean certainly we are in a
mania because, again, the Fed
has put a floor underneath asset
prices.
There's only one direction that
things can go and that's up.
Otherwise, the Fed will step in
and act.
So if things can only go up, why
wouldn't you just buy?
When I look out at what's
been going on the last six
months, I see financial mania.
I don't know what the right
value of some companies is.
But when they change by 50%
in six months, I think we should
all recognize, boy, that's hard
to estimate the value of that.
If it's 50% higher now than it
was six months ago, I guess we
were pretty bad on estimating
its value six months ago.
JACOBY: I assume you're
somebody who has assets, who's
invested, and that this has been
a good period for someone like
you, in part because you own
assets.
The Fed having pumped asset
prices to historically high
levels doesn't make me feel
comfortable.
I'd be... I feel as anxious
today as I've ever felt about
the financial world because of
my belief that the Fed has been
pumping up asset prices in a way
that is creating a bit of an
illusion.
I think the odds are now sort of
one in three-- very high-- that
we will look at this as an epic
mistake and one of the great
financial calamities of all
time.
They have the housing market,
the stock market, and the bond
market all overpriced at the
same time.
And they will not be able to
prevent, sooner or later, the
asset prices coming back down.
So we are playing with fire
because we have the three great
asset classes moving into bubble
territory simultaneously.
JACOBY: There's a growing
conversation right now about the
Fed's role, about whether it's
driving wealth inequality,
whether it's driving asset
prices into dangerous territory
that could pop right in our
faces, and whether the...
whether the financial system can
withstand that.
I mean there are these seemingly
legitimate questions about being
in what seems to be
unchartered territory.
These questions come from
people who are keen Wall Street
observers or Wall Street.
I never have once heard this
line of questioning from a
member of Congress that
represents a low income or
minority district, never once.
They come to us and they say,
"Why can't you do more?"
They never say, "Oh my gosh,
you're just benefiting Wall
Street, you know, raise
interest rates, because I wanna
keep Wall Street in check."
They say, "Help my constituents
find work."
So that's why, I mean, I find
these questions amusing because
I hear 'em all the time from
Wall Street.
And these are folks who don't
care about what's actually
happening on Main Street.
I don't hear it from Main
Street.
I certainly don't hear it from
low-income communities.
And I've heard all of
these questions before.
The price of virtually
everything seems to be going up.
From used cars to
plane tickets to furniture.
If you're going to get in
your car and drive to work, your
gas costs more.
JACOBY: There are now
signs of inflation percolating through
the economy.
Annual inflation is expected
to top 3.5% in the fourth
quarter.
So now there's speculation
the Fed may speed up its interest
rate plans.
JACOBY: The Fed insists
it's temporary but has signaled it
may taper quantitative easing
and raise interest rates as
early as 2023.
Fed Chair Jerome Powell
said while the economy has
rebounded, the job
market is still hurting.
Federal Reserve Chair Jerome
Powell announced that tweaks to
monetary policy
may still be needed.
It is an awfully
daunting task.
I pray for Jay Powell and
I pray for the committee.
Doing this successfully
will be a heck of a hat trick.
I would imagine people at
the Fed are scratching their heads
about how they are going
to be able to get that faucet
calibrated to a lower
level when necessary.
JACOBY: And the risk of
them turning off the valve right now
is what?
The risk of turning
the valve off is-is economic
collapse, right?
You would, you would see asset
values actually drop through the
floor.
You know, and a complete lack of
confidence.
The Fed, by the way, would not,
I can't imagine, turn it off in
one, you know, sort of in one
move.
But when the Fed does move, it's
going to want to do it probably
quite gradually.
And the question is: will they
be able to do it in such a way
that doesn't create this kind of
massive economic dislocation?
JACOBY: Whatever the Fed does
next, the consequences will
affect us all.
Viewers like you make
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Support your local PBS station.
The coronavirus pandemic
has left millions of Americans
out of work...
People have gone now without
four, five, or six, or seven
paychecks and it's starting to
catch up-- they need food, it's
the most basic thing.
JACOBY: Over the past year,
we've seen how many Americans
are living on the edge.
Have you got any income at
the moment?
No, no-- and we have kids
too, so.
So you're not making any
money at the moment?
No.
JACOBY: But while businesses
were shuttered, and millions
were left unemployed, one place
has been thriving like never
before.
Stocks surging even as
America enters its darkest
chapter yet of this pandemic.
JACOBY: On Wall Street, it
was a banner year.
The market has been open for
30 minutes and we've gone
straight up.
The Dow rising nearly 18%,
its best performance since 1987.
JACOBY: After a major dive,
markets reached record highs.
The pandemic would turn out to
be a blip in the longest bull
market ever.
The price of stocks have
skyrocketed-- and so has the
wealth of those who own them.
Elon Musk has added over
$10 billion to his wealth-- just
this week!
JACOBY: Some see signs of
mania...
This GameStop situation, we
will never encounter a setup
like this again.
JACOBY: As more Americans try
to get in on the party.
Right now we're in a
raging mania.
JACOBY: Some worry a crash
is to come.
It's the burst of euphoria
that typically brings these
things to an end.
JACOBY: As the financial
world has been diverging from
the real world, I've been
trying to understand the many
forces at play.
And I found one institution has
been at the center of it all:
the Federal Reserve-- the
nation's central bank.
It is the most powerful and
least understood institution in
the country.
It really is difficult to
overstate how important this
story is, and how big this story
is, and how much it matters.
JACOBY: I've been speaking
to current and former Fed
officials...
Is that really the first
time you're in a suit since
COVID?
From the waist down.
Can I take my mask off?
JACOBY: ...Economists, and
titans of finance.
Nobody knows how this is
gonna turn out.
This is an experiment.
JACOBY: I've heard that over
and over-- that we're living
through an epic experiment run
by the Fed.
I believe this is the
economic story of our time.
JACOBY: An experiment that's
been dramatically changing the
American economy.
(overlapping news reports)
Right now, breaking news
here, stocks all around the
world are tanking.
JACOBY: If you want to
understand how today's financial
world has grown so far removed
from the real world-- and the
role of the Federal Reserve--
you need to go back to 2008,
when investors, speculators, and
Wall Street bankers nearly
brought down the global economy.
Get on the train!
Otherwise it is gonna leave
the station without you.
Wall Street shaken to its
very foundation today.
We will need to stabilize,
repair, and reform our banking
system and get credit flowing
again to families and
businesses.
JACOBY: The new president and
Congress spent hundreds of
billions of dollars to restart
the economy, but at the center
of the rescue effort was the
Federal Reserve.
Richard Fisher was the head of
the Fed's bank in Dallas at
the time.
What the Federal Reserve
does is provide the blood supply
for the body of our capitalist
economy.
And what happened in 2008 is all
the veins and the capillaries
and the arteries collapsed.
So every financial function had
failed.
It had collapsed and we had to
restore them.
JACOBY: That's when the Fed
stepped in.
Its job is to promote employment
and keep inflation in check,
primarily by raising and
lowering short-term interest
rates.
In 2008, Fed officials decided
to do something they hadn't done
in half a century-- they began
dropping rates, eventually to
almost zero.
Those massive rate cuts have
not been stimulating the
economy.
JACOBY: With Americans still
suffering and the banking system
on the verge of collapse, Fed
officials there at the time
told me they felt compelled to
go even further.
And then the question was,
"What else can we do?"
And the committee came up with
the idea of quantitative easing.
Quantitative easing, what in
the world is it that?
Quantitative easing, that's
just a Greek term to a lot of
people.
A lot of people want to know
what they're gonna say about
what we call quantitative
easing, what are some of the...
JACOBY: Quantitative easing,
or QE, was championed by Ben
Bernanke, then the Fed chairman.
Mr. Bernanke, what does this
do to the financial crisis?
The Federal Reserve has been
putting the pedal to the metal.
So we're doing everything we
can to support the economy, and
we hope that that's going to,
you know, get us going next year
sometime.
JACOBY: QE was an
experimental way for the Fed to
inject money into the financial
system and lower long-term
interest rates.
The way they did it was to
literally create new money and
use it to buy huge amounts of
things like mortgage-backed
securities and government debt
from banks and other
institutions.
Their hope was that the lower
rates would spark more spending
and borrowing throughout the
economy.
It's almost like alchemy.
You can create money out of thin
air if you're at the Central
Bank.
So creating more money puts
more money in the banking
system, put more money out there
for the economy to take it and
put it to work and to grow, and
to restore itself.
JACOBY: As news of the Fed's
actions spread throughout the
financial world, Andrew Huszar,
a former Fed official who'd left
to work on Wall Street, got the
offer of a lifetime.
I was sitting in a cafeteria
in Stamford, Connecticut, when I
got the call.
I was eating a sandwich, I
almost choked on it at the time
(laughs)
Basically I realized very
quickly what I was being asked.
I was being asked if I would
manage the largest financial
markets intervention by a
government in world history.
JACOBY: The job was to join
the Fed office in Manhattan and
manage a massive expansion of
its power in the financial
markets under QE-- buying more
than a trillion dollars in
mortgage bonds from the banks
as quickly as possible.
The idea was that the Fed
was trying to get more credit
and cheaper credit into the
hands of the average American.
There were millions of people
losing their jobs, millions of
people in mortgages that they
couldn't afford, and how could
the Fed use its financial tools
to actually help the average
American?
JACOBY: Is this something
that had ever been attempted
before?
No.
You have to realize we were in
the midst of the next Great
Depression, this was an
incredible collapse of the
fundamental structure of the
U.S. economy in a very short
period of time and we were
building the plane while we
were flying it.
Everything in the markets
is a confidence game.
So, the Fed exists to restore
confidence when all confidence
is lost.
JACOBY: William Cohan is a
writer and former banker who
worked with us during our
months reporting this story.
JACOBY: The idea of lowering
interest rates and the idea of
quantitative easing was
basically pulling out all the
stops to make it cheaper to
borrow.
Basically by making money
so inexpensive, by suddenly it
being abundant and cheap and
easy to get, they just flooded
the zone with capital.
JACOBY: Easy money.
Easy money-- trillions of
dollars of easy money.
Like, the greatest experiment in
easy money in history.
(indistinct chatter)
JACOBY: All that easy money
sparked a rally in the stock
market.
We saw it take its effect
almost immediately.
The market reacted.
I was a little bit surprised
it took off that fast.
JACOBY: How is that viewed
inside of the boardroom?
Was that seen as success?
Yes, it validated what we
thought would happen-- that's
what we thought would happen.
When you drive interest rates
down all the way out, it forces
investors into taking bigger
steps on the risk spectrum.
Cheap money is the fuel for a
financial speculator and for a
financial investor.
JACOBY: What Fisher and other
former Fed insiders told me is
that the stock market rally was
no accident.
By design, the Fed's QE program
effectively lowered long-term
interest rates, making safer
investments like bonds less
attractive, and riskier assets
like stocks more attractive.
It was hard to argue with the
results.
Stock prices kept going up.
The old saying is don't fight
the Fed.
Don't fight the Fed.
Don't fight the Fed.
Rule number one as a young
trader you're taught is don't
fight the Fed.
I don't know what the
hangover's gonna look like down
the road from all this
extraordinary stimulus, but for
now, the markets love it.
Don't fight the Fed.
A cam roll one...
JACOBY: You look at me.
So we're approximating an
in-person interview.
It'll work, it'll work.
Mohamed El-Erian remembers it
well.
He was running the largest bond
fund in the world at the time,
and made a fortune for his firm
following the Fed's lead.
Don't fight the Fed.
The Fed is the one institution
that has a printing press in the
basement, and there's no limits
to how much it can use.
That is what makes the Fed such
an influential player in the
marketplace.
Keep an eye on the treasury
market...
JACOBY: El-Erian's firm
helped advise the Fed on it's QE
experiment.
He told me the expectation was
that the low interest rates and
QE would have a strong knock-on
effect on the wider economy.
That was the theory.
In practice, the Fed was very
successful, in terms of moving
asset prices.
It was much less successful in
moving the economy and the
result of that is we got the
largest disconnect ever between
Main Street and Wall Street,
between the economy and finance.
The banks are sitting on
their butts and they're still
not lending money.
JACOBY: One of the problems
was that the banks were holding
on to the money instead of
making it available to
borrowers.
The banking sector is broken.
JACOBY: At the Fed, Andrew
Huszer was disappointed by what
he was seeing.
I have great respect for the
Fed.
I never questioned, and I, to
this day, I will never question
the intention.
What I question, rather, is
whether their tools are able to
help the American people in the
way that they believe.
I came out of QE1 100 percent
believing that it was necessary,
because we had actually helped
to stabilize the economy, but
wondering if there wasn't a
fundamental problem with the
approach, in that the tools of
the Fed worked through the Wall
Street banks, and in so doing,
were disproportionately
benefiting the wrong people--
the people who didn't really
need the help.
JACOBY: So basically, what
you're saying is that you were
seeing, in practice, something
very different than what was
supposed to happen,
theoretically.
Yeah, I saw that Wall Street
is a private sector actor, and
Wall Street has its own
interests, and Wall Street can
do what Wall Street wants.
And the Fed was, on some level,
at the mercy of, of Wall Street.
JACOBY: Huszar and others
inside the Fed had been counting
on Congress to step in and help
correct the imbalance-- target
more money to Main Street and
the wider economy.
But then politics took a sharp
turn.
We've come to take our
government back!
JACOBY: Tea Party supporters
put Republicans in charge of the
House...
We need to restore fiscal
sanity to this nation.
JACOBY: ...dimming prospects
for Congress and the White House
to work together to stimulate
the economy.
The Fed was on its own.
Was it palpable that the Fed was
sort of the only game in town
here?
Yes.
The fact was we were carrying
the load all by ourselves.
JACOBY: The day after the
midterm elections, the Fed
announced it would do another
round of quantitative easing--
not just to stabilize the
economy but boost it.
Fed Chair Bernanke promoted the
plan, writing that it would
create a "virtuous" circle, with
with lower mortgage rates making
housing more affordable, and
higher stock prices boosting
consumer wealth.
He went on television to counter
critics who were warning the
decision risked causing
inflation.
They're looking at some of
the risks and uncertainties
associated with doing this
policy action.
What I think they're not doing
is looking at the risk of not
acting.
JACOBY: I wanted to talk to
Bernanke but he wouldn't agree
to an interview.
But I did speak to Sarah Bloom
Raskin, who was on the Board of
Governors at the time.
So, many of these tools had
not been tried before.
They were definitely like break
the glass kind of tools.
Like, what are we going to do in
order to restart the economy
here?
JACOBY: You voted for
quantitative easing two.
What was your thinking there?
Right, so, my thinking was
that we still had an economy
that was far from its potential.
As QE began, it showed great
promise.
We started to see that people's
sense of economic wellbeing was
ticking up somewhat.
People were finding jobs, people
were finding homes.
The foreclosure rate had slowed.
So there was a sense that
something was working.
And for that reason it was, in
my mind, worth supporting.
JACOBY: But outside the Fed,
some were saying that the costs
of quantitative easing might
already outweigh the benefits.
A lot of talk about
quantitative easing, QE2-- the
likelihood that that will have a
significant effect is close to
zero.
But the markets love it.
JACOBY: Joseph Stiglitz is
one of the most well-known
economists in America and a
winner of the Nobel Prize.
So you're doing a documentary
on the Fed and monetary policy?
JACOBY: We are trying to.
(laughing): Okay.
JACOBY: Are we insane?
No, no, no, I think it's a
great idea.
JACOBY: Okay.
Stiglitz told me that while the
Fed was doing some good, he also
had concerns at the time.
The main thing I was
concerned about was that the way
they were trying to revive the
economy was a kind of trickle
down economics.
The way quantitative easing
works is that it's a lowering of
the interest rates that leads
stocks to go up.
And so who owns the stocks?
It's the people in the top.
Not just the top ten percent,
one percent, one-tenth of one
percent.
And so it increases enormously
wealth inequality.
We had had increasing inequality
really since the late '70s and
this was putting that on
steroids.
So the immediate objective of
saving the banking system was
achieved, but the broader
objective, which was helping the
economy recovery quickly in a
robust way, in a way with shared
prosperity, total failure.
JACOBY: What sort of response
did you get from folks at the
Fed to what you were saying at
the time?
"Our mandate is to do what we
can to increase employment, to
use the tools that we have, and
that's what we're doing."
JACOBY: Was that even part of
the discussion at the time in
the boardroom, whether there was
any risk of exacerbating wealth
inequality?
There were strands of that, I
would... I recall.
The... these kind of costs were
considered speculative, because
again, the tools hadn't been
used before.
So there wasn't a clear sense as
to what would... you know, sort
of what the impact would be.
There was some discussion of it,
but nothing definitive.
JACOBY: Some saw wealth
inequality as a trade-off.
There was nothing you could
really do about it.
But it was, in my mind, in my
discussion, what I would present
at the table, it would be one of
the consequences we just had
to be mindful of.
That doesn't mean we shouldn't
have done what we did.
JACOBY: For Andrew Huszar, it
was time to walk away from the
Fed.
It was a while ago, but
whenever I come back here, it's
a very special feeling.
JACOBY: I bet.
You were still working in this
building when the second round
of quantitative easing happened.
What was your reaction to it
when that happened?
I was not surprised by the
announcement, but I was
incredibly demoralized.
What I was seeing outside of the
Fed was rising demands from Wall
Street that the Fed continue its
stimulus-- the idea that the
sky was gonna fall if the Fed
didn't continue to print money
and give it to the Wall Street
banks.
And yet, nobody was giving a
coherent explanation as to how
the Fed showering trillions of
dollars onto Wall Street banks
was actually directly benefiting
the average American.
And I'll tell you why they
weren't talking about it,
because it doesn't.
We did not see the knock-on
benefits that we had hoped for
the average American, as much
as we wanted to.
JACOBY: Why is this kind of
an emotional issue for you?
Well, perhaps it's because I
was a true believer of the Fed.
And I worried about what this
meant, in terms of the future,
about how much more the Fed
would double down, and how
addicted the, the... Washington
and the markets would become
to this extraordinary stimulus.
JACOBY: The Fed would keep
the money flowing under
successive rounds of
quantitative easing, injecting
more than $2 trillion into the
financial system.
And by 2013, unemployment was
continuing to fall, and the Fed
saw signs that its policies were
having a positive impact on the
economy.
Fed Chairman Bernanke signaled
that the easy money might start
to taper off.
If we see continued
improvement, and we have
confidence that that is going to
be sustained, then we could, in
the next few meetings, we could
take a step down in our pace of
purchases.
I was on the trade floor.
I remember Chairman Bernanke
saying that he would taper.
First we had to figure out what
does taper mean?
And the minute people realized
what taper meant, which is that
the Fed would step back from
buying all these securities, and
even though the Fed said it's
gonna be gradual, it's gonna be
measured, the markets had a
massive tantrum.
The markets selling off as
the Federal Reserve Chairman
Ben Bernanke said that the
central bank could start
tapering.
The markets went into a fit.
Became dysfunctional.
It was known as the taper
tantrum.
We all know it, when Ben
Bernanke talks, if the Federal
Reserve speaks, the markets
listen.
Taper tantrum!
Markets are like little kids.
They want candy, and the minute
you try to take the candy away,
they have a tantrum.
You have big Wall Street
reaction, right?
You have extreme volatility
where Wall Street says, "Whoa,
whoa, no, no!
No, unacceptable!" and values
plunge.
And of course the Fed doesn't
like that, nobody likes that,
that's a... that's a precursor
to instability, right?
But it put the Fed in a real
bind.
Chairman Bernanke.
And Chairman Bernanke had to
go in a conference in Boston
and say, "No, no, no, we're not
tapering."
You can only conclude that
highly accommodative monetary
policy for the foreseeable
future is what's needed in the
U.S. economy.
JACOBY: Bernanke's successor,
Janet Yellen, had better luck
the following year.
She was able to pause
quantitative easing without a
tantrum, in part, by promising
to maintain the Fed's massive
balance sheet of assets it had
bought-- and to keep short-term
interest rates low.
The F.O.M.C. reaffirmed its
view that the current zero to
one-quarter percent target
range for the federal funds
rate remains appropriate.
JACOBY: Low rates spurred
companies and individuals to
borrow in record amounts.
And the Federal government took
full advantage of the low
interest rates as well, running
the national debt up a trillion
dollars a year, to new highs.
Good afternoon, everyone,
and welcome.
JACOBY: By 2018, the new Fed
chair, Jerome Powell, was
saying the economy was in a
good place, citing historically
low unemployment numbers and the
fact that concerns about
inflation hadn't materialized.
The U.S. economy is in a good
place, and we will continue to
use our monetary policy tools to
help keep it there.
JACOBY: There was a growing
debate about whether the Fed
should raise interest rates and
slow the flow of easy money.
For those who were saying
during that period of time, you
know, you should've been
concerned about other
side-effects of keeping rates
so low.
Tell me what the downside of
raising rates would've been.
The downside is keeping
Americans on the side-line who
want to work.
JACOBY: I raised these issues
with Neel Kashkari, president
of the Minneapolis Fed.
He's been outspoken about how
the Fed's policies have helped
lower unemployment and improved
the economy overall.
The Fed has been on a
mission, I've been on a mission
to put Americans back to work
and help them get their wages
up, especially for those lowest
income Americans.
And if it has had some effect
on Wall Street, to me, the
trade off is well worth it if we
can put Americans back to work,
so that they can put food on the
table, they can take care of
themselves.
That is profoundly beneficial to
society.
JACOBY: One of the things
that we have seen in this
country is a widening wealth
gap.
The question is what role, if
any, the Fed has played in
widening that wealth gap.
Well, this is a great point,
and I'm glad you raised it.
Most people who make this
argument ignore the fact that
for many Americans, they don't
own a house, they don't own
stocks, they don't have a 401K,
the most valuable asset they
have is their job.
So by putting people back to
work and helping to boost their
wages, we are actually making
their most valuable asset more
valuable.
JACOBY: But the critics I
spoke to questioned the Fed's
success and pointed to other
indicators.
Wealth was becoming
increasingly unevenly shared; in
that quote "good place" the one
percent held 32 percent of the
nation's wealth and the
majority of Americans said they
were financially anxious.
40 percent of Americans didn't
have more than a $400 rainy day
fund.
Most Americans were tremendously
fragile economically speaking.
JACOBY: Karen Petrou is an
unlikely critic of the central
bank-- she spent her career as
an adviser to banks and large
investors, analyzing how
financial policy played out in
the real world.
Despite the quote, "record
employment," when you break
those numbers down, you can see
that more people had jobs and
that's great, but the wages and
the growth in the economy
remained very tepid and very
unequal.
JACOBY: When you speak to
the folks from the Fed about the
idea of raising interest rates,
they'll say, "What was the
alternative?"
And you say what to that?
I'd say, "What you were doing
wasn't working."
We'll never know whether
lowering rates would have
dampened growth.
We do know that keeping rates
ultra, ultra low didn't raise
growth.
It raised markets.
JACOBY: Petrou and other
critics were concerned that the
Fed's low rates and easy money
policies were fueling troubling
trends on Wall Street and in
corporate America.
One in particular was the amount
of corporate borrowing.
Valuations are generally
elevated, especially corporate
debt.
We have flagged the rise in
corporate debt.
We have entirely too much
corporate debt out there.
JACOBY: Taking advantage of
low interest rates, corporations
were selling bonds to big
investors.
I saw numerous studies and
reports detailing the extent of
the debt-- and how even marquee
companies were so leveraged,
their credit ratings plummeted.
The Fed had hoped that
companies would put all that
borrowed money to good use and
invest in their workforce and
their infrastructure.
But in reality it was playing
out differently.
Buybacks.
Buying back stock.
Stock buybacks...
Stock buybacks...
JACOBY: Companies were often
borrowing money to buy back
their own stock, making the
remaining shares more valuable
and the prices higher.
As a corporation, you realize
all that matters is the stock
price.
So what do we have to do to
increase the stock price?
And more often that is buying
back the stock.
JACOBY: Financial reporter
Dion Rabouin covered the growing
trend.
So it used to be that the
Fed would lower interest rates,
businesses would then take on
more debt, they would use that
debt to hire more workers,
build more machines and more
factories.
Now what happens is the
Federal Reserve lowers interest
rates, businesses use that to go
out and borrow more money, but
they use that money to buy back
stock and invest in technology
that will eliminate workers and
reduce employee head counts.
They use that money to give the
CEO and other corporate officers
big bonuses and then eventually
issue more debt and buy back
more stock.
So it's this endless cycle of
things that are designed to
increase the stock price, rather
than improve the actual company.
G.E. just authorized a $50
billion stock buyback.
JACOBY: The numbers were
astounding-- more than
$6 trillion in corporate
buybacks in the decade after
the financial crisis.
Warren Buffett likes Apple's
buybacks.
Well, why wouldn't he, he's
a shareholder and they're
buying back a hundred billion
dollars in stock.
Buybacks used to-- it's
just another example of things
that used to be viewed as kind
of, ugh, you know, just going
mainstream.
JACOBY: Sheila Bair, a former
top banking regulator, was
issuing public warnings at the
time that the Fed was
incentivizing bad behavior on
Wall Street despite its best
intentions.
I can't fault the companies
so much, because these interest
rate-- this interest rate
environment creates very strong
economic incentives to do
exactly what they're doing.
It's hard to create a new
product, it's hard to come up
with a new idea for a service,
it's hard to build a plant and
hire people and run the
organization.
It's real easy to issue some
debt and pay it out to your
shareholders to goose your share
price.
That's real easy to do, but it
doesn't create real wealth, it
doesn't create real
opportunity, it doesn't create
jobs, it doesn't improve the
labor market.
It's just another example of how
these very low interest rates
have really distorted economic
activity and frankly been a drag
on our economic growth, not a
benefit.
JACOBY: Corporate buybacks,
the elevation of corporate debt,
how was that viewed by you and
others at the Fed?
Something we pay a lot of
attention to, but when
companies are buying back their
stock, one of the things they're
telling us is we don't have
profitable places to invest,
and it's easier for us to just
to buy back our stock.
That's concerning in terms of
the future of our economy.
But that's not because of the
Fed, so we pay attention to it,
it really matters, but in my
view, we don't, it's not
something we control.
JACOBY: In our conversation,
Kashkari was also quick to
dispute the criticism that the
Fed is really just boosting
financial markets and helping
Wall Street.
There is this idea on Wall
Street that the Fed kind of
has our back and that because
you may have well-intentioned
policies that are trying to get
everybody to work, there is this
side effect, this unintended
side effect of just, kind of,
really helping the rich.
That argument ignores the
benefit to the poor.
And if... sure, if you're gonna
ignore the benefit to the poor,
then we're only helping the
rich but, of course, that's an
incomplete analysis.
When you actually sit down and
say, well, let's go through the
trade-offs of the choices that
the Fed has, whether it's
interest rates or it's
quantitative easing, it's not
just about Wall Street, it's not
just about asset prices, it's
also about thinking about the
men and women in America who are
trying to find work and who
want to have higher earnings and
who deserve higher earnings.
If we are benefiting them by
helping them find work and
helping them have higher wages,
I will take that trade off.
JACOBY: There's an ongoing
disagreement among people I
spoke to about how much the Fed
has been helping Main Street.
But what most do agree on is
that it's fueled the massive
growth of the financial sector--
a "golden age" for Wall Street,
as some have called it.
Even some of the largest
beneficiaries of this trend told
me it made them uncomfortable,
like legendary investor Jeremy
Grantham.
In my career in America,
the percentage of GDP that goes
to finance has gone from
three-and-a-half to
eight-and-a-half.
(laughs) Where in a way, we're
like a giant bloodsucker and we
we have more than doubled in
size and sucking more than twice
the blood out of the rest of the
economy.
And we do not generate any
widgets, we do not generate any
real increase in income.
We are just a cost.
JACOBY: When you say "we,"
you mean you and other members
of the financial community have
been this kind of bloodsucker on
the economy?
Is that what you're saying?
Yes, collectively we fulfill
a completely necessary service,
but what we have done is created
layers upon layers of more and
more convoluted, expensive
financial instruments.
And that's what makes all the
profits for the financial
industry, and it's taken a lot
of ingenuity and salesmanship to
make this happen and a lot of
lobbying in Congress, etc.,
etc., and we have imposed on the
rest of the economy the idea
that banking and finance are
utterly important at all times.
If you do anything wrong to us,
the entire economy will collapse
in ragged disarray.
JACOBY: As finance grew, so
did the risks.
One concern was what would
happen to all those companies
that had gone into debt if there
was a downturn-- and what would
happen to the trillions of
dollars in corporate bonds that
had been sold to investors.
There were also increasing
warnings about a key player in
all the borrowing going on,
little known and unregulated
financial companies that had
been flourishing in the easy
money economy, known as shadow
banks.
Shadow banks are large
financial institutions that
don't have bank charters.
So they don't have a special
relationship to the government.
They have other financial
licenses to conduct other types
of financial businesses.
JACOBY: Lev Menand, who'd
been an economic advisor to the
Fed and the Treasury Department,
said the biggest source of
worry about the shadow banks was
their lack of a cushion in the
event of a downturn.
The core of the problem of
the shadow banking system is
that it's extremely fragile.
Anybody who is an investor in
a shadow bank, who has their
money in a shadow bank, instead
of a real bank, is going to have
an incentive to withdraw in the
face of any uncertainty.
So little economic shocks that
cause asset prices to fall have
the potential to trigger runs
and panics.
And so what we've, what we've
done is, by allowing this shadow
banking system to develop, is
we've inserted a source of
instability in our entire
economic system that doesn't
need to be there and that has
the potential of throwing us
all off course.
Let me start by saying that
my colleagues and I...
JACOBY: That potential
instability posed by the shadow
banking system was on the Fed's
radar.
How are you thinking about
potential risks bubbling up in
the broader shadow banking
system?
You know, this is a project
that the Financial Stability
Oversight Council is working on
now, and also the Financial
Stability Board globally is
looking carefully at leveraged
lending and, you know, we think
it is something that requires
serious monitoring.
JACOBY: Despite those
concerns, little action was
taken by the Fed, other
regulators, or Congress, and
the system remained vulnerable
to a shock.
It would arrive in early 2020.
A preliminary investigation
into a mysterious pneumonia
outbreak in Wuhan, China, has
identified an previously
unknown coronavirus.
When the pandemic hit, it was
so unlike anything any of us
have experienced in our
lifetimes.
We'd been paying attention to
what was happening in China for
a few months.
I was calling my contacts,
global businesses that had big
operations in China, to
understand what their employees
and staffs were seeing.
And we were all trying to learn
as much as we can about
pandemics and what it's likely
gonna mean.
Major selloff across Europe
this morning...
I think we all figured out
very quickly the pandemic and
the virus would drive the
economy.
Investors are spooked by the
growing number of infections
outside China.
But how fast would it hit us?
How widespread?
What would the health care
response be?
It was maximum uncertainty.
And you were seeing that
uncertainty manifest in
financial markets.
What you have here are
concerns, fears, worries, and
deep uncertainties about what's
likely to happen next.
People were scared.
Investors were scared.
Individuals were scared.
And they said, you know what, I
just want cash.
Markets giving us the worst
two-day point drop ever in
history.
I don't even want treasury
bonds, I don't even want
corporate bonds, I don't want
stocks, I just want cash.
And when everybody in the
economy says "I want cash" at
the same time, that leads to
potentially a collapse of
financial markets.
On the bell, on the bell!
It's the first circuit
breaker, has been triggered.
Market functioning was
starting to cascade into
failure.
The Dow plunging again
today, the 11-year bull market
has ended.
Stocks were just on a
downward freefall.
You had credit markets seizing
up.
People were selling anything
that wasn't nailed down.
Investors are really growing
incredibly pessimistic.
The U.S. economy, the biggest
economy in the world, is in
freefall.
Then comes the realization
that we have to lock down.
The list of closings and
activities being suspended is
growing from coast to coast.
JACOBY: COVID hit the global
economy hard and fast, but it
wasn't just the pandemic that
was causing a financial crisis--
it was the vulnerabilities of a
now highly leveraged financial
system.
Attention focused on the shadow
banks.
What we saw in March of last
year was a full-blown panic in
the shadow banking system.
It wasn't something that you
have when you have a pandemic,
you have a bank panic.
It was, you have a bank panic
because you had some exogenous
shock in the economy and you
have these underlying
vulnerabilities in your monetary
system that you haven't
resolved.
JACOBY: The Fed sprang into
action.
They turned back to quantitative
easing-- buying hundreds of
billions in debt from financial
institutions.
By mid-March they made more than
a trillion dollars available to
the shadow banks.
And they cut interest rates back
down to near zero.
The Federal Reserve cut
interest rates to near zero.
What that tells all of us is
that the economic impact of the
coronavirus is going to be
crippling.
The Federal Reserve lent half
a trillion dollars to securities
dealers, half a trillion dollars
to foreign central banks, bought
$2 trillion of treasury
securities, another trillion
dollars of mortgage-backed
securities.
It flooded the zone with new
government cash to stabilize
this system.
JACOBY: But it wasn't enough
to stop the panic.
The emergency rate cut failed
to calm investors; in fact, it
did the opposite.
JACOBY: The corporate debt
market had frozen up, and
companies were unable to finance
themselves, putting the wider
financial system at risk.
There's just this corporate
debt picture out there and we're
just beginning to see how those
dominoes are gonna fall.
JACOBY: So, on March 23,
the Fed took its economic
experimentation to a whole new
level.
With Congress' backing, Fed
Chair Powell announced a range
of new loan programs.
He said the Fed, for the first
time, would be willing to buy up
corporate debt.
We often talk about the
Federal Reserve using a bazooka
to tackle markets and the
economy.
This is bazooka, cannons, and
tanks all at once.
So this was huge, this was
the Fed stepping in on an
unprecedented scale, and saying
to the market, "We will do
whatever it takes."
The motion is adopted.
(cheers and applause)
JACOBY: By the end of March,
Congress would also act, passing
the largest economic stimulus
bill ever-- the $2.2 trillion
CARES Act.
The bill rushed to the
president after clearing the
House in a voice vote.
JACOBY: It provided support
for individuals and small
businesses.
I wanted that to be a nice
signature.
(applause)
JACOBY: A big portion of the
bill-- nearly half a trillion
dollars-- was earmarked to go to
the Fed to support its lending
programs.
I don't think most people are
aware that we came this close to
a bona fide financial crisis.
Yeah, I think a lot of it is
missed for two reasons.
One: there was a lot of other
stuff going on in the news at
the time.
And the other is the Federal
Reserve did an amazingly good
job at putting out the flames of
this panic.
And even though the panic in
March 2020 was more severe along
many metrics than anything we
saw in 2008, the government's
response was more powerful in
certain respects.
And we're lucky that-that the
government was successful or we
could be living through a true
depression.
(bell ringing)
And there's the opening bell.
Looks like markets are set to
rally...
JACOBY: But in staving off
unemployment and economic
disaster, the Fed had also used
its powers to rescue some of the
riskiest parts of the financial
system, like the junk bond
market.
Is this just like a high
yield junk bond bailout?
I mean I don't get...
We've got to live with it
now, Tom.
...why is this an emergency?
We've got to live with it.
JACOBY: To the critics, the
Fed was sending the wrong
message, rewarding the wrong
people.
Over the years, we've been
trained to believe that the Fed
is on our side.
What the Fed has trained us to
believe is that if we make a bet
in the market and we win, we're
on our own, we get to keep the
profits.
If we lose, they will bend every
effort and every dollar they can
get their hands on, one way or
another, to bail us out.
This is asymmetry of the most
splendid kind.
A speeds, go ahead and clap
it off please.
JACOBY: Billionaire bond
investor Howard Marks called the
Fed out at the time, saying it
was undercutting the way the
free market is supposed to work.
There are negative
ramifications to this.
One called moral hazard, which
means conditioning people to
believe that if there's a
problem, the government will
bail you out.
And, if people really believe
that, then there's no downside
to risky behavior.
Because if there's a problem, it
won't fall on you, you'll get
bailed out.
If you, if you play it
aggressively and-and succeed,
you make money, if you play it
aggressively and fail you'll get
bailed out.
JACOBY: So has moral hazard
gotten worse as a result of this
bailout?
There's no barometer of moral
hazard, so I can't give you a
reading.
All I can say is that for the
last year or so, risk-taking has
been rewarded, and that tends to
bring on more risk-taking.
JACOBY: Do you see moral
hazard in what has just
happened?
Oh, absolutely.
I-I think now, you know, the
entire business community is...
has had a taste of bailouts,
you know.
And-and, boy, doesn't it work
really, really nicely?
Yeah.
So, I-I fear that now, the Fed
stepping in, not just to bail
out Wall Street, but the entire,
you know, corporate America
is-is starting to be embedded
into people's thinking.
People talk about the survival
of capitalism, but this is the
biggest threat to capitalism.
In good times when anybody can
make money you reap those
profits.
In bad times, the Fed, the Fed
just keeps stepping in.
You have this never-ending
ratchet up.
The markets never correct.
JACOBY: It's like a no-lose
casino.
It is, it is a no-lose
casino.
That's exactly right.
JACOBY: This is the second
time in 12 years that you and
your institution have had to
funnel into the financial system
trillions of dollars and there
is this sense that the financial
markets have an iron-clad
backstop from the Fed.
Well, I completely agree that
it is unacceptable that 12 years
after 2008, we had to do this
again.
I am proud that we did what we
did, it was the right thing to
do, it was necessary.
But it is unacceptable as an
American citizen that we have a
financial system that is this
risky and this vulnerable.
JACOBY: What, if any,
responsibility or accountability
does the Fed have for the
financial system having been so
risky and so vulnerable to a
shock?
Well, I think all financial
regulators that have a seat at
the table have a... have
responsibility for what was left
incomplete after 2008, and where
we go from here.
We need to use this crisis to
finish the work that we did not
finish after '08.
JACOBY: With all due respect,
I just I wonder if you could be
a little bit more explicit with
me.
What will the Fed own when it
comes to the vulnerability of
the system?
Well, I reject the thesis.
I actually don't think it's been
the Fed's monetary policy that
has led to these
vulnerabilities.
I think it's been incomplete
regulatory policy that has led
to these vulnerabilities.
JACOBY: That's an idea
Kashkari expressed repeatedly to
me: that there are other actors
responsible and larger economic
forces at play beyond the Fed's
decisions.
The shadow of the pandemic is
going to be extremely long.
JACOBY: With unemployment
still high, the Fed and Congress
have continued to pump money
into the economy.
Let's keep 'em coming this
way.
JACOBY: Trillions to
struggling individuals and small
businesses.
And, once again, quantitative
easing to keep the interest
rates low and the cost of
borrowing down.
Last March, the Fed announced
that they've just decided it's
gonna be the right thing to do
to drive 100 miles an hour.
Okay, your judgment call.
A year later, they're still
driving 100 miles an hour.
(chuckling)
And you ask them, "Why exactly
are you driving 100 miles an
hour now?"
They say, "Well, you know it was
a good idea last March and we
don't wanna change things too
quickly and so, yeah, we just
think it's a really good idea."
JACOBY: Peter Fisher spent
years at the New York Federal
Reserve, and at Blackrock, the
largest asset management firm in
the world.
It's pretty basic in-in
medicine that our doctor may
give us a drug, which in a small
punchy dose, for a brief period
of time, might help us recover
from whatever ails us.
But that the same medicine, the
same drug, taken in massive
doses over long periods of time
might kill us, or make us ill,
or have perverse side effects.
JACOBY: Corporate America has
taken on yet more debt, and
investors are gobbling it up.
The housing market and the
millions of people who own some
stocks and bonds are seeing a
boom.
Elon Musk has added over
$10 billion to his wealth just this
week.
JACOBY: And for the richest
Americans, it's been a bonanza.
Just the billionaires in the
United States, from March 2020
to February 2021, have grown
their wealth by $1.3 trillion.
$1.3 trillion.
Billionaires now hold
two-thirds more in wealth than
the bottom half of the U.S.
population.
The thing about wealth is
what creates wealth is wealth.
When you have $100 million
to invest, it's much more easy to
become a billionaire than
when you have $100 to invest.
You ever think about trading
stocks?
JACOBY: But that hasn't
stopped many $100 investors from
trying to get a piece of the
action.
People like us can trade just
like the big guys.
With Robinhood.
All these brokerage platforms
saw the largest growth of new
users they'd ever seen because
people said, "Now is my
opportunity, I'm gonna invest my
money in the stock market.
I may not understand what the
Fed's doing, or how it works,
or what exactly is going on..."
The Dow rising nearly 18%,
its best performance since
1987...
"But I understand the Fed
takes action, stock prices go
up, these people get rich."
And it became a very clear
mandate for people, "If I wanna
get in on this economic recovery
we're having, I've gotta buy
stocks."
I'm gonna take my stimulus
check and I'm gonna put it in
the stock market.
So they're online, they're
trading stocks, they're buying
and selling, and putting money
into these stock accounts.
They started creating their own
communities
Welcome Declan, Michael Lee,
so many people, Bob Smith...
JACOBY: Jerome Powell has
become a kind of cult figure,
master of the money printer.
Money printer go brr...
Invest in these four tickers,
I'll put them right above.
JACOBY: Billions have been
piling into so-called meme
stocks.
This GameStop situation, we
will never encounter a set-up
like this again.
JACOBY: New financial assets
like NFTs-- non-fungible tokens.
From art to music to sports,
it's a new phenomenon that is
moving quickly, and
with big numbers.
JACOBY: And cryptocurrencies.
Bitcoin has been on a wild
ride during the past few months.
It doesn't really matter if
something is a good buy or if
it's fundamentally sound.
The money is crazy
and awesome and I think...
There's been so much money
injected into the economy that
people just need things to buy.
JACOBY: I mean, what
you're describing is mania.
(laughing)
Yeah, yeah, you could call it
mania.
I mean certainly we are in a
mania because, again, the Fed
has put a floor underneath asset
prices.
There's only one direction that
things can go and that's up.
Otherwise, the Fed will step in
and act.
So if things can only go up, why
wouldn't you just buy?
When I look out at what's
been going on the last six
months, I see financial mania.
I don't know what the right
value of some companies is.
But when they change by 50%
in six months, I think we should
all recognize, boy, that's hard
to estimate the value of that.
If it's 50% higher now than it
was six months ago, I guess we
were pretty bad on estimating
its value six months ago.
JACOBY: I assume you're
somebody who has assets, who's
invested, and that this has been
a good period for someone like
you, in part because you own
assets.
The Fed having pumped asset
prices to historically high
levels doesn't make me feel
comfortable.
I'd be... I feel as anxious
today as I've ever felt about
the financial world because of
my belief that the Fed has been
pumping up asset prices in a way
that is creating a bit of an
illusion.
I think the odds are now sort of
one in three-- very high-- that
we will look at this as an epic
mistake and one of the great
financial calamities of all
time.
They have the housing market,
the stock market, and the bond
market all overpriced at the
same time.
And they will not be able to
prevent, sooner or later, the
asset prices coming back down.
So we are playing with fire
because we have the three great
asset classes moving into bubble
territory simultaneously.
JACOBY: There's a growing
conversation right now about the
Fed's role, about whether it's
driving wealth inequality,
whether it's driving asset
prices into dangerous territory
that could pop right in our
faces, and whether the...
whether the financial system can
withstand that.
I mean there are these seemingly
legitimate questions about being
in what seems to be
unchartered territory.
These questions come from
people who are keen Wall Street
observers or Wall Street.
I never have once heard this
line of questioning from a
member of Congress that
represents a low income or
minority district, never once.
They come to us and they say,
"Why can't you do more?"
They never say, "Oh my gosh,
you're just benefiting Wall
Street, you know, raise
interest rates, because I wanna
keep Wall Street in check."
They say, "Help my constituents
find work."
So that's why, I mean, I find
these questions amusing because
I hear 'em all the time from
Wall Street.
And these are folks who don't
care about what's actually
happening on Main Street.
I don't hear it from Main
Street.
I certainly don't hear it from
low-income communities.
And I've heard all of
these questions before.
The price of virtually
everything seems to be going up.
From used cars to
plane tickets to furniture.
If you're going to get in
your car and drive to work, your
gas costs more.
JACOBY: There are now
signs of inflation percolating through
the economy.
Annual inflation is expected
to top 3.5% in the fourth
quarter.
So now there's speculation
the Fed may speed up its interest
rate plans.
JACOBY: The Fed insists
it's temporary but has signaled it
may taper quantitative easing
and raise interest rates as
early as 2023.
Fed Chair Jerome Powell
said while the economy has
rebounded, the job
market is still hurting.
Federal Reserve Chair Jerome
Powell announced that tweaks to
monetary policy
may still be needed.
It is an awfully
daunting task.
I pray for Jay Powell and
I pray for the committee.
Doing this successfully
will be a heck of a hat trick.
I would imagine people at
the Fed are scratching their heads
about how they are going
to be able to get that faucet
calibrated to a lower
level when necessary.
JACOBY: And the risk of
them turning off the valve right now
is what?
The risk of turning
the valve off is-is economic
collapse, right?
You would, you would see asset
values actually drop through the
floor.
You know, and a complete lack of
confidence.
The Fed, by the way, would not,
I can't imagine, turn it off in
one, you know, sort of in one
move.
But when the Fed does move, it's
going to want to do it probably
quite gradually.
And the question is: will they
be able to do it in such a way
that doesn't create this kind of
massive economic dislocation?
JACOBY: Whatever the Fed does
next, the consequences will
affect us all.