How the Federal Reserve's Easy Money Experiment Fueled Wall Street's Boom and Wealth Inequality

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

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