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Age of Easy Money
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August 2022

MALE NEWSREADER:

Federal Reserve Chairman Jerome Powell speaking at an annual economic summit in Jackson
Hole, Wyoming.

MALE VOICE:

Yep, we’re on with him.

FEMALE NEWSREADER:

Powell and his colleagues at the Fed are under pressure to curb inflation.

FEMALE NEWSREADER:

Powell could take a harder line, or he could simply play his cards close to the vest.

MALE VOICE:

Here we go. He’s on the move.

MALE NEWSREADER:

It’s going to be a tough crowd at Jackson Hole because of the fact that he made a call sim-
ply last year that didn’t age well. Now—

CHRISTOPHER LEONARD, Author, The Lords of Easy Money:

Every year the Federal Reserve holds an economic symposium at Jackson Hole, Wyoming, in
August. It's sort of like the Oscars of the Fed world. And media comes from all around the
world and the Fed chairman gives a keynote speech that gets all the attention.

MALE NEWSREADER:

All eyes on Jackson Hole this morning.

MALE NEWSREADER:

He’s giving a speech as central banker to the world.

MOHAMED A. EL-ERIAN, Chief economic advisor, Allianz:

So Jackson Hole plays a very important role in the central bank community, because you're
basically bringing the central bankers of the world and economists to a place to discuss criti-
cal issues. So people looked to Jackson Hole to see, is there a reset in monetary policy?

FEMALE FINANCIAL REPORTER:

The economy has slowed. We’re likely in recession and perhaps going deeper into it. Are they
going to keep taking us down this road? Are they going to keep slamming the brakes on
rates? Raising 75 basis points until we've got job cuts across the corporate sector?

RAGHURAM RAJAN, Fmr. head, Indian Central Bank:

Central bankers were saviors post-global financial crisis. This time it was different. The mood
was more "for the first time, we're failing."

FEMALE REPORTER:

Is Powell ready to risk recession? This is the question.

MALE SPEAKER:

Chair Powell, the floor is yours. Please come to the podium.

NOURIEL ROUBINI, Economist:

Jackson Hole in 2022 was quite important.

JEROME POWELL:

Thank you, Peter, and good morning, everyone.

NOURIEL ROUBINI:

The market were feeling in the summer that maybe the Fed would have a pivot, would stop
raising rates and maybe start cutting them.

MALE INVESTMENT ADVISER:

The market started talking about a Fed pivot.

FEMALE REPORTER:
—market, so maybe they’ll just ease up a bit.

MALE INVESTMENT STRATEGIST:

The market is, I think, anticipating that they’re going to blink.

JEROME POWELL:

Reducing inflation is likely to require a sustained period of below-trend growth.

NOURIEL ROUBINI:

And what Powell told them in Jackson Hole, he said, "Listen, inflation is still way too high,
it's not peaking, it's not going to fall fast enough. And if you guys think that we're going to
stop raising rates, or even cutting them, you are a bit delusional."

JEROME POWELL:

The U.S. economy is clearly slowing from the historically high growth rates of 2021.

NEEL KASHKARI, Pres. & CEO, Fed. Reserve Bank of Minneapolis:

I think the chair’s objective at Jackson Hole was to deliver a very concise message that, "We
know what our job is: Our job is to get inflation back down to 2%, and we're going to do
what we need to do to get it back down to 2%."

JEROME POWELL:

While higher interest rates, slower growth and softer labor market conditions will bring
down inflation, they will also bring some pain to households and businesses. These are the
unfortunate costs of reducing inflation. But a failure to restore price stability would mean
far greater pain.

NEEL KASHKARI:

His remarks were remarkably brief for a Jackson Hole speech, and that was by design to de-
liver a very direct message. And I think his message was very effective.

FEMALE NEWSREADER:

Pain.

LARRY SUMMERS:

Pain.

MALE NEWSREADER:
Pain.

MALE NEWSREADER:

Some big—

MALE NEWSREADER:

—pain ahead.

FEMALE NEWSREADER:

Pain for American families.

SEN. ELIZABETH WARREN, (D) MA:

What he calls “some pain” means putting people out of work.

DION RABOUIN, The Wall Street Journal:

Jay Powell is not messing around. And that is when the markets reacts and says, “Oh, my
God. Things are going to change.”

JEROME POWELL:

Restoring price stability will likely require maintaining a restrictive policy stance for some
time.

CHRISTOPHER LEONARD:

If the Fed puts us into a higher interest rate world, it will change everything. The financial
system globally has been built around extremely low, ultralow interest rates for 10 years. All
of these of things that got built up over the last decade are going to have to be dismantled
or changed.

JEROME POWELL:

We will keep at it until we're confident the job is done. Thank you.

NOURIEL ROUBINI:

We lived in a bubble, in a dream, and this dream in a bubble is bursting.

FEMALE NEWSREADER:

—as rising interest rates in the U.S. and many other countries are intensifying fears of a
recession.
JAMES JACOBY:

Ever since that Fed meeting at Jackson Hole, we’ve been getting mixed signals about the
economy. Is it bound for recession, or is it in a booming recovery?

MALE NEWSREADER:

An economy with such a strong labor market is not in a recession.

JAMES JACOBY:

At the center of the debate are the actions of the Federal Reserve, which seems to have our
economic fate in its hands.

MALE NEWSREADER:

The Fed is trying to stop inflation. But is the medicine worse than the disease?

JAMES JACOBY:

Lately, it’s been raising interest rates at the fastest pace in decades, trying to tamp down on
inflation. But for most of the past decade, the Fed was keeping interest rates incredibly low,
trying to stimulate the economy, creating what has been called an age of easy money.

MALE NEWSREADER:

Tonight, the economic alarms are blaring.

JAMES JACOBY:

For the past two years, I’ve been investigating the Fed and the far-reaching consequences of
its easy money policies.

THOMAS HOENIG, Pres., Fed. Reserve Bank of Kansas City, 1991-2011:

I'm game if you are.

JAMES JACOBY:

I’m definitely game.

I’ve been speaking to current and former Fed officials.

Is that really the first time you’re in a suit since COVID?

RICHARD W. FISHER, Pres., Fed. Reserve Bank of Dallas, 2005-15:

From the waist down.

SHEILA BAIR, Chair, FDIC, 2006-11:

Can I take my mask off?

JAMES JACOBY:

Titans of finance.

You were thinking what?

JIM CHANOS, Founder, Kynikos Associates:

I was thinking this is the craziest market I've seen in 40 years.

JAMES JACOBY:

Those who follow the decision making—

CHARLES DUHIGG, The New York Times:

None of us think about this because it’s boring, but it’s everything. It touches everything.

JAMES JACOBY:

—and those who have been hit the hardest by it.

FEMALE SPEAKER:

It’s like choosing between your rent and your food.

JOHN ADEL, Client, Money Management Intl.:

They do not understand what everybody's going through.

CHAPTER ONE

An Emergency Measure

JAMES JACOBY:

The Fed's easy money experiment traces back to pivotal decisions made over a decade ago
in 2008—

FEMALE REPORTER:

Right now, breaking news here: Stocks all around the world are tanking because—

JAMES JACOBY:

—when investors, speculators and Wall Street bankers nearly brought down the global
economy.
MALE FLOOR TRADER:

Right? Get on the train, otherwise it's going to leave the station without you.

FEMALE FINANCIAL REPORTER:

—with Wall Street shaken to its very foundation today.

PRESIDENT GEORGE W. BUSH:

We are in the midst of a serious financial crisis, and the federal government is responding
with decisive action.

FEMALE REPORTER:

The Bush administration—

JAMES JACOBY:

The president and Congress spent hundreds of billions of dollars to restart the economy, but
at the center of the rescue effort was the Federal Reserve. Richard Fisher was the head of
the Fed’s bank in Dallas at the time.

RICHARD W. FISHER, Pres., Fed. Reserve Bank of Dallas, 2005-15:

What the Federal Reserve does is provide the blood supply for the body of our capitalist
economy. And what happened in 2008 is all the veins and the capillaries and the arteries col-
lapsed. So every financial function had failed. It had collapsed, and we had to restore them.

MALE NEWSREADER:

We’re at the precipice of the apocalypse.

MALE NEWSREADER:

We’re on the edge of the abyss.

SEN. BARACK OBAMA, (D) IL:

We are in the most serious financial crisis in generations.

MALE NEWSREADER:

There was nothing but panic yesterday. There's been panic all week.

MALE NEWSREADER:

The bottom to America’s financial woes appear nowhere in sight.

FEMALE NEWSREADER:

The banks are still not lending to one another, and as long as that’s not happening, the sys-
tem remains stuck and imperiled.

JAMES JACOBY:

In normal times the Fed’s job is to promote employment and keep inflation in check, primari-
ly by raising and lowering short-term interest rates, making borrowing cheaper or more
expensive.

But amid the crisis, Fed officials decided to do something they hadn’t done in half a century:
They began dropping rates, eventually to almost zero.

FEMALE FINANCIAL REPORTER:

Those massive rate cuts have not been stimulating the economy, so it's the other things—

JAMES JACOBY:

With Americans still suffering and the banking system on the verge of collapse, Fed officials
there at the time told me they felt compelled to go even further.

RICHARD W. FISHER:

And then the question was, "What else can we do?" And the committee came up with the
idea of quantitative easing.

FEMALE NEWSREADER:

Quantitative easing. What in the world is it that?

FEMALE FINANCIAL REPORTER:

Quantitative easing. That’s just a Greek term to a lot of people.

FEMALE NEWSREADER:

A lot of people want to know what they’re going to say about what we call quantitative
easing.

JAMES JACOBY:

Quantitative easing, or QE, was championed by Ben Bernanke, then the Fed chairman.

BEN BERNANKE:
The Federal Reserve is committed to using all available tools to stimulate economic activity
and to improve financial market functioning.

JAMES JACOBY:

QE was an experimental way for the Fed to inject money into the financial system and lower
long-term interest rates.

RICHARD W. FISHER:

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.

BEN BERNANKE:

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 get us going next year
sometime.

JAMES JACOBY:

Their hope was that the new money would help shore up the failing banks and get them
lending again. It would become the heart of their easy money policies.

THOMAS HOENIG:

It was an emergency measure. I mean, the economy was imploding. No one would lend to
anyone. There was no ability to borrow. The economy was going to be a stop dead.

JAMES JACOBY:

Thomas Hoenig was the president of the Kansas City Fed and initially supported the quanti-
tative easing plan.

THOMAS HOENIG:

These are trying times, and as you just heard, there is much to be done as we try and work
through this financial crisis.

When you have a crisis, that's when you want your central bank to be willing to put cash in,
and so to avoid a major depression, where everything just stops, you provide the cash. So I
agreed with, yes, we need to provide this money on the expectation that once we got
through the crisis, we would go back to a more normal policy.
ANDREW HUSZAR, Fed. Reserve Bank of NY, 2001-11:

Again, you can tell me if I’m giving too long answers or what have you.

JAMES JACOBY:

The task of managing most of the program went to Andrew Huszar, a former Fed official
who was then working on Wall Street.

ANDREW HUSZAR:

I realized very quickly what I was being asked. I was being asked if I would manage the
largest financial markets intervention by a government in world history.

JAMES JACOBY:

The Fed began creating hundreds of billions of dollars to buy things like mortgage-backed
securities and government bonds from banks and financial institutions.

ANDREW HUSZAR:

This was a $5 trillion market. This was the largest private bond market in the world, and the
Fed had never once before bought a mortgage bond in its history. And basically in the fall of
2008, it announced that it would buy basically 25% of the entire market within 15 months.

JAMES JACOBY:

And that was your job to do that purchasing?

ANDREW HUSZAR:

That was my job, to think about how to get the program done.

SARAH BLOOM RASKIN, Fed. Reserve Board of Governors, 2010-14:

Many of these tools had not been tried before. They were definitely like "break the glass"
kind of tools. Like, what are we going to do in order to restart the economy here?

JAMES JACOBY:

Sarah Bloom Raskin joined the board of governors while QE was already underway.

SARAH BLOOM RASKIN:

As QE began, it showed great promise. We started to see that people's sense of 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. Now
how it was working was a different question altogether.

MALE NYSE FLOOR TRADER:

Things are not as bad. We’re getting better. And things will get better. There’s no question
about it.

SARAH BLOOM RASKIN:

So view it as an experimental drug that actually is doing some good things, but nobody
quite knows how or why at the moment.

JAMES JACOBY:

The financial sector had begun to stabilize, but there were early signs that not everything
would go according to plan.

MALE NEWSREADER:

The banking industry fat cats still aren't lending money.

MALE NEWSREADER:

Well, the big banks aren’t lending.

JAMES JACOBY:

Despite the money the Fed was pouring into the banks, they still weren’t back to lending.

MALE SPEAKER:

The government's not doing anything to help small business, and the banks are sitting on
their butts and they’re still not lending money.

JAMES JACOBY:

Instead, they were taking a lot of the money and investing it themselves.

MALE ECONOMIST:

The banking sector is broken. It is not lending to small business. Somebody’s got to get the
money there. The government is the actor in this case.

JAMES JACOBY:

You were injecting money into the banks, more than a trillion dollars worth at that point,
and what were the banks doing with that money?
ANDREW HUSZAR:

The Fed's idea was the banks would be taking that money and lending it, effectively, at low-
er interest rates. What the banks were doing instead was that they were just investing in the
same bonds that the Fed was buying. They were taking that money and they were turning
around and buying the same mortgage-backed securities and other bonds. Why? Because
the Fed had made very clear that its goal was to drive up the price of financial assets. And so
Wall Street turned around and thought, "Why would I go through the effort of making a
mortgage when I can just press a button and buy millions, if not billions, dollars of bonds
and ride that trade, as the price of those assets are very consciously being inflated by the
Fed?"

JAMES JACOBY:

Huszar grew increasingly disappointed by the program and would eventually leave in 2011.

ANDREW HUSZAR:

I hadn't seen the benefits accrue to the average American, and I wasn't seeing larger struc-
tural reform in favor of the average American. I began to question whether it was my role
any more to be at the Fed.

JAMES JACOBY:

Were you seeing that the banks were gaming the Fed? That they were in some ways taking
advantage of this program that was intended to help the real economy?

ANDREW HUSZAR:

I think you could say they were gaming the Fed, or I think you could just say that they have
a different mind, and they're not part of the Fed, and they have their own interests. You
know, it's sort of like the Aesop's fable of the scorpion and the frog. On some level, it's in
their nature to do what's in their nature, and their nature is to make the most money possi-
ble in the quickest way possible. And just because the Fed wanted to do something, and
wanted to help the average American, it doesn't necessarily mean that Wall Street has the
same interests.

CHAPTER TWO

Volatility and Anger

PRESIDENT BARACK OBAMA:

Twenty billion dollars worth of bonuses. It is shameful.

MALE NEWSREADER:

Are these executives greedy or stupid? Personally, I am stumped for an alternative word.

BARACK OBAMA:

There will be time for them to make profits, and there will be time for them to get bonuses.
Now is not that time.

MALE VOICE:

It’s socialism for the rich.

JAMES JACOBY:

By the end of 2009 the banks were back to making money, and paying themselves record
bonuses, while the real economy lagged.

MALE ECONOMIST:

Washington loaned them money at cut rates, so our thanks is they’re going to stuff it in
their pockets even as many Americans are suffering from unemployment and reduced
wages.

MALE VOICE:

People absolutely ought to be outraged. I mean, these guys just don’t get it.

JAMES JACOBY:

The inflation rate was well below the Fed’s target of 2%, signaling weak demand. Unem-
ployment had shot up, and foreclosures were continuing across the country.

MALE PROTESTER:

Banks got bailed out, we got sold out!

SARAH BLOOM RASKIN:

People had lost homes. Household net worth had plummeted. It really wasn't an inclusive
recovery. It was a recovery that benefited only portions of the economy.

FEMALE PROTESTER:

I’m here to support all of the people who want their taxpayer dollars back, me included.
SARAH BLOOM RASKIN:

There was a sense that the banking sector, the financial sector benefited primarily, and not
so much everybody else. And that had a political taste to it which became the basis, I think,
for a lot of anger, and really set the stage for the next chapter in our country's political
history.

MALE PROTESTER:

We have you surrounded. Come out with the Constitution intact, you usurpers!

FEMALE REPORTER:

Demonstrators opposed to what they call out-of-control government spending begin a se-
ries of rallies this afternoon.

JAMES JACOBY:

That resentment helped give rise to the Tea Party—

PROTESTERS [singing]:

We ain’t going away!

JAMES JACOBY:

—fueled by the belief that government spending and bailouts had been out of control and
ordinary people weren’t seeing any benefits.

MALE PROTESTER:

Hedge fund bankers, Bear Stearns—they didn’t build this country. Workers like us did.

CHRISTOPHER LEONARD:

The only political constant in 2010 was volatility and anger.

FEMALE PROTESTER:

Hell no, we won’t go!

FEMALE PROTESTER:

Nobama, Nobama!

CHRISTOPHER LEONARD:
And there was a real loss of faith in the political and economic system. And that manifests as
the Tea Party.

SARAH PALIN:

Tea Party Americans, you’re winning! You’re winning!

JAMES JACOBY:

They were especially outraged by the $800 billion stimulus package that President Obama
and Congress had passed in 2009 to get the economy going again.

PROTESTERS [chanting]:

Can you hear us now? Can you hear us now?

CHRISTOPHER LEONARD:

The entire principle of the Tea Party, the entire platform was to stop Washington, D.C., from
intervening.

MALE PROTESTER:

This is just the beginning.

CHRISTOPHER LEONARD:

It was an agenda of "no."

SEN. RAND PAUL, (R) KY:

We’ve come to take our government back.

JAMES JACOBY:

As Republicans swept the 2010 midterm elections, aided by the Tea Party’s growing influ-
ence—

SEN. RON JOHNSON, (R) WI:

We need to restore fiscal sanity to this nation.

JAMES JACOBY:

—the prospects for Congress and the White House working together to pass another stimu-
lus bill were growing dim.

REP. CHIP CRAVAACK, (R) MN:

Let this serve as a warning to Congress: We don’t work for you, you work for us.

JAMES JACOBY:

Into the political vacuum stepped the Federal Reserve.

Was it palpable that the Fed was sort of the only game in town here?

RICHARD W. FISHER:

Yes. The fact was we were carrying the load all by ourselves.

CHAPTER THREE

Unintended Consequences

FEMALE NEWSREADER:

Resurgent Republicans racked up huge gains Tuesday.

MALE REPORTER:

A devastating night for the Democrats that fundamentally changes American politics.

BARACK OBAMA:

People are frustrated, they're deeply frustrated, with the pace of our economic recovery.

JAMES JACOBY:

The Fed wasted no time. The day after the midterm elections, they took a dramatic step: an-
other round of QE, not just to stabilize the economy, but to boost it.

CHRISTOPHER LEONARD:

What happened on Nov. 3, 2010, represents a step change in the Fed’s role in our economy,
when the Fed changes from a central bank that manages the currency to the primary engine
of economic growth in America. Whatever your philosophy is—small government, limited
government, big government that hires people to go out and build roads to stimulate
growth—whatever it is, it's supposed to be our democratic institutions that do that, not the
central bank.

JAMES JACOBY:

You're basically saying that because our democratic institutions are so paralyzed and there's
so much political dysfunction, that we as a society, we as a country have become overly re-
liant on the Fed to run things?
CHRISTOPHER LEONARD:

Totally. Economic affairs. I think one of the most important things to think about is that our
democratic institutions in America are becoming less and less capable and less and less ef-
fective. I think that point is almost undeniable. So what we're doing in this country is we're
relying on our nondemocratic institutions to take up the burden, like the central bank in eco-
nomic affairs. Which leads you to the surreal place where we are today, where this commit-
tee of 12 people is making these decisions that could very well plunge our economy into a
deep, deep, deep recession and cause financial crisis.

JAMES JACOBY:

In the early days of the easy money experiment, Fed Chair Bernanke promoted his plan say-
ing it would create a wealth effect—that boosting the stock market would make people feel
wealthier and start spending again.

MALE REPORTER:

There’s no doubt that there is quite a bit of opposition.

JAMES JACOBY:

But he was met with some skepticism and concern that the decision risked causing runaway
inflation. He went on television to push back on the critics.

BEN BERNANKE:

What they're doing is they’re looking at some of the risks and uncertainties associated with
doing this policy action. What I think they’re not doing is looking at the risk of not acting.

FEMALE NEWSREADER:

QE2 has become a punching bag for everyone from top-tier economists to Sarah Palin.

JAMES JACOBY:

Inside the Fed itself, Thomas Hoenig was sounding alarms about the long-term
consequences.

FEMALE REPORTER:

You are the one member of the Fed that has been critical of 0% interest rates. Why?

JAMES JACOBY:
Over the course of 2010 he argued against Bernanke’s plan at every meeting and cast the
lone dissenting vote eight times in a row.

THOMAS HOENIG:

It was difficult, but this was fundamental. And so I really did think that it was a wrong poli-
cy, and I didn't want to be associated with it, so I voted no.

JAMES JACOBY:

Did you think it was a radical policy?

THOMAS HOENIG:

I most certainly did think it was a radical policy, and I think most people did. It was meant to
be radical. And so my concern was we had come through a crisis and we provided the liquid-
ity necessary to come through it and we were on the other side of that crisis. The economy
was recovering. And yet we were engaging in a deliberate effort to have easy money.

JAMES JACOBY:

What were you most concerned about, if easy money continued?

THOMAS HOENIG:

I thought that it was unnecessary to do. I thought it brought new dangers. When you keep
interest rates at zero and keep pumping money into the economy, you favor the debtor and
you penalize the saver. You are saving for nothing. I mean, you get nothing for that. And if
you are a borrower, well, life is good. You borrow for nearly nothing. And so you actually en-
courage speculation. You encourage additional risk-taking. In fact, that's one of the reasons
they did quantitative easing, was to encourage greater risk-taking.

CHAPTER FOUR

Dangerously Addicted

FEMALE NEWSREADER:

The stock market rally on Wall Street today pushes the Dow to its highest level in nearly
nine months—

MALE NEWSREADER:

That figure includes activity fueled by recent government stimulus programs.

JAMES JACOBY:
The Fed’s quantitative easing set off what would become the longest bull run in the stock
market’s history.

MALE NEWSREADER:

Investors took the good news and, well, they basically ran with it.

JAMES JACOBY:

By design, QE effectively lowered long-term interest rates, making safer investments like
bonds less attractive and riskier investments like stocks more attractive.

RANA FOROOHAR, Associate editor, Financial Times:

The Fed goes out and buys certain kinds of assets, and it kind of puts a floor under the mar-
ket, and it artificially pushes up prices. And when I say artificial, what I really mean is noth-
ing changed at Apple or IBM or GE. It wasn't like somebody invented the new new thing,
post-2008, but a lot more investors got bullish in the stock market, so the stock prices of
those companies go up. But what's really happening? Nothing's changed. Nothing new has
been invented. It’s a sugar high. It’s like drinking a Coke instead of having a meat-and-pota-
toes meal.

FEMALE NEWSREADER:

You’ve got oil up. You’ve got gold up. You’ve got copper up. You’ve got stocks up. Stock fu-
tures are up. All because of central banks and the stimulus they’ve been putting into the
economy.

JAMES JACOBY:

On Wall Street, no one seemed to mind. The stock market rally continued.

FEMALE FINANCIAL REPORTER:

The old saying is "don’t fight the Fed."

FEMALE FINANCIAL REPORTER:

Don’t fight the Fed.

MALE FINANCIAL REPORTER:

Don't fight the Fed.

MALE FINANCIAL REPORTER:

Rule number one as a young trader you’re taught is "don’t fight the Fed."

FEMALE FINANCIAL COMMENTATOR:

I don’t know what the hangover’s going to look like down the road from all this ex-
traordinary stimulus, but for now the markets love it. Don’t fight the Fed.

MOHAMED A. EL-ERIAN:

Don’t fight the Fed. The one institution that has a printing press in the basement, and
there's no limits to how much it can use it. That is what makes the Fed such an influential
player in the marketplace.

JAMES JACOBY:

Mohamed El-Erian remembers it well. He was running the largest bond fund in the world at
the time and helped advise the Fed on its QE experiment.

MOHAMED A. EL-ERIAN:

Keep an eye on the Treasury market—

JAMES JACOBY:

He shared with them his concerns that the markets were becoming dangerously addicted to
the Fed’s easy money.

MALE NEWSREADER:

To taper or not to taper.

JAMES JACOBY:

His prediction played out in 2013 when after multiple rounds of quantitative easing totaling
more than $2 trillion, Bernanke signaled the Fed might start to taper off.

BEN BERNANKE:

If we see continued improvement and we have confidence that that is going to be sus-
tained, then we could, in the next few meetings, we could take a step down in our pace of
purchases.

MOHAMED A. EL-ERIAN:
I was on the trade floor. I remember Chairman Bernanke saying that he would taper. First we
had to figure out "what does taper mean?" And the minute people realized what "taper"
meant, which is that the Fed would step back from buying all these securities, and even
though the Fed said it's going to be gradual, it's going to be measured, the markets had a
massive tantrum.

FEMALE FINANCIAL REPORTER:

The market selling off after Federal Reserve Chairman Ben Bernanke said that the central
bank could start tapering its economic stimulus measures—

RICHARD W. FISHER:

It shows you how addicted the markets are. The markets went into a fit, became dysfunc-
tional. It was known as the "taper tantrum."

FEMALE FINANCIAL REPORTER:

Well, we all know it: When Ben Bernanke talks, and the Federal Reserve speaks, the markets
listen.

MOHAMED A. EL-ERIAN:

Markets are like little kids. They want candy, and the minute you try to take the candy away,
they have a tantrum.

SARAH BLOOM RASKIN:

You had 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 precursor to instability, right? But it put the Fed in a real
bind.

MALE ANNOUNCER:

Chairman Bernanke.

MOHAMED A. EL-ERIAN:

And Chairman Bernanke had to go in a conference in Boston and say, "No, no, no, we're not
tapering."

BEN BERNANKE:
You can only conclude that highly accommodative monetary policy for the foreseeable fu-
ture is what's needed in the U.S. economy.

RANA FOROOHAR:

Every single time the Fed would start talking about, "OK, we're going to maybe taper back
faster, or we're going to think about raising rates." Boom! Stocks would correct, because
stocks wanted that easy money dopamine hit.

JAMES JACOBY:

Bernanke’s successor, Janet Yellen, had better luck the following year. She was able to pause
the quantitative easing part of the easy money policy without a tantrum, in part by sug-
gesting she’d maintain the Fed’s massive balance sheet of assets it had bought and to keep
short-term interest rates low.

JANET YELLEN:

The FOMC reaffirmed its view that the current zero to one-quarter percent target range for
the federal funds rate remains appropriate.

JAMES JACOBY:

The Fed justified its actions in part because the fears about runaway inflation hadn’t materi-
alized, and in fact it was running below its target of 2% because economic growth was still
low. But Yellen’s partial easy money pullback didn’t dampen concerns and criticisms about
the ill effects of the Fed’s policies.

CHAPTER FIVE

Who Owns the Stocks

JOSEPH STIGLITZ, Chief economist, The Roosevelt Institute:

So you're doing a documentary on the Fed and monetary policy?

JAMES JACOBY:

We are trying to.

JOSEPH STIGLITZ:

OK [laughs].

JAMES JACOBY:
Are we insane?

JOSEPH STIGLITZ:

No, no, no. I think it's a great idea.

JAMES JACOBY:

OK.

Joseph Stiglitz is one of the most well-known economists in America and a winner of the
Nobel Prize.

JOSEPH STIGLITZ:

The intention of the Fed was to stimulate aggregate demand.

JAMES JACOBY:

He told me that while the Fed had done some good, he worried at the time that by stoking
the stock market so aggressively, it was exacerbating economic inequality.

JOSEPH STIGLITZ:

The main thing I was concerned about was that the way they were trying to revive the
economy was a kind of trickle-down economics. The way quantitative easing works is that
it's a lowering of the interest rates. That leads stocks to go up. And so who owns the stocks?
It's the people in the top. Not just the top 10%, 1%, one-tenth of 1%. And so it increases enor-
mously wealth inequality. We had had increasing inequality really since the late '70s, and this
was putting that on steroids.

JAMES JACOBY:

What sort of response did you get from folks at the Fed to what you were saying at the
time?

JOSEPH STIGLITZ:

"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."

JAMES JACOBY:

I heard a similar response when I raised these issues with the president of the Minneapolis
Fed, Neel Kashkari, in March of 2021. He was the only current Fed official who agreed to
speak to us.
NEEL KASHKARI:

The Fed has been on a mission—I've been on a mission—to put Americans back to work and
to 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.

JAMES JACOBY:

One of the things that we have seen in this country is a widening wealth gap. The question
is what role, if any, the Fed has played in widening that wealth gap?

NEEL KASHKARI:

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 401(k). The most valuable asset they have is their job. So by putting peo-
ple back to work and helping to boost their wages, we are actually making their most valu-
able asset more valuable.

BARACK OBAMA:

Middle-class economics works.

FEMALE NEWSREADER:

President Obama today in Wisconsin fired up over jobs. Another 223,000 added in June. Un-
employment at its lowest—

JAMES JACOBY:

In fact, by 2015, the employment was heading toward record lows. But critics I spoke to said
the Fed’s focus on jobs was missing the full picture.

I mean, Neel Kashkari told me that a job is a great asset. That when I—

KAREN PETROU, Author, Engine of Inequality:

[Laughs] His may be. I'm not so sure that that's true for the folks working three jobs behind
the counter at the supermarket. Sorry, Neel, I think that is an elitist assumption of what la-
bor income is good for.

JAMES JACOBY:
Karen Petrou is an unlikely critic of the central bank.

We’ve got Pete here—

KAREN PETROU:

Go lie down. Down. There we go.

JAMES JACOBY:

She spent her career inside the financial system, advising banks and big investors.

MALE CAMERA OPERATOR:

Interview [inaudible], take five marker.

JAMES JACOBY:

2015 to 2020 was actually considered a time of recovery. Unemployment was getting to
record lows and there was a kind of conventional wisdom that the economy was in a good
place at that point in time. So, you disagreed with that?

KAREN PETROU:

I did, because most Americans disagreed with that. The majority of Americans said they
were economically anxious. Significant percentages of people who were in the statistical
middle class were skipping medical treatments because they didn't think they could afford
them. Forty percent of the United States didn't have $400 in a rainy day fund and they were
at risk of imminent financial peril if a tire blew. That's not a good place.

JAMES JACOBY:

What about this idea that there was record unemployment?

KAREN PETROU:

Record unemployment was judged the way conventionally the Fed chooses to judge it, not
by taking into account the people sitting out working because they couldn't get enough
wages with their jobs to make going to work pay. Employment was fine, by at least some
numbers. Wages weren't, and people work to eat. They don't work because of some noble
ideal.

JAMES JACOBY:

So just to understand, what was wrong with the models that the Fed was using in order to
judge the success of their programs?
KAREN PETROU:

Paul Krugman, a well-known economist, has a great example. You've got four guys in a bar,
each one of whom is making $60,000 a year. Jeff Bezos walks into the bar, and he's making
two gazillion dollars. Does that mean that the four guys in the bar are doing any better? No,
it doesn't. It's distorting statistics. You have to look at how much each person has, not at
what the averages are, to understand what's going on in the economy. And when four out of
five guys in the bar are not doing well, the country isn't doing well.

CHAPTER SIX

A Missed Opportunity

JAMES JACOBY:

The growing sense that the system was not working for the poor and middle class became a
central theme of Donald Trump’s populist campaign.

DONALD TRUMP:

Sadly, the American dream is dead.

CHRISTOPHER LEONARD:

When you have a society with the middle struggling and the rich realizing almost unimagin-
able gains, it starts to corrode the civic foundation.

DONALD TRUMP:

We have to clean up the country. Our country is a mess.

CHRISTOPHER LEONARD:

People start to feel like this cliche you hear all the time: that the system is rigged.

MALE TRUMP SUPPORTER:

Like he says, I think the system is rigged.

MALE TRUMP SUPPORTER:

You know what? He’s just speaking what we’re all thinking. But he’s saying it in the public
domain. He’s saying it in the political domain.

CHRISTOPHER LEONARD:
You know, the fact that a huge portion of Americans were willing to vote for a president like
Donald Trump, whose entire campaign seemed to be burning down the system—

DONALD TRUMP:

We are going to drain the swamp.

CHRISTOPHER LEONARD:

—that doesn’t just happen in a vacuum.

CROWD [chanting]:

Drain the swamp! Drain the swamp!

DONALD TRUMP:

We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports,
schools, hospitals.

JAMES JACOBY:

It was a moment of potential for the Fed’s easy money policies. Trump promised to take ad-
vantage of the low interest rates and create jobs by investing in new infrastructure.

DONALD TRUMP:

We will create millions of new jobs and make millions of American dreams come true.

JAMES JACOBY:

But once in office, the political paralysis in Washington only intensified—

FEMALE VOICE:

Congress simply hasn’t been willing to find the amount of money necessary to do it.

JAMES JACOBY:

—making big economic investments all but impossible.

RANA FOROOHAR:

There just wasn't the political cohesion to push through these major programs. And you saw
a lot of op-eds, by a lot of economists, and even Fed bankers themselves, after the first or
second, or certainly third and fourth round, of quantitative easing. They were saying,
"Please, give us some fiscal policy," meaning "Give us some government action to direct this
money to the right places. We can't do all this alone. We can keep rates low, we trying to
keep rates low here, trying to keep confidence high. But we can't make you spend on a
bridge or revamp a school."

JAMES JACOBY:

Are you saying that there was sort of a squandered opportunity here?

RANA FOROOHAR:

A hundred percent it was a missed opportunity. We didn't use the cheapest money in memo-
ry—I don't want to say in history, but certainly in the last several decades. We didn't use
that opportunity to spend on the things that would have been almost free, in terms of debt.
We really missed something that now will be more costly, because now that interests rates
are going up—I still think, for example, we should do more infrastructure spending. That we
should revamp education. But it's going to be more costly to do it now.

PRESIDENT DONALD TRUMP:

It’s the largest—I always say the most massive, but it's the largest tax cut in the history of
our country. And reform, but tax cut.

JAMES JACOBY:

The marquee legislative achievement of the Trump administration would instead be a tax
cut that further boosted the markets and deepened economic inequality.

DONALD TRUMP:

That’s your bill.

JAMES JACOBY:

The jury is still out on whether it contributed to the economic growth that had started to
tick up during the Trump presidency. But to some inside the Fed, it seemed like an ideal time
to pull back on the easy money experiment.

One of them was Jerome Powell.

CHAPTER SEVEN

The Fed Blinked

DONALD TRUMP:
It is my pleasure and my honor to announce my nomination of Jerome Powell to be the next
chairman of the Federal Reserve. Congratulations.

JAMES JACOBY:

Trump appointed Powell in late 2017.

CHRISTOPHER LEONARD:

Jay Powell is a profoundly competent, smart guy who has spent his entire career at the
nexus of big money and big government.

JEROME POWELL:

In the years since the global financial crisis ended, our economy has made substantial
progress toward full recovery.

CHRISTOPHER LEONARD:

A self-acknowledged Republican. He's a conservative. He tends to embrace the deregulatory

view of the economy. And he's also a Wall Street guy, who came up through the business of
corporate debt and deal-making.

MALE FINANCIAL COMMENTATOR:

The Fed is seen continuing to raise interest rates going forward.

JAMES JACOBY:

The Fed had already begun raising rates and reversing QE. They’d call it quantitative tighten-
ing, or QT. Powell took office eager to accelerate the effort.

JEROME POWELL:

The really extraordinarily accommodative low interest rates that we needed when the econ-
omy was quite weak, we don’t need those anymore. They’re not appropriate anymore.

JAMES JACOBY:

Once again the market threw a tantrum.

MALE NEWSREADER:

The Dow closing down more than 500 points today.

FEMALE FINANCIAL COMMENTATOR:

A brutal week in the market. The Dow and the S&P now on track for their worst December
since the Great Depression.

CHRISTOPHER LEONARD:

The global financial system short circuits.

MALE FINANCIAL COMMENTATOR:

The decline will accelerate if Jay Powell doesn’t walk things back.

JAMES JACOBY:

The president threw a tantrum, too.

DONALD TRUMP:

I think the Fed has gone crazy.

It’s a correction that I think is caused by the Federal Reserve.

If the Fed knew what it was doing, they would lower rates and they would stop quantitative
tightening.

MALE NEWSREADER:

The president has been attacking the Fed chair on Twitter very often for raising interest
rates.

FEMALE NEWSREADER:

—with the Fed's decision to raise interest rates. He suggested it would hurt the economy.

MALE FINANCIAL REPORTER:

In a tweet, he said that quantitative tightening is a killer, should have done the exact
opposite.

JAMES JACOBY:

Powell would change course.

FEMALE NEWSREADER:

The Federal Reserve cut a key short-term interest rate today after raising it as recently as
December.

DION RABOUIN:
You see this complete reversal and what a lot of investors and economists saw as a capitula-
tion to financial markets. Financial markets don't like this, so the Fed's going to reverse
course. And that has defined Chair Powell ever since then.

MALE NEWSREADER:

A tricky balancing act for Chairman Powell. He’ll now face criticism that the Fed has bowed
to pressure from the White House or Wall Street or both, sacrificing the central bank's pre-
cious independence.

JIM CHANOS, Founder, Kynikos Associates:

The Fed blinked, and the Fed reversed course when the market was down 20% and went
from tightening policy to easing policy. And it became very clear to the market that saving
the stock market was now one of the Fed mandates, and I think that had really ominous
ramifications for the future.

CHAPTER EIGHT

A Giant Bloodsucker

JAMES JACOBY:

By 2019, the Fed’s easy money experiment had been going on for a decade.

MALE FINANCIAL REPORTER:

The Fed’s job isn't to help the president of the United States.

JAMES JACOBY:

What had started out as an emergency measure to save the economy had become the status
quo.

MALE FINANCIAL REPORTER:

Yes, quantitative easing is there, but it’s a tool you don’t want to overdo.

JAMES JACOBY:

And it was deepening the concerns about how the Fed was fueling troubling trends. Taking
advantage of the Fed’s low rates, private equity firms had been buying up huge swaths of
the economy with borrowed money—

MALE AUCTIONEER:
A hundred and ten thousand, 128,000.

MALE REPORTER:

For multimillion-dollar private equity firms, this is a bargain hunt.

JAMES JACOBY:

—concentrating wealth and ownership of everything from houses to hospitals.

BLACKSTONE SPOKESMAN:

Across Blackstone, we own a range of things. So SeaWorld, Busch Gardens, Birds Eye Foods,
Michaels Stores, Hilton and Waldorf. What we like to do is come in, buy either real estate or
companies. We see an opportunity to grow something faster, to invest capital, fix whatever
that is that's broken, and then sell it.

JAMES JACOBY:

The Fed’s policies had also been fueling a frenzy in Silicon Valley—

MALE REPORTER:

WeWork has announced it’s received a massive $4.4 billion investment from SoftBank Group.

JAMES JACOBY:

—leading to all sorts of excesses—

MALE NEWSREADER:

Venture capitalists pumped nearly half a billion dollars into the food delivery start-up
industry.

FEMALE NEWSREADER:

Airbnb is now valued at $10 billion, more than big hotels chains, including Hyatt and
Wyndham.

JAMES JACOBY:

—and enabling certain tech companies to disrupt and dominate entire industries without
ever turning a profit.

FEMALE FINANCIAL REPORTER:

WeWork is saying its total opportunity is $3 trillion dollars. I mean, that’s 3.5% of the entire
world’s GDP.
JAMES JACOBY:

But perhaps the most destabilizing consequence to the economy was how the Fed’s low in-
terest rates had been incentivizing public companies to take on more and more debt.

MALE FINANCIAL REPORTER:

Valuations are generally elevated, especially corporate debt.

MALE FINANCIAL COMMENTATOR:

We have flagged the rise in corporate debt.

FEMALE FINANCIAL REPORTER:

We have entirely too much corporate debt out there.

JAMES JACOBY:

I saw numerous studies and reports detailing the extent of the debt and how even marquee
companies were becoming so leveraged their credit ratings plummeted.

The Fed had hoped that companies would put all that borrowed money to good use and in-
vest in their workforce and their infrastructure. But in reality, it played out differently.

FEMALE NEWSREADER:

Buybacks.

MALE NEWSREADER:

Buying back stock.

FEMALE NEWSREADER:

Stock buybacks.

FEMALE NEWSREADER:

Stock buybacks robbing the American worker.

JAMES JACOBY:

Companies were often borrowing money to buy back their own stock, making the remaining
shares more valuable and the prices higher.

DION RABOUIN:
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.

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 facto-
ries. 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 headcounts. 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.

MALE FINANCIAL COMMENTATOR:

GE just authorized a $50 billion stock buyback.

JAMES JACOBY:

The numbers were astounding: More than $6 trillion in corporate buybacks during this easy
money decade after the financial crisis.

MALE FINANCIAL COMMENTATOR:

Fifty billion dollar stock buyback. That makes a big deal, big difference to the stock price.

SHEILA BAIR, Chair, FDIC, 2006-11:

Buybacks were an embarrassment, and so it’s just another example of things that used to be
viewed as kind of "ew" just going mainstream.

JAMES JACOBY:

Sheila Bair, a former top banking regulator, was issuing public warnings at the time that the
Fed was incentivizing bad behavior on Wall Street despite its best intentions.

SHEILA BAIR:

I can't fault the companies so much, because this interest rate environment creates very
strong economic incentives to do exactly what they're doing. It's hard to create a new prod-
uct. It's hard to come up with a new idea for a service. It's hard to build a plant and hire peo-
ple and run the organization. It's real easy to issue some debt and pay it out to your share-
holders 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 eco-
nomic activity and frankly been a drag on our economic growth, not a benefit.

FEMALE NEWSREADER:

Warren Buffett likes Apple’s buybacks.

MALE NEWSREADER:

Well, why wouldn’t he? He’s a shareholder, and they’re buying back $100 billion in stock.

RANA FOROOHAR:

When you get an age of easy money like what we've seen, you get a financialized economy
that's really more in service to itself. So, most of what it's doing is buying and selling exist-
ing assets rather than helping real businesses and real people make real investments.

But one of the things that's so diabolical, I would say, about easy money and our financial-
ized economy in general, is that we're all in it. We're all part of this Faustian bargain of pre-
tending that there's something wonderful happening in the real economy, when really it's
just Wall Street going up. But we all kind of want the market to go up, because we're in it,
with our pension funds, and with our 401(k)s. So everybody's money is kind of helping to
push this whole cycle along.

JAMES JACOBY:

Even some of the largest beneficiaries of this trend told me it made them uncomfortable,
like legendary investor Jeremy Grantham.

JEREMY GRANTHAM, Co-founder, GMO LLC:

In my career in America, the percentage of GDP that goes to finance has gone from 3 1/2 to 8
1/2 [laughs]. 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 real increase in income. We are just a
cost.

JAMES JACOBY:

When you say "we," you mean you and other members of the financial community have
been this kind of bloodsucker on the economy? Is that what you're saying?
JEREMY GRANTHAM:

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. It's taken a lot of ingenuity and sales-
manship to make this happen, and a lot of lobbying in Congress, etc., etc., and we have im-
posed on the rest of the economy the idea that banking and finance are utterly important at
all times. If you do anything wrong to us, the entire economy will collapse in ragged disarray.

JAMES JACOBY:

Corporate buybacks. The elevation of corporate debt. How was that viewed by you and oth-
ers at the Fed?

NEEL KASHKARI:

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 eas-
ier for us just to buy back our stock." That's concerning in terms of the future of our econo-
my, but that's not because of the Fed. So we pay attention to it, it really matters, but in my
view, we don't—It's not something we control.

JAMES JACOBY:

Kashkari and others have pointed out that it’s the job of Congress and regulators to address
some of these concerning trends. And when we sat down in 2021, he was quick to dispute
the criticism that the Fed’s policies had really just been boosting financial markets and help-
ing Wall Street.

We hear it all the time from Wall Street people, that basically that prices are completely un-
tethered from some fundamental reality. There is this idea on Wall Street that the Fed has
our back, and that because you may have well-intentioned policies that are trying to get
everybody to work, there is this side effect, this unintended side effect, of just kind of really
helping the rich.

NEEL KASHKARI:

That argument ignores the benefit to the poor. And for 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.

CHAPTER NINE

A Source of Instability

JAMES JACOBY:

Beyond the debate over the effects on Main Street, there were increasing concerns about
the risks on Wall Street. What would happen to all those companies that had gone deep into
debt—and their investors—if there was a downturn?

But some of the most dire warnings were about a largely unregulated sector of the financial
world that had become a key player in all the borrowing going on.

MOHAMED A. EL-ERIAN:

Finance was getting bigger and bigger and riskier and riskier. And then there was something
else going on that was only noticed later on. The risk had migrated to what we call the non-
banks, to the financial system that are not banks, and it had morphed, it had changed. And
in doing so, the ability to understand what was going on came down, because the non-
banks are not supervised and regulated as well as the banks.

The phrase that was used at the time was "shadow banking." That there were banking activi-
ties happening, but they were happening in the shadows, in the shadows of the banks
themselves. These are the asset management companies, these are the hedge funds. These
are not well-regulated, but suddenly become systemically important.

JAMES JACOBY:

When it comes to shadow banks, what was your big concern?

LEV MENAND, Economist, Fed. Reserve Bank of NY, 2016-17:

The core of the problem of the shadow banking system is that it's extremely fragile.

JAMES JACOBY:
Lev Menand, who’d been an economic adviser to the Fed and Treasury Department, was
warning that even though Congress had imposed regulations on big banks after the financial
crisis, shadow banks were largely untouched—and they were endangering the whole
system.

LEV MENAND:

Anybody who is an investor in a shadow bank, who has their money in a shadow bank in-
stead of a real bank, is going to have an incentive to withdraw in the face of any uncertain-
ty. So little economic shocks that cause asset prices to fall have the potential to trigger runs
and panics. And so 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.

JEROME POWELL:

Let me start by saying that my colleagues and I strongly—

JAMES JACOBY:

That potential instability posed by the shadow banking system was on the Fed’s radar.

REP. JIM HIMES, (D) CT:

How are you thinking about potential risk bubbling up in the broader shadow banking
system?

JEROME POWELL:

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 we think
it's something that requires serious monitoring.

JAMES JACOBY:

But by the end of 2019, little action had been taken by the Fed, financial regulators or Con-
gress to rein in the shadow banks and other growing risks. The system remained vulnerable
to a shock. It would arrive in early 2020.

CHAPTER 10

Whatever It Takes

MALE NEWSREADER:
A preliminary investigation into a mysterious pneumonia outbreak in Wuhan, China, has
identified a previously unknown coronavirus—

NEEL KASHKARI:

When the pandemic hit, it was so unlike anything any of us have experienced in our
lifetimes.

MALE NEWSREADER:

Already, 45 cases have been reported in China, including two deaths. The victims are thought
to have contracted the virus in a meat and seafood market.

NEEL KASHKARI:

We'd been paying attention to what was happening in China for a few months.

MALE NEWSREADER:

There are new images out of Wuhan that purport to show the dire conditions in hospital.

NEEL KASHKARI:

I was calling my contacts, global businesses that had big operations in China, to understand
what their employees and staffs were seeing. And we were all trying to learn as much as we
can about pandemics and what it's likely going to mean.

FEMALE REPORTER:

Major selloff across Europe this morning.

NEEL KASHKARI:

I think we all figured out very quickly the pandemic and the virus would drive the economy.

FEMALE NEWSREADER:

Investors are spooked by the growing number of infections outside China.

NEEL KASHKARI:

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.

MALE NEWSREADER:
What you have here are concerns, fears, worries and deep uncertainties about what’s likely
to happen next.

NEEL KASHKARI:

People were scared. Investors were scared. Individuals were scared. And they said, "You
know what? I just want cash."

FEMALE NEWSREADER:

Markets giving us the worst two-day point drop ever in history.

NEEL KASHKARI:

"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.

MALE FINANCIAL TRADER 1:

On the bell, on the bell!

MALE NEWSREADER 1:

Means the first circuit breaker—

MALE NEWSREADER 2:

For whom the bell tolls.

MALE NEWSREADER 1:

—has been triggered.

MALE FINANCIAL TRADER 2:

I knew we were going to [unintelligible].

JAMES JACOBY:

All the weaknesses of the system that had built up over the years of easy money were being
exposed.

MOHAMED A. EL-ERIAN:

Market functioning was starting to cascade into failure.

MALE NEWSREADER:
The Dow plunging again today. The 11-year bull market has ended.

DION RABOUIN:

Stocks were just on a downward free fall. You had credit markets seizing up. People were
selling anything that wasn't nailed down.

MALE FLOOR TRADER:

I can’t do anything, I'm frozen.

JAMES JACOBY:

Attention was focused on the highly leveraged shadow banks.

LEV MENAND:

What we saw 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 underly-
ing vulnerabilities in your monetary system that you haven't resolved.

JAMES JACOBY:

The Fed responded to this new crisis with an old tool—once again, quantitative easing.

FEMALE NEWSREADER:

The Fed will try to steady the ship after a week that echoed the financial crisis of 12 years
ago.

JAMES JACOBY:

It bought up hundreds of billions in debt from financial institutions.

MALE REPORTER:

We have seen the Fed inject money into the economy in the last couple of days.

JAMES JACOBY:

By mid-March they had made more than a trillion dollars available to the shadow banks and
they cut interest rates back down to near zero.

FEMALE NEWSREADER:

What that tells all of us is that the economic impact of the coronavirus is going to be
crippling.
LEV MENAND:

The Federal Reserve lent half a trillion dollars to securities dealers, half a trillion dollars to
foreign central banks, bought $2 trillion of Treasury securities, another trillion dollars of
mortgage-backed securities. It flooded the zone with new government cash to stabilize this
system.

FEMALE NEWSREADER:

Incredible effort from the Federal Reserve, taking major action to—

CHRISTOPHER LEONARD:

Everything that Ben Bernanke's Fed had done over the course of the financial crisis of 2008,
Jay Powell did that in a weekend. The scary part is it wasn't enough. The crisis continued,
and they had to intervene even further.

MALE NEWSREADER:

Good morning. We are here for you on this morning when the stock market has taken a dra-
matic plunge. At least—

FEMALE NEWSREADER:

—as the emergency rate cut failed to calm investors. In fact, it did the opposite. Futures im-
mediately dropped—

JAMES JACOBY:

Despite the Fed’s actions, the corporate debt market froze up and companies were unable to
pay their bills, putting the wider financial system at risk.

RANA FOROOHAR:

There's just this corporate debt picture out there, and we're just beginning to see how those
dominoes are going to fall.

MOHAMED A. EL-ERIAN:

Then comes the realization that we have to lock down.

FEMALE NEWSREADER:

The list of closings and activities being suspended is growing from coast to coast.

JAMES JACOBY:
In the White House, Eric Ueland was the Trump administration’s point person dealing with
Congress on the response.

ERIC UELAND, Dir., Trump Office of Legislative Affairs:

Every day and into the evening as we're going through and hearing more information and
trying to explore the health side of this exploding virus crisis, there's also an economic im-
pact that is just getting larger and larger and more significant. And so what's the impact on
a community when suddenly you're telling it a significant amount of economic activity
needs to slow or actually cease? That's pretty dramatic.

FEMALE NEWSREADER:

Three point four million people filed for unemployment last week.

FEMALE NEWSREADER:

You can't really compare this to the financial crisis, or even 9/11. There's never been a time in
history where the U.S. government told the economy to shut down.

ERIC UELAND:

Then we're talking about impacts on businesses—from small businessmen, who are the real
heartbeat of our economy, communities, and how to keep people employed. What's the im-
pact on industries and significant economic sectors of the American economy? But the policy
response that we need to design and hopefully execute here inside this crisis is a lot broader
than anybody conceived up to that point.

REP. ANTHONY BROWN, (D) MD:

The motion is adopted.

JAMES JACOBY:

In a rare moment of bipartisanship, the Trump administration and Congress would end up
passing the largest economic stimulus ever.

DONALD TRUMP:

All right, thank you, all.

JAMES JACOBY:

The $2.2 trillion CARES Act, which unlike after the crisis in 2008, was aimed not just at Wall
Street but directly at individuals and small businesses as well.
ERIC UELAND:

You encouraged your team to be bold, be brave and go big, and we certainly delivered to-
day: $6.2 trillion.

MALE NEWSREADER:

You ain't seen nothing yet, from what the Fed is about to do.

JAMES JACOBY:

Part of the money would go to the Fed, which announced a new range of loan programs
worth trillions. And for the first time, it began buying up corporate debt. The easy money
experiment went into overdrive.

CHRISTOPHER LEONARD:

A guy inside the Fed was telling me that what they were doing was not that sophisticated.
They were just looking at any part of the market that looked like it was on fire and dumping
money on it.

FEMALE NEWSREADER:

We often talk about the Federal Reserve using a bazooka to tackle markets and the econo-
my. This is bazooka, cannons and tanks all at once.

DION RABOUIN, Axios, 2018-21:

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."

JEROME POWELL:

Many of the programs that we’re undertaking rely on emergency lending powers that are
available only in very unusual circumstances such as those we find ourselves in today. We
will continue to use these powers forcefully, proactively and aggressively until we're confi-
dent that we are solidly on the road to recovery.

JAMES JACOBY:

I don't think most people are aware that we came this close to a bona fide financial crisis.

LEV MENAND:
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 se-
vere along many metrics than anything we saw in 2008, the government's response was
more powerful in certain respects. And we're lucky that the government was successful or
we could be living through a true depression.

CHAPTER ELEVEN

Moral Hazard

MALE NEWSREADER:

Everything has been thrown at this market to try to keep it floating.

MALE NEWSREADER:

The Federal Reserve now getting into junk bonds.

MALE NEWSREADER:

It's a joke. The market is manipulated. They're printing trillions of dollars to pump up the
value of publicly traded stocks.

JAMES JACOBY:

In trying to keep workers employed and companies afloat, the Fed had also used its power
to rescue some of the riskiest parts of the financial system, like the junk bond market.

MALE FINANCIAL COMMENTATOR 1:

Is this just like a high-yield junk bond bailout? I mean, I don’t get—

MALE FINANCIAL COMMENTATOR 2:

Yeah, we've got to live with it now, Tom.

MALE FINANCIAL COMMENTATOR 1:

—why this is an emergency.

MALE FINANCIAL COMMENTATOR 2:

We've got to live with it.

JAMES JACOBY:
To the critics, the Fed was rewarding the same players and practices that had helped make
the system so fragile in the first place.

JEREMY GRANTHAM, Co-founder, GMO LLC:

Over the years, we've been trained to believe that the Fed is on our side. What the Fed has
trained us to believe is that if we make a bet in the market and we win, we're on our own.
We get to keep the profits. If we lose, they will bend every effort and every dollar they can
get their hands on, one way or another, to bail us out. This is asymmetry of the most splen-
did kind.

MALE CAMERA OPERATOR:

A speeds. Go ahead and clap it off, please.

JAMES JACOBY:

Billionaire bond investor Howard Marks called the Fed out at the time, saying it was under-
cutting the way the free market is supposed to work.

HOWARD MARKS, Co-founder & co-chair, Oaktree Capital Management:

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 play it aggressively and succeed, you make
money. If you play it aggressively and fail, you'll get bailed out.

MALE NEWSREADER:

We are truly getting to a point of moral hazard.

MALE NEWSREADER:

Do we want to live in a world—Do central banks themselves want to live in a world where
their interventions are so central to the market outlook and of market performance?

JAMES JACOBY:

So has moral hazard gotten worse as a result of this bailout?

HOWARD MARKS:
There’s no barometer of moral hazard, so I can’t give you a reading. All I can say is that for
the last year or so, risk-taking has been rewarded, and that tends to bring on more risk-
taking.

FEMALE FINANCIAL COMMENTATOR:

I don't think it's anything that investors should be applauding, necessarily, because it's a nail
in the coffin of capitalism.

MALE FINANCIAL COMMENTATOR:

This is going to be a test of whether or not capitalism is just a call sign when CEOs are look-
ing for bailouts.

JAMES JACOBY:

Do you see moral hazard in what has just happened?

SHEILA BAIR, Chair, FDIC, 2006-11:

Oh, absolutely. I think now the entire business community has had a taste of bailouts
[laughs]. And boy, doesn't it work really, really nicely. Yeah, so I fear that now, the Fed step-
ping in, not just to bail out Wall Street, but the entire corporate America, is starting to be
embedded into people's thinking.

People talk about the survival of capitalism, but this is the biggest threat to capitalism. In
good times, when anybody can make money, you reap those profits. In bad times, the Fed
just keeps stepping in. You have this never-ending ratchet up. The markets never correct.

JAMES JACOBY:

It's like a no-lose casino.

SHEILA BAIR:

It is. It is a no-lose casino. That's exactly right.

JAMES JACOBY:

This is the second time in 12 years that you and your institution have had to funnel into the
financial system trillions of dollars, and there is this sense that the financial markets have an
iron-clad backstop from the Fed.

NEEL KASHKARI, Pres. & CEO, Fed. Reserve Bank of Minneapolis:

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.

JAMES JACOBY:

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?

NEEL KASHKARI:

Well, I think all financial regulators that have a seat at the table have responsibility for what
was left incomplete after 2008 and where we go from here. We need to use this crisis to fin-
ish the work that we did not finish after '08.

JAMES JACOBY:

With all due respect, 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?

NEEL KASHKARI:

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.

CHAPTER TWELVE

Orgy of Speculation

FEMALE NEWSREADER:

The coronavirus pandemic has left millions of Americans out of work.

MALE FOOD BANK VOLUNTEER:

The people have gone now without four or five or six or seven paychecks, and it's starting to
catch up. They need food. It's the most basic thing.

JAMES JACOBY:

In the months following the Fed’s rescue, we saw a troubling disparity.

MALE BBC REPORTER:

Have you got any income at the moment?

FEMALE SPEAKER:

No. No. And we have kids, too, so—

JAMES JACOBY:

As businesses were shuttered and millions of Americans were living on the edge, the mar-
kets did indeed look like a no-lose casino, thanks to the Fed's safety net.

MALE NEWSREADER:

The economy may be facing major hardships, but the stock market is thriving.

MALE NEWSREADER:

The best quarter for the Dow in 33 years, it surged 17%.

MOHAMED A. EL-ERIAN, Chief economic advisor, Allianz:

We ended up in a world where bad news was good news.

MALE NEWSREADER:

The unemployment rate is now a staggering 14.7%

MOHAMED A. EL-ERIAN:

Bad news for the economy was good news for markets. Why?

FEMALE NEWSREADER:

In the midst of all the economic turmoil, Wall Street actually closed out its best week in 45
years.

MOHAMED A. EL-ERIAN:

Because when people saw bad news, they said, "The Fed will have to do more."

MALE NEWSREADER:

Anna, today the markets say, “Bring on the next quarter!”

MOHAMED A. EL-ERIAN:

And then over the next few months we saw one record after another in stock markets.

MALE NEWSREADER:

Stocks surging even as America enters its darkest chapter yet of this pandemic.
CHRISTOPHER LEONARD, Author, The Lords of Easy Money:

Even after the initial emergency passed the Fed was pumping $120 billion a month into the
economy through quantitative easing on an indefinite basis. The fire hose was simply turned
on and left on the curb. The extraordinary measures of 2010 literally become the daily oper-
ating procedure of 2020.

FEMALE NEWSREADER:

The S&P 500 hitting another record high today after surging 55%.

CHRISTOPHER LEONARD:

The stock market didn't just regain all of its losses in a matter of months but started break-
ing new records.

MALE NEWSREADER:

I see quite a bit of green on the markets this morning. Dow, S&P, NASDAQ—all of them
higher.

JAMES JACOBY:

Over the next two years, tech stocks would soar.

MALE NEWSREADER:

Apple is now the first publicly listed U.S. company to be valued at $2 trillion.

MALE NEWSREADER:

Tesla shares are soaring.

MALE NEWSREADER:

This company has just gone through the roof this year. The stock price has more than
quadrupled.

FEMALE NEWSREADER:

Right now it's a seller's market, and homes are selling fast.

JAMES JACOBY:

The price of real estate would shoot up across the country.

MALE NEWSREADER:
The housing market has never been hotter.

JAMES JACOBY:

And corporate America would take on even more debt, which investors gobbled up.

MALE NEWSREADER:

Massive issuance of corporate debt.

FEMALE NEWSREADER:

More than $10.5 trillion.

JAMES JACOBY:

For the richest Americans, it was an extraordinary time.

SEN. BERNIE SANDERS, (I) VT:

Mark Zuckerberg has increased his wealth during the pandemic by more than $37 billion.

MALE NEWSREADER:

Elon Musk has added over $10 billion to his wealth just this week.

MALE NEWSREADER:

Jeff Bezos reportedly earning over $50 billion this year.

MALE FINANCIAL REPORTER:

Billionaires now hold two-thirds more in wealth than the bottom half of the U.S. population.
Let that sink in for a moment. And as I mentioned—

DION RABOUIN:

Just the billionaires in the United States, from March 2020 to February 2021, have grown
their wealth by $1.3 trillion. One point three trillion dollars.

JEREMY GRANTHAM:

It's the burst of euphoria that typically brings these things to an end.

JAMES JACOBY:

But even some of those billionaires were worried the Fed was fueling a dangerous bubble.

JEREMY GRANTHAM:
The housing market, the stock market and the bond market, all overpriced at the same time.
If the Fed knew what it was doing it would not allow bubbles of this magnitude to take
place.

MALE SOCIAL MEDIA PERSONALITY:

Smash the "like" button. Invest consistently.

JAMES JACOBY:

But the epic rise in the markets proved irresistible to millions of new small investors, too.

FEMALE SOCIAL MEDIA PERSONALITY:

So when a stock does well because of internal or external factors, you secure the bag, honey.

ROBINHOOD COMMERCIAL:

An app that's changing the way we do money.

DION RABOUIN:

All these brokerage platforms saw the largest growth of new users they'd ever seen because
people said, "Now is 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—"

FEMALE NEWSREADER:

—the S&P 500 now on track for the best week going back since 2008.

DION RABOUIN:

"—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 got to buy stocks."

FEMALE SOCIAL MEDIA PERSONALITY:

I’m going to take my stimulus check and I’m going to put it in the stock market.

DION RABOUIN:

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.

ROARING KITTY, Social media personality:

Welcome, Declan, Michael Lee—ah, so many people. Bob Smith—

MALE SOCIAL MEDIA PERSONALITY:

We've got the get the Dow Jones up!

JAMES JACOBY:

Fed Chair Powell became a kind of cult figure, master of the money printer.

REDDIT MEME VIDEO:

Money printer go BRRR.

MALE SOCIAL MEDIA PERSONALITY:

Invest in these four tickers. I’ll put them right above.

JAMES JACOBY:

And billions poured into so-called “meme stocks.”

ROARING KITTY:

This GameStop situation, we will never encounter a setup like this again.

JAMES JACOBY:

And new, risky asset classes like cryptocurrency took on a life of their own.

FEMALE NEWSREADER:

Bitcoin.

FEMALE NEWSREADER:

Bitcoin.

FEMALE NEWSREADER:

Bitcoin has been on a wild ride.

MALE NEWSREADER:

It really is the new currency.

DION RABOUIN:

There's just too much money. [Laughs] People just have so much money and there's not real-
ly places to put it. So what folks have started doing is investing in these very speculative as-
sets, things like bitcoin, because they're just seeing ridiculous rates of return. It doesn't really
matter what the underlying value of the thing is, just like it doesn't matter what the under-
lying value of a company is, right? As long as the stock price goes up, you want to buy be-
cause the stock is going to keep going up and then you'll sell. It's the greater fool theory of
investing.

STEPHEN COLBERT:

Cryptocurrency.

BILL MAHER:

Cryptocurrency.

"SILICON VALLEY" VIDEO CLIP:

Cryptocurrency.

"THE SIMPSONS" VIDEO CLIP:

Cryptocurrency.

ELON MUSK ON SNL:

Blockchain technology.

BEN McKENZIE, Actor:

It's actually—This is actually a very comfortable chair.

JAMES JACOBY:

Crypto was all the rage in Hollywood, where actor Ben McKenzie saw it being pushed on an
unsuspecting public. With reporter Jacob Silverman, he began raising alarms.

BEN McKENZIE:

Crypto exchanges primarily were driving the advertising dollars here, so it's not unreason-
able to think that these folks got paid not just multiple millions of dollars, but potentially
tens of millions of dollars to sell this stuff.

MEGAN THEE STALLION:

Bitcoin is a new kind of money.

NEIL PATRICK HARRIS:

Cash into crypto.

MALE SPEAKER:
What's up?

TOM BRADY:

I'm getting into crypto with FTX. You in?

MATT DAMON:

History is filled with "almosts."

BEN McKENZIE:

When you're talking about an ad like the Matt Damon ad that went viral, and not in a good
way. What does he work, one day? He walks around a studio and points at stuff that isn't
there and talks about how brave you need to be to buy crypto? It's a pretty easy paycheck.

MATT DAMON:

Fortune favors the brave.

BEN McKENZIE:

I certainly understand how easy it is to get lured in to cryptocurrency, especially when you
see, at least for one brief, shining moment, all of your friends and neighbors or people you
follow on social media getting rich. Of course you're going to try it.

JAMES JACOBY:

How does the Fed figure into this? Was there just so much money sloshing around that it
just needed to go somewhere, and crypto was one of those places where it just was like, "All
right, we'll throw it in there."

BEN McKENZIE:

Yeah. When money is cheap, people gamble. It's just undeniable. And fraud runs rampant.

JACOB SILVERMAN, Freelance reporter:

You would hear, even within crypto circles, people started talking about Ponzi schemes in a
non-derisive way, saying, "Well, maybe we're doing new types of economics." There are all
forms of irrational thinking, and rationalization also, that come together to help sort of con-
jure this illusion that there's value here until something pops it.

MALE CAMERA OPERATOR:

Sound speed.
JAMES JACOBY:

A number of serious investors, like Jim Chanos, began speaking out.

JIM CHANOS, Founder, Kynikos Associates:

It just became this orgy of speculation by the first half of 2021. Anyone who wanted to raise
money for anything could do so.

The amount of fraud we saw being floated on top of legitimate companies was really con-
cerning, particularly in places like the crypto space, which was sort of not being regulated.
People were creating new coins or NFTs and selling them on to the public, who was eager to
get in on the latest fad. And that bothered me.

JAMES JACOBY:

And you would draw a direct link between what the Fed was doing and the crypto craze?

JIM CHANOS:

Well I just—It was all part of speculation that led to people doing really silly things with
their money. At the end of bull markets, at the end of speculative markets, all kinds of crazy
schemes get floated to separate people from their money.

NEEL KASHKARI:

At least these are different questions and not the same question over and over again.

JAMES JACOBY:

Was last time the same question over and over again?

NEEL KASHKARI:

It was the same question for 90 minutes.

JAMES JACOBY:

I don't know about that.

NEEL KASHKARI:

Yes, trust me. I have a tape of it.

JAMES JACOBY:

Oh, yeah?
When I sat down with Neel Kashkari again recently, I asked him how the madness in the
markets looked to the Fed.

It kind of was mania at the time, but the Fed was continuing to flood the markets with liq-
uidity, with money. Did you not see all of that mania as a sign of overheating? That an indi-
cator in the markets was telling you something about what was happening in the economy?

NEEL KASHKARI:

Yeah, I mean, we see froth in financial markets not infrequently. There have been other times
when we've seen booms in financial markets. If we are going to try to raise interest rates to
control excitement in the stock market, the cost—Who's going to bear the cost of that? The
people who are out of work today. If we had said, "Let’s go raise interest rates to try to keep
crypto down, keep bitcoin from going too high, and we're going to keep millions of Ameri-
cans out of work as the way to do that," that strikes me as a bad trade.

CHAPTER THIRTEEN

Economics 101

MALE VOICE:

I think interest rates and inflation are going to rise well above what the Fed has projected.

JAMES JACOBY:

As the markets were heating up, so were concerns that the Fed's policies would fuel
inflation.

MALE NEWSREADER:

Prices are rising at the fastest pace in more than a decade.

JAMES JACOBY:

But it wasn’t just what the Fed was doing.

PRESIDENT JOE BIDEN:

I'm going to help the American people who are hurting now.

JAMES JACOBY:

The new Biden administration was sending $1,400 checks to many Americans—

FEMALE NEWSREADER:
—stimulus money from the latest COVID relief bill is arriving in bank accounts all over the
country.

JAMES JACOBY:

—extending unemployment benefits, tax credits and other relief programs.

LARRY SUMMERS:

I think there is a real possibility that within the year we're going to be dealing with the most
serious incipient inflation problem that we have faced in the last 40 years.

JAMES JACOBY:

Critics like former Treasury Secretary Larry Summers were publicly expressing concern that
all the stimulus money from the Fed and the government would boost economic demand at
a time when supply problems from the pandemic were still an issue.

NOURIEL ROUBINI, Economist:

People like myself, like Larry Summers and other, saw that that massive stimulus—it was un-
precedented, an order of magnitude greater than the one we had after the global financial
crisis—would lead to excessive demand, overheating and inflation.

So we had an unprecedented fiscal stimulus. An unprecedented monetary stimulus. We had

bail-out checks sent to everybody—every household, every firm, every financial institution.
It was too much and should have been more selective.

DION RABOUIN:

There really just was all this money being pushed out in the economy. At the same time
you've got the Federal Reserve, they're pushing out another $4 or $5 trillion into the econo-
my, and so prices rose.

MALE NEWSREADER:

Core CPI inflation is set to rise sharply over the next three months.

DION RABOUIN:

This goes back to your Economics 101 textbook, right? When there's too much money chas-
ing too few goods, prices go up, and that drives inflation higher.

JAMES JACOBY:

It only took a few months for the warnings to come true.

FEMALE NEWSREADER:

It seems like everything across the board is becoming more expensive.

MALE ON-STREET INTERVIEW:

Gas prices going up, food prices going up.

JAMES JACOBY:

But the Fed didn’t flinch.

MALE NEWSREADER:

A surge in energy, housing and food costs.

JAMES JACOBY:

It didn’t raise interest rates or pull back on quantitative easing.

MALE REPORTER:

The question now haunting economists is whether these price hikes are a pandemic blip or a
sign of a long-term threat to the economy.

JAMES JACOBY:

And they had a word for the highest inflation in more than a decade.

MALE NEWSREADER:

Transitory.

FEMALE NEWSREADER:

Transitory.

MALE NEWSREADER:

Transitory.

MALE NEWSREADER:

Transitory.

REP. PAT TOOMEY, (R) PA:

Now, I know you believe this is transitory, but everything's transitory. Life is transitory.

MOHAMED A. EL-ERIAN:
This inflation round is not transitory. This is a very hot inflation environment, and the longer
the central banks wait, the greater the risk.

I reacted quite strongly to the assertion that inflation was going to be transitory. I remem-
ber warning at that time that we simply don't have enough evidence that it's going to be
transitory.

Transitory is a very reassuring term, because I tell you, "Don't worry about it, it is temporary.
It is reversible. Therefore you don't need to change behavior. So yes, we have inflation, but
don't worry."

JAMES JACOBY:

What kind of evidence were you seeing that this may be stickier inflation than it is
transitory?

MOHAMED A. EL-ERIAN:

One, what companies were telling us. And companies were saying, "I am not sure it's transi-
tory. This is beyond the pandemic." I was talking to CEOs, and they were giving me a very
clear message, the same message that was in one earning call after another earning call:
They did not view the disruptions as being transitory.

JAMES JACOBY:

Why transitory? Why that word? What did you think at the time?

NEEL KASHKARI:

Well, saw a number of factors that we thought were conspiring to lead to high prices and
that many of those factors would fade away over time. So for example, supply chains we
saw were getting gummed up. But we also know that businesses were working very hard to
un-gum those up, to untangle those supply chains. So we thought that they'd probably
make more progress there than we expected.

JAMES JACOBY:

The Business Roundtable, for instance, was coming out and saying—polling their CEOs and
saying, "Look, we're seeing inflation everywhere in what we're doing, OK?" How does some-
thing like that land for you at that time?

NEEL KASHKARI:
I mean, I take it seriously. I don't dismiss it. But then I map it against the data that we're see-
ing. But I'll just say if we did not have an outlier view on inflation or the economy overall, if
you look at the consensus of forecasts of my experts in America, on Wall Street, around the
world, they all basically had the same forecast, which is inflation's going to be transitory. It's
going to come back down. Yes, there were outliers, but if you look at the consensus, we
were well within the consensus of the experts who study this.

JAMES JACOBY:

Any regret about not taking the foot off the pedal, seeing what, for instance, the federal
government was doing at that point in time?

NEEL KASHKARI:

Well, I think, again, knowing what I know now, absolutely.

JAMES JACOBY:

I put the same questions to Brian Deese, one of the chief architects of the Biden administra-
tion’s $1.9 trillion Rescue Plan.

Were the inflation concerns at the time part of your internal deliberation about doing the
Rescue Act?

BRIAN DEESE, Dir., National Economic Council, 2021-23:

It was an issue that we were always aware of and focused on and weighing in the weighing
and balancing that you have to make when you do policymaking in the face of uncertainty.

JAMES JACOBY:

You’re saying that you knew that that could be a potential tradeoff.

BRIAN DEESE:

It is always a tradeoff. It was always a tradeoff, and the logic behind our actions was to get
ahead of the pandemic, help bridge for families and businesses and also ensure against the
downside risks to our economy. And I think if we look back now and recognize that the infla-
tion challenge that the U.S. economy faces is not unique, it is a global challenge. Inflation is
higher in Europe and the U.K. today than it is in the United States.

JAMES JACOBY:
Was there a concern at the White House that the Fed was running the economy too hot for
too long?

BRIAN DEESE:

That is a question that I will institutionally not answer.

JAMES JACOBY:

Why?

BRIAN DEESE:

Because one of the hallmarks of our system is the independence of monetary policymaking.
This has been something that you can't take for granted in our system, that prior presidents
have not necessarily honored. But this president, this administration is quite committed to
the proposition that the strength of our system, one of the strengths of the U.S. economy, is
the trust that people have in the independence of our monetary authority. And therefore we
make deliberate choices to not make comments on questions like that.

FEMALE NEWSREADER:

We're going to begin tonight with the rough road to recovery for America's economy.

JAMES JACOBY:

Through late 2021 and into 2022, stimulus from the Fed and the government would con-
tribute to a rapid economic recovery.

JOE BIDEN:

As our economy has come roaring back, we've seen some price increases.

JAMES JACOBY:

But inflation continued climbing at the fastest pace in decades, hitting the poor and middle
class the hardest—

MALE REPORTER:

You know, these price increases will be a real impact on families, and they're not going away
any time soon.

JAMES JACOBY:

—the people the Fed had hoped its easy money policies would help the most.
CHAPTER FOURTEEN

A Different World

MALE NEWSREADER:

This is the epicenter of this rise in inflation.

FEMALE NEWSREADER:

—the highest inflation rate of any major city in the country. Housing prices—

JAMES JACOBY:

No city had it worse than Phoenix, which had the highest inflation rate in the nation. When I
visited St. Mary’s Food Bank, the cars were lined up first thing in the morning.

TOM KERTIS, Pres. and CEO, St. Mary’s Food Bank:

Every day, my key team, we get an email with the number of people that come through.
Yesterday was a 1,007 households. And it's not people, it's households coming through.
They're feeding four or five people. And it's like, wow. And that's five days a week.

They just don't have any other choice. We're hearing that their budget is being eaten up by
all the impacts of inflation, and it's either that or they don't have food for their children.

FEMALE SPEAKER 1:

I'm a single mom, so sometimes at the end of the month I need the assistance. Because life
has gotten a lot more expensive, and being a single parent, I can feel it. It's like choosing be-
tween your rent and your food.

FEMALE SPEAKER 2:

It's like, yesterday I spent a hundred bucks just to get cereal, milk and bread. And eggs. And
that was basically it. And some lunch meat. And that was a hundred bucks, and that was our
week's worth of food. And that's not going to feed six kids.

JAMES JACOBY:

When you did start seeing an increase in people coming?

TOM KERTIS:
It was the end of February this year, 2022. We saw a slight uptick, didn't know if it was real,
but it kept climbing. And it's climbed all through summer. We thought that was a plateau,
and then at the end of summer, it's continued to climb. And here we are today with 1,000
households coming through. We've seen a 26% increase year over year in the number of
people coming to us for help.

JAMES JACOBY:

From 2021 to 2022?

TOM KERTIS:

Yes. And of that, 18% of the people are first-time people coming to the food bank.

JAMES JACOBY:

Is what you're seeing now actually worse than what you saw during the height of the
pandemic?

TOM KERTIS:

It is worse now. And it's worse because the food was more available during the pandemic.
We're seeing food availability going down. What was once predictable doesn't appear to be
predictable anymore. It's probably going to get worse before it's going to get better,
unfortunately.

JAMES JACOBY:

What brings you here?

MALE SPEAKER:

I'm just trying to get a little extra food. Can't really—you know, trying to stretch the dollar.

JAMES JACOBY:

Yeah.

MALE SPEAKER:

It's not hard to spend $200 at a grocery store and only have one week's worth of food for
two people.

JAMES JACOBY:

Have you been coming here for a long time, or this is more recent?
MALE SPEAKER:

It's more recent, since probably the last six months I've been coming here.

JAMES JACOBY:

Are you working? Are you—

MALE SPEAKER:

Yeah, I'm working, but it's just not enough.

JAMES JACOBY:

We heard similar stories from credit counselors and their clients at a money management
counseling center.

KATE BULGER, Dir. of research, Money Management Intl.:

You know, we're getting all these folks who are telling us for the first time they can't pay
their bills, they can't make ends meet. And often when when they say that, they say, "I'm a
good person. I've always paid my bills before."

CRAIG BLECK, Counselor, Money Management Intl.:

With the inflation, they have just eaten away their savings. People have told me, "I did the
three to six months of savings for an emergency fund. That’s gone."

JAMES JACOBY:

So you're saying that it's not just folks that you're seeing that have had chronic problems
with credit or—these are, there's a lot of new people that are coming to you now. OK.

WANDA JENKINS, Counselor, Money Management Intl.:

Yeah, a lot of new people.

KATE BULGER:

These are folks who had been making it before and were solidly middle class now, and today
are struggling to make ends meet, struggling to keep their utilities on, struggling to stay in
their apartment or their home, and are really in danger of falling out of the middle class. It's
a shrinking middle class problem.

JAMES JACOBY:

How real are rent increases right now?

DOMINIQUE PAYTON, Client:

At a local shelter here in Phoenix, we've seen an uptick of new families and individuals com-
ing in that just could no longer afford where they were living. Because even where they
were living, their rents increase $500 to $1,000 in one month.

WANDA JENKINS:

Sometimes clients have called me—now, and they're angry when they call. They need our
help, but they're angry, and I understand it. They're ashamed and they're crying and all of
that, but I was there. I was one of them.

JAMES JACOBY:

Are your numbers up in terms of people that are seeking out help at the moment?

KATE BULGER:

So it's not just that we're getting more calls, it's that the folks who are calling us are in
greater distress. Because now instead of calling us because they're just behind on their cred-
it cards, they're calling us because they're behind on their credit cards and they're behind on
their utilities and they're struggling with their housing payment. They are facing greater
economic challenges I think and more diverse economic challenges than what they faced just
a few years ago.

JOHN ADEL, Client:

It's a different world, but I have to tell you, I go to the store and I am just shocked. I'm keep-
ing my nose above the waves right now, but I feel like that wave is a lot bigger than I
thought and it's behind me and it's coming.

CHAPTER FIFTEEN

Things are Gonna Get Harder

JAMES JACOBY:

In the fall of 2021, with inflation at 6.8%—well above the Fed’s 2% target—Chairman Powell
acknowledged it might not be transitory after all.

JEROME POWELL:
So I think the word "transitory" has different meanings to different people. To many it car-
ries a sense of short-lived. We tended to use it to mean that it won’t leave a permanent
mark in the form of higher inflation. I think it’s probably a good time to retire that word and
try to explain more clearly what we mean.

JAMES JACOBY:

It would be the start of a new phase in the easy money experiment.

JEROME POWELL:

The committee is determined to take the measures necessary to restore price stability. Thank
you. I look forward to your questions.

JAMES JACOBY:

Over several months, they’d raise interest rates.

May 2022

JEROME POWELL:

Good afternoon. It's nice to see everyone in person for the first time in a couple of years.

JAMES JACOBY:

In response to the rising inflation, the Fed would also pause quantitative easing and begin
tightening.

JEROME POWELL:

At today's meeting, the committee raised the target range for the federal funds rate. We
also decided to begin the process of reducing the size of our balance sheet.

MALE FINANCIAL COMMENTATOR:

But neither Powell nor any other Fed official has explained with any precision just how far
the Fed will go.

MALE NEWSREADER:

The Federal Reserve raising a key interest rate three-quarters of a percent.

MALE NEWSREADER:

—its biggest hike in nearly three decades.

MALE NEWSREADER:
The Federal Reserve has raised its key interest rates again.

MALE NEWSREADER:

—and a move that seemed unfathomable to many just months ago has now happened
twice in a row.

JAMES JACOBY:

Other events, like the war in Ukraine—

MALE NEWSREADER:

Russia is picking off Ukraine's military facilities one after another.

JAMES JACOBY:

—lockdowns in China—

MALE NEWSREADER:

China has decided to put its southern tech hub Shenzhen under a citywide lockdown.

JAMES JACOBY:

—and companies raising prices—

RODNEY McMULLEN, CEO, Kroger:

A little bit of inflation is always good in our business.

JAMES JACOBY:

—would all send inflation even higher and accelerate the Fed’s moves.

MALE NEWSREADER:

Federal Reserve Chairman Jerome Powell speaking at an annual economic summit in Jackson
Hole, Wyoming—

JAMES JACOBY:

Which brings us back to Jackson Hole, Wyoming, in August 2022—that annual meeting of
central bankers where Jerome Powell signaled that he’d keep the Fed on course—

MALE NEWSREADER:

He made a call simply last year that didn't age well.

JAMES JACOBY:
—raising rates to try to combat inflation.

JEROME POWELL:

While higher interest rates, slower growth and softer labor market conditions will bring
down inflation, they will also bring some pain to households and businesses.

JAMES JACOBY:

How do you explain, for instance, to someone who is seeing their gas bills go up, their food
bills go up, and groceries, their rents go up, how is it that higher interest rates and what
you're doing with this very blunt instrument, how do you say that that's going to help them
with those issues in particular?

NEEL KASHKARI:

Well, one of the reasons prices are high is because there's too much demand in the economy.
And by raising interest rates—For example, we are going to slow down demand for housing,
people going out and buying up homes, which eventually should prevent home prices and
rents from continuing to climb. That should benefit workers. But things like gas prices, that's
not being driven by us. I mean, that's being driven by the war, Russia invading Ukraine, Sau-
di Arabia cutting back production, big geopolitical forces. So there's some pieces of this that
we can directly affect. Some pieces of this are out of our control.

JAMES JACOBY:

I mean, some people have said you're kind of—interest rates are almost like a hammer, a
sledgehammer. It's not like a scalpel. Can these problems be solved with a scalpel, or you re-
ally do believe that you need to bring the hammer down to some extent?

NEEL KASHKARI:

Well, here's the thing. I would love to be able to bring it with a scalpel, and a year ago I ar-
gued that I thought many of these factors were transitory, meaning you've got these one-
time events, they're going to pass and then inflation will come down, so let’s not bring out
the hammer. That was my view. That didn't happen. So now we have to bring the hammer,
because if we don't bring the hammer, this thing can get out of control.

JAMES JACOBY:

So to those who point to the Fed and say you ran it too hot for too long and that was an
epic mistake, you say what?
NEEL KASHKARI:

I say look around the world. Other central banks adjusted more quickly than we did, to their
credit, and unfortunately their economies are facing very similar inflation. And so yes, with
the benefit of hindsight, I wish we had tightened sooner, but I'm not kidding myself to think
it would have made a big difference in where we are in inflation today.

MALE NEWSREADER:

Stick around for just a second as we watch the clock here, counting down to 2:30.

JAMES JACOBY:

A month after Jackson Hole, I caught up with business reporter Chris Leonard as the Fed was
announcing another rate hike, moving at the fastest pace in 40 years.

JEROME POWELL:

Good afternoon. Today, the FOMC raised its policy interest rate by three-quarters of a per-
centage point.

CHRISTOPHER LEONARD:

It can be a little bit hard to understand, because you hear, OK, the Fed hiked rates today to 3
1/2%. Well, what does that mean? That my credit card rate is going to be a little bit higher, or
I'll have to borrow more money for a house? He is talking about a fundamental restructuring
of the financial system. The financial system globally has been built around extremely low,
ultra-low interest rates for 10 years.

JEROME POWELL:

My colleagues and I are strongly committed to bringing inflation back down to our 2% goal.

CHRISTOPHER LEONARD:

I think people don't appreciate the magnitude of what the Fed did over the last decade, and
so this is going to be like a long-term thing playing out over time, probably over a year or
two, of shifting to a higher rate environment and then the correction that that's going to
cause.

So he's talking about a huge adjustment that's not going to be an adjustment upward.
Things aren't going to get easier. Things are going to get harder.

MALE NEWSREADER:
Tonight, the economic alarms are blaring.

JAMES JACOBY:

The specter of this kind of economic upheaval has heightened concerns about a recession—

FEMALE NEWSREADER:

The Fed has made it clear its number one priority is fighting inflation, even if it means the
jobless rate, unemployment, goes up.

MALE UNION ORGANIZER:

Good evening! Are we going to let this corporation stop workers from joining a union?

CROWD:

No!

JAMES JACOBY:

It's also raised fears of layoffs, which has aggravated the organized labor movement.

LIZ SHULER, President, AFL-CIO:

I'm here with 12 1/2 million union members—

JAMES JACOBY:

Liz Shuler leads the largest union in the country. She's been urging the Fed to slow down.

LIZ SHULER:

Listen to your workers!

We met with Chairman Powell and six board of governors because I think the Fed doesn't
often get to hear from actual working people and how they're seeing things in the economy.

JAMES JACOBY:

What was your message for the Fed when they started to raise rates?

LIZ SHULER:

That raising the interest rates is bad for working people. That we think it puts the trajectory
that we're on at risk, in terms of coming out of this pandemic.
We know that we're in a consumer-driven economy, right? And if working people are not
able to make ends meet, they're not going to be buying goods, and it's going to grind the
economy to a halt. We can't take aggressive moves that are going to throw people out of
work and basically balance the economy on the backs of working people.

JAMES JACOBY:

But I mean, the Fed is tasked with controlling inflation, and inflation is definitely bad for
working people. So why advocate for the Fed to take its foot off the pedal?

LIZ SHULER:

Well, because the interest rate hikes they were implementing were happening quickly, and
we thought it was happening too fast. And also, though, their tools aren't necessarily going
to impact the things like gas prices and food prices, which is what most working people are
worried about.

DION RABOUIN:

The Fed doesn't ever want to say this out loud, but their goal is, quite literally, to make busi-
nesses not want to hire people or to get businesses actually to lay people off. The Fed has
estimated that the unemployment rate, under their very rosy projections, by the end of this
year would rise to 4 1/2%. There is no real way for unemployment to get from 3 1/2% to 4
1/2% without millions of people losing their jobs.

JAMES JACOBY:

I understand the best-case scenario being that you bring down inflation without unemploy-
ment going up, and that somehow we avoid a recession. But if employment does stay
strong and inflation stays high, then don't you have to basically hurt the jobs market? Isn't
that the bottom line here?

NEEL KASHKARI:

We do have to. We are going to have to keep raising rates until we get inflation back down,
that is absolutely true. And one of the sources of optimism, and it's mild optimism, is when
there have been recessions that have been caused by the central bank raising interest rates,
the good news is, once inflation is in check and they reverse the policies, the bounce back
can be very quick. So we're not trying to engineer a recession, but if one were to happen, I
feel pretty confident that we could have a very fast recovery.
JAMES JACOBY:

So how remote is the possibility that there could be much higher unemployment in the next
couple of years?

NEEL KASHKARI:

I mean, I wouldn't say it's remote. It's hard to put the odds on it.

CHAPTER SIXTEEN

The Tide Goes Out

JAMES JACOBY:

Throughout 2022, the economy remained strong. Unemployment hovered near historic lows.

FEMALE NEWSREADER:

—showing unemployment at a half-century low.

JAMES JACOBY:

Wages were on the rise.

MALE NEWSREADER:

We also saw some wage growth, about 5% annually.

JAMES JACOBY:

—causing the Fed to continue pumping the brakes to try to cool down inflation.

FEMALE NEWSREADER:

The Fed has been raising rates in hopes of slowing the economy, and with so many business-
es still hiring, that means the economy isn't really slowing that quickly.

JAMES JACOBY:

That riled Wall Street.

MALE NEWSREADER:

Facing the growing possibility of a recession, Wall Street spent another day in turmoil.

FEMALE NEWSREADER:

And you're probably feeling it in those 401(k)s. Stocks are headed—

JAMES JACOBY:
For the stock market and bond market, it was the worst year since the great financial crisis
in 2008.

FEMALE NEWSREADER:

The NASDAQ down for four straight quarters for the first time since the dot-com bust.

MOHAMED A. EL-ERIAN:

In 2022, we've had this very unusual situation whereby you've made double-digit losses on
both risky assets, stocks, and risk-free assets, U.S. Treasuries. That's not supposed to happen.
But there's been absolutely nowhere to hide. That is a big issue for retirement plans, pension
systems, because no matter how well you diversified your portfolio, there was no risk miti-
gation in it at all.

JAMES JACOBY:

It was all losses?

MOHAMED A. EL-ERIAN:

It was all losses.

FEMALE NEWSREADER:

U.S. existing home sales plunged to a 12-year low in December.

DION RABOUIN, The Wall Street Journal:

You've seen a huge impact on the housing market.

FEMALE NEWSREADER:

The Federal Reserve's interest rate hiking cycle has pushed housing into a recession.

DION RABOUIN:

Housing prices have started actually coming down for the first time in a very long time.
Mortgage applications have decreased. The crypto market, you've seen a number of compa-
nies wiped out.

MALE NEWSREADER:

Crypto winter is here.

DION RABOUIN:

That is not unrelated to what's happened with the Fed.

MALE SPEAKER:

Hold on to me, Sam. Let's go.

FEMALE NEWSREADER:

Sam Bankman-Fried faces investigations from U.S. regulators and potentially the Depart-
ment of Justice.

MALE SOCIAL MEDIA PERSONALITY:

He invested $3 million into Luna, and now it's worth $1,000.

STEVEN PEARLSTEIN, Contributing columnist, The Washington Post:

You create these asset bubbles—that is, bubbles in stock markets and bond markets and
real-estate markets and art markets, whatever people invest their money in with borrowed
money. And then those bubbles burst, and then that causes a downturn. So rather than hav-
ing—

JAMES JACOBY:

Steven Pearlstein has been reporting on the financial markets and the economy for almost
40 years.

STEVEN PEARLSTEIN:

Bubbles tend to be everything bubbles these days because if the source of it is cheap mon-
ey, then you can be pretty much sure that it's not just real estate, or it's not just stocks, or
it's not just tech and telecom. It's not just bitcoin. These things are connected by rubber
bands with each other in a sort of way, and what propels one propels all of them.

JAMES JACOBY:

There's a famous line by investor Warren Buffet.

WARREN BUFFET:

You don't find out who's been swimming naked until the tide goes out. [Laughter]

JAMES JACOBY:

Almost everyone I spoke to repeated that line to describe what's been happening.

RANA FOROOHAR, Associate editor, Financial Times:

When interest rates start to rise and the tide pulls out, as Warren Buffet would say—
CHARLES DUHIGG, The New York Times:

You don't know who's swimming naked—

DENNIS KELLEHER, Pres. & CEO, Better Markets:

—until the tide goes out.

AARON BENDIKSON, Partner, Onsight Capital Management:

You see who's swimming without a bathing suit—

NOURIEL ROUBINI:

—when the tide is receding.

SCOTT MINERD, Chief investment officer, Guggenheim Partners:

We'll find out who's wearing their swimsuits when the tide goes out.

RANA FOROOHAR:

What's amazing is that a lot of people, and I would say I'm included in this, think that there
probably will be a bigger correction at some point.

JAMES JACOBY:

Look, when you say you expect there to be a bigger correction, what does that actually
mean? I mean, a lot of people are going to see this and get concerned about that, obviously.

RANA FOROOHAR:

Yeah. Yeah, let me try and be honest but not scare people [laughs], if that's possible. So the
markets were down 20% last year. That seems like a lot, and if we were in a normal market
cycle, I'd say, "OK, we're done. We're probably at the bottom." I don't know if I can safely say
that we're at the bottom because of what we're looking back at, this age of easy money.
Not just even since the financial crisis, but before that, for the decades that rates have been
going down and down and down and debt has been going up and up and up. That's a long
period of time where assets have arguably been artificially inflated, and so is it possible that
you could see a continued correction at some point? It is possible. Now, I'm personally not
going out and selling my entire stock portfolio; I don't want to scare people. But I do want
to say that I think we are in a once-in-a-lifetime financial transition, and I think that every-
body needs to sort of strap in for that, and if you need your money in the next couple of
years, I would be more cautious than not.
JAMES JACOBY:

In these early months of 2023, on Wall Street, some have been betting that the Fed will re-
lent and stop raising interest rates. Maybe even tolerate higher inflation. Because the higher
it pushes rates, and the longer it does, the greater the risks.

MOHAMED A. EL-ERIAN:

So the marketplace is saying the Fed is going to go too far and is going to be forced to re-
verse course. That is really unusual. And we've got to a situation now where the markets dis-
miss what the Fed is telling us. It's a moment where there are many more potential out-
comes. Some are fine—a "soft landing." Some are not—a hard landing. And the truth is, you
cannot distinguish enough between them.

JAMES JACOBY:

One of the most pessimistic voices is economist Nouriel Roubini, who became famous for his
accurate prediction of the financial crisis in 2008.

NOURIEL ROUBINI:

We have had literally a few decades of ever-increasing bubbles that have been fed and sup-
ported by central banks. And not only have we had bubbles, but we've had bubbles that
have been fed by excessive leverage, excessive private and public borrowing and excessive
risk-taking.

The party is over. Inflation is high and rising. Central banks have to increase interest rates.
That is bursting the asset bubble. It's increasing the amount of the debt servicing of every-
body who over-borrowed like crazy. So we lived in a bubble, in a dream, and this dream in a
bubble is bursting and is turning into an economic and a financial nightmare.

JAMES JACOBY:

If Roubini's prediction of a debt crisis is correct, then Jim Millstein would be on the front
lines of it. He’s known on Wall Street as the guy who countries and companies turn to when
they run into trouble and need their debts to be restructured.

Wouldn't a debt crisis actually be good for your business?

JIM MILLSTEIN, Co-chairman, Guggenheim Securities:

[Laughs] You know, I'm getting a little too old for this. [Laughs]
JAMES JACOBY:

[Laughs] Meaning what? Too old for what?

JIM MILLSTEIN:

This business! No, I—Yeah, no, it'll be a boom for the restructuring business. But I just don't
think it's avoidable at this point. I think we're just—The bill has come due and it's going to
have to be paid.

JAMES JACOBY:

How worried are you about what's happening right now?

JIM MILLSTEIN:

I've never been more worried in the 42 years that I've been a professional, either as a lawyer,
banker or government servant. The American corporate sector has never been more levered
in American history, never had more debt, and American households are just about as levered
as they were heading into the 2008 financial crisis, whether it's student loans or mortgage
loans or car loans or personal loans or credit card loans. We've borrowed a lot of money as a
people.

And so the Fed is absolutely right to try and get it under control by raising interest rates and
slowing economic activity. But the most highly levered players in our economy are going to
come under real stress, whether that's households or businesses or governments, as interest
costs rise.

JAMES JACOBY:

Are you basically saying that we should be preparing right now? That there would be a
bursting of this massive credit bubble?

JIM MILLSTEIN:

It's happening right in front of us. It may—It's happening right now.

JAMES JACOBY:

Are you usually this gloomy, or am I just getting you on a bad day?

JIM MILLSTEIN:

You got me on a bad day. [Laughs]

JAMES JACOBY:
One of the concerns is that there's a kind of debt bomb out there, both in the American
economy as well as the global economy. How concerned are you about a credit bubble
popping?

NEEL KASHKARI:

We're looking at the data. We're not seeing evidence of such a popping. We're not seeing ev-
idence of delinquencies taking off. Might it happen in the future? It might, but I'm not see-
ing evidence of it. Households on average have very strong balance sheets. The big banks,
which can be very risky for the economy, are well-capitalized relative to where they were
before 2008. So we're not seeing evidence of it yet. Can't rule it out.

JAMES JACOBY:

So I guess the question though is how much disruption in the financial markets are you will-
ing to tolerate now that they're adjusting to this new interest rate environment, after more
than a decade of zero rates?

NEEL KASHKARI:

We live in a market economy, and market participants need to find a way to adjust to a
changing economic landscape. It's not the Fed's job to bail out Wall Street investors if their
stock portfolios go down. Obviously, we need to keep systemic risk from spilling across the
whole economy, and when those events happen, we are prepared to act. But from—in my
view, the bar of us acting, the bar from us acting should be quite high.

JAMES JACOBY:

I mean, the Fed has come to the rescue several times, and we've talked about this in the
past, of the financial markets that had grown vulnerable and brittle. So, are you saying—I'm
just, again I'm asking, what degree of disruption would you have to see in order for the Fed
to intervene?

NEEL KASHKARI:

We're a long, long way away from that. I guess I would say it that way. We're a long, long
way for any kind of disruption that would warrant us stepping in in that way.

JAMES JACOBY:

Less than five months after that interview, the Fed would indeed have to step in.

FEMALE NEWSREADER:
In breaking news, a U.S. Federal Reserve has bailed out the Silicon Valley Bank, which had
collapsed over the weekend.

JAMES JACOBY:

It enacted emergency measures to shore up the banking system after two banks collapsed.

MALE NEWSREADER:

This is the biggest bank collapse since the 2008 financial crisis.

JOE BIDEN:

There are important questions of how these banks got into the circumstance in the first
place.

SHEILA BAIR:

We're seeing a potential fragility in the system related to monetary policy. If we hadn't been
driving our economy for 14 years with easy money and then trying to really quickly undo
that, no, we wouldn't be having these problems now. Absolutely not.

JAMES JACOBY:

What should the Fed do?

SHEILA BAIR:

So, for a long time, I've advocated that the Fed should be raising rates. But even I believe
now they need to hit pause. They've gone too far, too fast. They need to hit pause and as-
sess the impact on the financial system and the economy.

JAMES JACOBY:

It's unclear what the Fed will do next. But just days before the bank failures, Jerome Powell
appeared before Congress to answer tough questions about the economy.

JEROME POWELL:

We actually don’t think that we need to see a sharp or enormous increase in unemployment
to get inflation under control.

SEN. ELIZABETH WARREN, (D) MA:

I’m looking at your projections. Do you call laying off 2 million people this year not a sharp
increase?
JAMES JACOBY:

The hearing was a showcase of partisan politics and government gridlock.

SEN. KEVIN CRAMER, (R) ND:

Raising interest rates won’t stop Senate Democrats and President Biden from overtaxing,
overspending, overborrowing, overregulating.

JAMES JACOBY:

And it was yet another reminder of how, in an era of political dysfunction, we’ve become so
dependent on the Fed, and on easy money, to drive the American economy.

STEVEN PEARLSTEIN:

The economy needs to get back into balance, and that will be painful. And if we keep
putting off the day of reckoning, we’ll just make the day of reckoning a bigger day of
reckoning.

JAMES JACOBY:

How do you think we’ll look back at this era of easy money?

STEVEN PEARLSTEIN:

Unfortunately, I think we may look back on it as something of a golden era, because cheap
and free money, without consequences, is great. But in other ways, we will think about it as
a lesson for the future, which is that it was a mistake.

MOHAMED A. EL-ERIAN:

I think that we're going to look back on this era as being totally exceptional historically, and
one where we didn't fulfill its potential. We lost sight of something critical: We lost sight of
how we grow our economy in a sustainable and inclusive fashion.

The world of easy money went way too far. Way, way too far. Let's do the other stuff that's
needed. The stuff that really promotes genuine, durable, inclusive growth and not this stuff
that creates artificial growth. We are capable of producing that. None of that is in the hands
of the Fed. They don't invest in infrastructure. They can't reform the tax system. They can't
help labor retraining. This is a political problem.

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