March 29, 2024

The Power of the Fed (full documentary) | FRONTLINE



Published May 17, 2023, 11:20 p.m. by Liam Bradley


Since the early days of cinema, the documentary film has been used to explore a wide range of topics, from the everyday to the extraordinary. In recent years, the popularity of documentaries has exploded, thanks in large part to the rise of streaming services like Netflix and Amazon Prime. With so many options available, it can be tough to know where to start. If you're interested in learning more about the world of finance, then you should check out the documentary finance - The Power of the Fed.

The film explores the history and inner workings of the Federal Reserve, the world's most powerful central bank. Through interviews with key figures like former Fed chairmen Alan Greenspan and Ben Bernanke, as well as current chair Janet Yellen, the film offers a rare glimpse into the often-opaque world of central banking.

Whether you're a finance novice or a seasoned pro, you're sure to learn something from this fascinating documentary. So sit back, relax, and prepare to be enlightened about one of the most important institutions in the world.

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the coronavirus pandemic has left

millions of americans

out of work the people have gone now

without four or five or six

or seven paychecks and starting to catch

up they need food it's the most basic

thing

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

but while businesses were shuttered and

millions were left

unemployed one place has been thriving

like never before

stock surging even as america enters its

darkest chapter yet of this pandemic

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 as the best

performance since 1987

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

some see signs of mania this gamestop

situation

we will never encounter a setup like

this again as more americans try to get

in on the party

right now we're in an enraging maniac

some worry a crash is to come

it's the burst of euphoria that

typically brings these things to an end

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

and it really is difficult to overstate

how important this story is and how big

this story is

and how much it matters 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 economists and

titans of finance

nobody knows how this is going to turn

out this is an experiment

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 an experiment that has been

dramatically changing

the american economy

the dow you know what right now breaking

news here stocks all around the world

are tanking 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

all right get on the train

otherwise you're just going to leave the

station wall street's 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

the new president in 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 in the capillaries and the

arteries collapsed

so every financial function had failed

it had collapsed and we had to restore

them

[Music]

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

so it's the other thing with americans

still suffering in 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

that quantitative easing that's just a

greek term to a lot of people

a lot of people want to know what

they're going to say about what we call

quantitative easing what are some of the

non-traditional quantitative easing or

qe

was championed by ben bernanke than the

fed chairman

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

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

as news of the fed's actions spread

throughout the financial world

andrew hussar 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 stanford connecticut when i got the

call

i was eating a sandwich i almost choked

on it at the time

basically i realized very quickly what i

was being asked i was being asked

if i would manage the largest financial

markets intervention

by government in world history 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 is

this something that had ever been

attempted before

no you have to realize we were in the

midst of a the next great depression

this was an incredible

collapse of the fundamental um

structure of the us economy in a very

short period of time and

uh we were building the plane while we

were flying in

everything in markets is a confidence

game

so the fed exists to restore confidence

when all confidence is lost

william cohen is a writer and former

banker who worked with us during our

months reporting this story

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

being abundant and cheap and easy to get

they just flooded the zone with capital

easy money easy money trillions of

dollars of easy money

like the greatest experiment in easy

money

in history

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

how was that viewed inside of the board

room was that seen as success

yes it validated what 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

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 is going to look

like down the road from all this

extraordinary stimulus but for now

the markets love it don't fight the fed

they can

roll one you look at me so so it's we're

approximating an in-person interview

it'll work it'll work mohamed ellerian

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

ellerian's firm helped advise the fed on

its qe experiment

he told me the expectation was that the

low interest rates in 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 bus and

they're still not lending money and

until one of the problems was that the

banks were holding on to a lot of the

money

instead of making it available to

borrowers the banking sector

is broken at the fed

andrew hussar was disappointed by what

he was seeing

i have great respect for the fed i

never question 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 believing that

it was necessary because we 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

uh were disproportionately benefiting

the wrong people

the people who didn't really need the

help 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 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 wall street

hussar 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 tea party

supporters put republicans in charge of

the house

we need to restore fiscal sanity to this

nation

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

uh yes the fact was we were carrying the

load all by ourselves

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 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

as they're looking at some of the risks

and uncertainties associated with doing

this policy action what i think they're

not doing is

is looking at the risk of not acting i

wanted to talk to bernanke but he would

not 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 um 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

you voted for quantitative easing too

what was your thinking there right so

um my thinking was that uh

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 um sense of um

economic well-being 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 but outside the fed

some were saying that the cost 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

joseph stieglitz is one of the most

well-known economists in america

and a winner of the nobel prize so

you're

doing a uh documentary on the

fed and monetary policy we are trying to

okay are we insane no no no i think it's

a great idea okay

stieglitz told me that while the fed was

doing some good he had greater 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 leagues

stocks

to go up and so who owns the stocks

it's the people in the top not just the

top 10 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 recover

quickly in a robust way

in a way with shared prosperity total

failure

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 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 um i 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

some saw wealth inequality as a

trade-off there's nothing you could

really do about it

but it was a in my mind

in my discussion what i would present at

the table it would want to be one of the

consequences we just had to be mindful

of

that doesn't mean we shouldn't have done

what we did

for andrew hussar 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

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 of the fed was

rising demands from wall street that the

fed continue

its stimulus the idea that the sky was

going to fall if the fed didn't continue

to

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

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

the fed would keep the money flowing

under successive rounds of quantitative

easing

injecting more than two trillion dollars

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

um uh 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 that the fed

would step

back from buying all these securities

and even though the fed said it's going

to be gradual it's going to be measured

the markets had a massive tantrum the

market's selling off after federal

reserve chairman ben bernanke

said that the central bank could start

tapering its economy the markets went

into a fit

later this year became dysfunctional was

known as the taper tantrum well we all

know it when ben bernanke talks or 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

bindery 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

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 fomc reaffirmed its view

that the current zero to one-quarter

percent target range

for the federal funds rate remains

appropriate

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

[Music]

good afternoon everyone and welcome 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 us economy is in a good place and we

will continue to use our monetary policy

tools to help keep it there

there was a growing debate about whether

the fed should raise interest rates

and slow the flow of easy money for

those who are saying during that period

of time

you know you should have been concerned

about other side effects of keeping

rates so low

tell me what the downside of raising

rates would have been

the downside is keeping americans on the

sideline who want to work

i raised these issues with neil 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 one of

the things that we have seen in this

country is a widening wealth gap

the question is what role if any of 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 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 of americans didn't have more than a

400

rainy day fund most americans were

tremendously fragile

economically speaking karen petru is an

unlikely critic of the central bank

she spent her career as an advisor 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 of the

economy remained

very tepid and very unequal when you

speak to 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 say

what you were doing wasn't working we'll

never know

whether raising rates would have

dampened growth we do know that keeping

rates ultra ultra low

didn't raise growth they raised markets

[Music]

petru 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

in particular was the amount of

corporate borrowing

valuations are generally elevated

especially

corporate debt we have flag the rise in

corporate debt we have entirely too much

corporate debt out there

and 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

stocks of companies were often borrowing

money to buy back their own stock

making the remaining shares more

valuable and the price is 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

financial reporter dion rebowen covered

the growing trend

so it used to be 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 okay ge just

authorized a 50 billion dollar stock

buyback

the numbers were astounding more than

six trillion dollars in corporate

buybacks

in the decade after the financial crisis

warren buffett likes apple's buybacks

well

why wouldn't he's a shareholder and

they're buying back 100 billion

buybacks it's just another example of

things that used to be viewed as kind of

ooh

you know just going mainstream sheila

bear

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 company 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

but 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

corporate buybacks the elevation of

corporate debt

how is 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 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 i in my view we don't it's

not something we control

in our conversation kashkari was 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 um helping the

rich

that argument ignores the benefit to the

poor and if you're sure

if you're going to 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 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

we're in a way we're like a giant

bloodsucker

and 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 any real

increase in income we are just a cost

when you say we

you mean you and other members of the

financial community

have been this kind of blood sucker on

the economy is that 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 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 if you do anything wrong to us the

entire

economy will collapse in ragged disarray

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 lev

minand who'd been an economic advisor at

the fed and 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's 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 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

that potential instability posed by the

shadow banking system

was on the fed's radar how are you

thinking about

potential risk bubbling up in the in the

broader shadow banking system

you know this is 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 uh you know we

think it's a

it's something that requires serious

monitoring 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 a previously

unknown coronavirus

when the pandemic hit it was so unlike

anything any of us have experienced in

our lifetimes

we've been paying attention to what was

happening in china for a few months

i was calling my contacts global

businesses that have big operations in

china

to understand what their employees and

staff were seeing and we were all trying

to learn as much as we can about

pandemics and what it's likely going to

mean

major sell-off 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 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 free fall you had credit

markets seizing up

people were selling anything that wasn't

nailed down investors are really growing

incredibly pessimistic

the us economy the biggest economy in

the world is in free fall

then comes the realization that we have

to lock down

the list of closings and activities

being suspended is growing from coast to

coast

covid had 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 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 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 two trillion dollars of treasury

securities another trillion dollars of

mortgage-backed securities

it flooded the zone with new government

cash

to stabilize this system but it wasn't

enough to stop the

panic the emergency rate cut failed to

calm investors

in fact it did the opposite future 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 going to fall

so on march 23 the fed took its economic

experimentation to a whole new level

with congress's 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

by the end of march congress would also

act passing the largest economic

stimulus bill ever

the 2.2 trillion dollar cares act the

bill

rushed to the president after clearing

the house in a voice vote

it provided support for individuals and

small businesses

[Applause]

a big portion of the bill nearly half a

trillion dollars

was earmarked to support the fed's

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

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 uh

depression

and there's the opening markets

but in trying to keep workers employed

and companies afloat

the fetid also used its power 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 it we've got to live with it now

this is an emergency

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 a symmetry of the most splendid

kinds

a speeds go ahead and clap it off please

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 so has moral

hazard gotten worse as a result

of of this bailout there's no barometer

of moral hazard

uh so i can't give you a reading all i

can say is that

for the last year or so uh

risk-taking has been rewarded and that

tends to

bring on more risk-taking do you see

moral hazard in what has just happened

oh absolutely um i i think uh

now you know the entire business

community has

has had a taste of bailouts you know and

boy

it doesn't work really really nicely uh

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

starting to be embedded into people's

thinking

you know 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

and bad

times the fed the fed just keeps

stepping in you have this

never-ending ratchet up the market's

never correct it's like a no-lose casino

it is it isn't a loose casino that's

exactly right 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

the sense that the financial markets

have a 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

but 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 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. with

all due respect i just i 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

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 the decisions

of the pandemic is going to be extremely

long people who lost their jobs

with unemployment still high the fed and

congress have continued to pump money

into the economy

trillions to struggling individuals and

small businesses

and once again quantitative easing to

keep interest rates low and the cost of

borrowing down

last march the fed announced that

they've just decided it's

going to 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

and you ask them why exactly are you

driving 100 miles an hour now

say well it was a good idea last march

and we don't want to change things too

quickly and so yeah we just think it's a

really good idea

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 punt 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

corporate america has taken on even 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

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 dollars 1.3 trillion dollars

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 dollars to

invest it's much more easy to become a

billionaire

than when you have a hundred dollars to

invest

you ever think about trading stocks but

that hasn't stopped many hundred dollar

investors

from trying to get a piece of the action

people like us can trade just like the

big guys

with robin hood

all these brokerage platforms saw the

largest growth of new users they'd ever

seen

because people said now's my opportunity

i'm going to 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

as the 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 want

to get in on this economic recovery

we're having

i've gotta buy stocks i'm gonna take my

stimulus check 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

community

welcome declan michael lee so many

people bob smith

jerome powell has become a kind of cult

figure

master of the money printer money

printer

invest in these four tickers i'll put

them right above

billions have been piling into so-called

meme stocks

this gamestop situation we will never

encounter a setup like this again

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 and

cryptocurrencies

bitcoin has been on a wild ride during

the past few months

it doesn't really matter if something is

a good buyer 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 i mean what you're

describing is mania

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 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 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'll 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 price is

coming back down

so we are playing with fire because we

have the three great asset classes

moving into bubble territory

simultaneously

[Music]

there is a growing conversation right

now about the fed's role

um 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 uncharted 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

want to 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 them 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 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

there are now signs of inflation

percolating through the economy

annual inflation is expected to top

three and a half percent in the fourth

quarter

so now there's speculation the fed may

speed up its interest rate plans

the fed insists it's temporary but is

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 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 in 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

whatever the fed does next the

consequences will affect us all

[Music]

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programs visit our website at pbs.org

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[Music]

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