Money for Nothing: Inside the Federal Reserve (2013) - full transcript

The dollar is the most
remarkable achievement

in the history of
money. Think of it,

this piece of paper
costs nothing to produce,

there's nothing behind it except
the goodwill of Ben S. Bernanke,

and let us not forget
the US Congress.

This piece of paper...

somehow still commands
value and respect.

How can the dollar be anything

except the world's
greatest monetary brand,

the Coca-Cola of money?
Well, you just watch.

Since 1971,



the US dollar and the
global financial system

have been based solely upon faith,

faith in the guardian
of that currency

and of that system:

the American central
bank, the Federal Reserve.

As the world's reserve currency,

the US dollar is how
we measure our time,

our products, our self-worth.

Ours is a system based
on trust and confidence,

both of which began to
disappear in the fall of 2007.

Plunging interest rates helped
trigger the housing boom,

but with interest
rates climbing back,

many homeowners are having a
hard time paying their mortgages.

Fourteen-million people



took a mortgage in
the last three years.

Seven million of them
will lose their homes.

This is crazy.

The Fed thought that
this was a small problem.

When the crisis was
first talked about,

this was a
subprime-mortgage problem.

And it just kept growing
and growing and growing.

Bear Stearns unravelling
some big bets

on mortgages that have gone awry.

Government officials scrambling
to prevent the collapse

of the giant investment
bank Lehman Brothers.

American International
Group is seeking

a $14 billion bridging loan
from the Federal Reserve.

We were having an
electronic run on the banks.

The Federal Reserve's estimation

was that $5.5 trillion
would have been drawn

out of the money-market
system of the United States,

would've collapsed
the entire economy,

and within 24 hours,

the world economy
would've collapsed.

It would've been the end
of our economic system

as we know it.

Congress could not
act in a timely way.

Therefore the Fed felt
like it was important

to stabilise the
economy, that we do it.

That is not the normal
role for a central bank,

nor should it be.

While politicians
debated, the Fed acted.

It used its political
independence and unlimited power

to create money to provide
trillions of dollars in loans

to corporations of all kinds,

dwarfing the Congressional
aid that followed.

What people on Main Street
and most politicians

didn't understand is that
if we didn't do something,

General Electric,
Berkshire Hathaway,

General Motors, Citigroup
would've pulled down,

Bank of America.

I mean, we came to the brink of
the abyss and we looked over,

and it was a long way down.

The Fed really did
have to step in.

And this is why the
Fed was set up in 1913:

to provide liquidity to the
financial system as a whole

at a time when you
have a financial panic.

What do you know about
the Federal Reserve?

Not much.

There is this perception
that people have

that the Fed is this
kind of black box.

Nobody quite understands it.

Take care of
currency? I don't know.

Where... something about money?

They somehow regulate
the stock market.

I think we're
mysterious to people.

I think they're not
sure what we do.

Sounds like they're
printing money. Nu.

One myth that's out there
is that what we're doing

is printing money. We're
not printing money.

Is that tax money that
the Fed is spending?

It's not tax money.

It's much more akin to
printing money than borrowing.

- You've been printing money.
- Well, effectively.

What exactly is the Fed's job?

It does control the money supply,

set interest rates,
regulate banks,

and is supposed to ensure
the safety and soundness

of the financial system.

The Fed is supposed to be the
guardian of financial stability,

preventing chaos in markets.

Now, usually it can do that.

In the summer of 2008,
it couldn't do that,

and we did get chaos.

But what caused the
crisis in the first place?

What brought the wealthiest
nation in history to its knees?

According to many economists
and senior Fed officials,

it was the Fed itself
at the eye of the storm.

I'm on record as
saying that I thought

the Fed kept interest
rates too low for too long.

That contributed to the
bubble in housing prices.

This was warned about at the time.

This was textbook, when
you take rates that low,

you're going to have a boom,
and a bust is likely to follow.

The Fed failed to prevent
the housing bubble,

the predatory lending scandal,

and utterly failed to
prevent the financial crisis.

So we failed to regulate

the most important part
of our financial system.

And I don't think any of us
who've ever worked at the Fed

take any comfort from the
fact that somebody screwed up.

But I think it's
important we recognise

there were some big mistakes made.

Didn't the Federal
Reserve System fail?

I know my time has run out,

but I really
fundamentally disagree

with your point of view.

And I think there is
a natural inclination

that things are fixed,
but things are not fixed.

Everybody wants to go back
and say, "Things are fine now.

Look, we solved our problem."

We're just asking
for another crisis.

This is an experiment.
We've never done

this before, we've
never been here before.

The Federal Reserve
is really operating

by the seat of their pants.

Now, the other side of that is
that these are smart people,

hard-working people

who are trying to do
the best that they can.

So I think we need to
look very carefully

at what the Fed did.

And perhaps even more important

than looking back
and blaming people

is the issue of what role
should the central banks play

going forward as we
start thinking about,

"This is a mess,

and we don't want
to do this again."

This isn't the first time

the central bank we created
to protect our economy

has instead led us to the brink.

The real currency of
the world is trust.

As that slips away,

can the Fed learn from the past?

Can it do it in time?

We haven't had big
countries going down,

unable to save the
system and collapsing.

That's the crisis we
have to worry about.

You have what degree of
confidence in your ability

- to control this?
- Hundred percent.

Before the Federal Reserve System,

we didn't have a government bank.

The banking system
was very fragmented

and we experienced these panics

in which monetary
conditions would change.

A shock would hit the
economy, the banks fail,

and then other banks would fail.

Bank customers would
become suspicious

and they would want to pull
their money out of that bank,

and then some other
people would be afraid

that their bank would go,
and so people would want

to pull their money
out of deposits

and withdraw the
money as currency.

The banks would not have
the currency to pay out,

and they would just
close their doors.

There was no lender
of last resort.

You didn't have a central
bank, like the Bank of England,

that could provide reserves
to the New York banks.

1907 was a sort of
a watershed panic.

The panic of 1907

was the straw that
broke the camel's back.

The US is the biggest
economy in the world.

Americans are saying,
"Gee, other countries

with central banks are not having

so many financial
crises. Why are we?"

They said "Wait a
minute, the US government

couldn't deal with this crisis
what's wrong with us?"

Brits have the Bank of England,
Germans have the Reichsbank,

something has to get done here.

In 1910, Senator Nelson
Aldridge summoned

New York's most powerful
bankers to an island off Georgia

to secretly negotiate plans
for an American central bank.

Travelling under false names
in a private railroad car,

the great secrecy
of this expedition

would foster conspiracy
theories for decades to come.

Later on,

when people got wind
of this, they said,

"-oh, it's the same old
story of the rich guys

creating something
that'll be good for them

and not so good for all of us."

Different parts of the country
were suspicious of proposals

that left New York, Wall
Street or Washington

too much in control.

It was actually Woodrow
Wilson who proposed

what I consider to be
an ingenious compromise,

which we have today: a
decentralised central bank.

Twelve reserve banks
that would be owned

by the member banks,

and a central
coordinating authority

in the Federal Reserve
Board in Washington.

Over the next century,

the Fed's problems didn't
come from its structure,

which divided interest-rate votes

between publicly appointed
board members in Washington

and privately appointed
regional bank presidents,

and sent any profits
to the US Treasury.

What would plague the Fed instead,

in each of its three major crises,

was its reluctance to
abandon old ideas,

even in the face
of mounting danger.

Trying to overturn an
intellectual consensus,

forged amongst...

the reputed best
economists in the world,

that's not so easy.

That's not so easy.

Congress created the Fed

to forge a better monetary system.

But in the Fed's first
crisis, it failed to recognise

that the world around it
had radically changed.

That the gold standard,
a centuries-old system

the Fed had been
created to manage,

was on the verge of collapse.

There used to be a country
called Great Britain.

Now we call it the UK, or Britain.

And Great Britain was
this little tiny place

that had this wonderful
world-beating banking system

and a currency that passed
for good money the world over.

This currency was backed
by gold. You could,

not that many people
felt they had to,

walk into the Bank of England

and exchange your bank notes
for gold at a certain rate.

So the gold standard,

making your money tied
to a precious metal,

is a way of stabilising its value,

and restricting the ability,

both of banks and the governments,

to create too much paper money.

But that world came crashing apart

in the summer of 1914,

when World War I began.

To print the money needed
to finance the war,

the great powers of Europe
abandoned the gold standard.

With Britain bankrupt

and German society
destroyed by hyperinflation,

the US, its new Federal Reserve,

and a gold-backed currency
emerged pre-eminent.

The United States rose up
and supplanted Britain,

and the pound was demoted

from being the world's
great reserve currency.

The US becomes the financial
leader of the world

almost, sort of, overnight.

While the world economy struggled,

America's boomed,
and the Fed realised

it could use its influence
not just in times of panic.

Monetary policy,

a power the Fed is
still struggling

to manage to this day, was born.

The Federal Reserve has
the power to create money.

If you or I run the printing
press in our basement,

we're counterfeiters.

When the Federal Reserve
runs the printing press,

the electronic printing
press, it's monetary policy.

Monetary policy is when
the Fed uses its power

to create or destroy money

to lower or raise interest rates.

If it creates more
money in the system,

money becomes more available
and interest rates fall,

so we're more likely
to borrow and spend.

If the Fed takes money
out of the system,

we borrow and spend less
and are more likely to save.

If you're raising rates,

you want to slow economic activity

to cool inflation.
When you lower rates,

you want to stimulate
some economic activity.

Change in rates...

by the Fed is really a question
of gas pedal versus brake.

In the 1920s,

the Fed reached beyond
its original mandate

and began to use
this newfound power

to steer the US economy.

The Fed moved into managing
the overall macroeconomy.

Now, unfortunately,

its first foray into that
was the Great Depression.

Did not do a great job.

The roaring '20s saw
the first instance

of a Fed-induced boom and bust.

At first, the Fed's low rates

unintentionally helped fuel
stock market and debt bubbles,

which saw speculators
borrow more money

than the entire
amount in circulation.

An alarmed Fed then clamped down,

raising rates aggressively in 1928

and setting the
stage for a recession

and stock-market crash.

Right after the crash,
the New York Fed

did exactly the right
thing. It provided liquidity

to the New York money market;
it prevented a banking panic.

Now, the board in Washington
wasn't too happy about this.

They were worried the
expansionary policies

the Federal Reserve was following

would lead to a re-ignition of
speculation and an inflation.

So the Fed stopped
its easing policy.

Well, then trouble hit
the banking system,

and the Fed did nothing.

As banks began to fail,

people withdrew deposits,
stuck them under the mattress.

Now banks didn't have
money to make new loans,

and the economy spiralled down.

Because we were still
on the gold standard,

we had trouble figuring
out what to do.

We tried to protect
our gold position,

which required raising rates
at exactly the wrong time.

My grandfather, for example,

went on vacation, two
weeks down to Kentucky,

came back and their
bank had been closed

and they lost $3,000
worth of savings.

And so instead of
providing enough money

to prevent prices from falling,

the Fed allowed the
money supply to collapse.

And that's what turned
what would've been

a garden-variety recession
into the Depression.

It wasn't that the Fed

deliberately created
the Great Depression.

They desperately wanted
to fix what was going on.

They just had the wrong diagnosis.

That's a view that
is widely shared now.

The current Federal Reserve
Chairman Ben Bernanke has said,

"We did it", we being
the Federal Reserve.

"We caused the Great Depression
and we won't do it again."

They were wrong. They learnt...

by the pain and suffering we
all felt as a result of that.

First great mistake

was the Great Depression;

the other great mistake
was the Great Inflation.

At Bretton Woods, New Hampshire,

delegates arrived for the opening

of the United Nations Monetary
and Financial Conference.

Thirty years after World War I
tore apart the gold standard,

a new system was finally
created to replace it in 1944.

The US dollar would
be linked to gold,

and the rest of the world
would link their currencies

to the US dollar.

The Fed would be the
banker to the world.

But shortly after agreeing
to the Bretton Woods system,

Congress passed the
Employment Act of 1946.

The country decided to
add to the Fed's mission:

stabilising employment
over the business cycle.

No one wanted another Depression,

people were afraid of
another Depression.

But that conflicted with what
they agreed to at Bretton Woods,

because Bretton Woods told them
they had to control inflation.

Well, they weren't
about to do that.

♪ The best things
in life are free ♪

♪ But you can keep them for the
birds and bees I need money ♪

In the next great crisis,

the problem wasn't too
little money, but too much.

♪ I want money ♪

♪ Yeah that's what I want

Fear of unemployment
was the new ideology,

which like the gold standard,

the Fed would abandon only
after great social cost.

The middle of the 1960s

was a very nice period.

There was no inflation,
no unemployment,

and a lot of self-congratulation
in Washington, DC.

They finally had got it,

fiscal policy would be just
so, monetary policy just so,

and we would have
the kingdom of heaven

right here in the United
States of America.

This administration,

today, here and now,

declares unconditional
war on poverty in America.

In 1965, President Lyndon Johnson

announced a sweeping vision
to transform the country

into what he called
the Great Society.

However, beneath the surface
of things, there was trouble.

Johnson's Great Society programs

and his massive escalation
of the war in Vietnam,

drastically increased
government spending

and caused prices in
the US to shoot higher.

The war in Vietnam
was, like all wars,

the cause of a governmentally
orchestrated inflation.

To protect the
value of the dollar,

Fed Chairman Bill Martin
needed to raise interest rates,

as he had done since 1951.

But Lyndon Johnson was a
different kind of president.

Johnson said, "No, we don't
want interest rates to rise,

we don't want to derail
the Great Society,

to create a recession;

we've got a war to fight."
And the Fed caved in.

He knew he shouldn't
be doing that,

but he believed it
wasn't his responsibility

to tell the Congress they
couldn't run deficits.

I've talked for a long time

about the independence
of the Federal Reserve.

That's independence
within the government,

not independence
of the government.

If there was a big
private-investment boom,

he could raise interest
rates to stop it.

But if there was a big
public-expenditure boom,

that was not his
responsibility to stop,

that was the Congress.

The results were disastrous.

Vietnam, then Johnson's
Great Society programs

on top of that

was too much demand
for the economy,

created this immense inflation.

At Bretton Woods,
the US had promised

that it would be the
world's reserve currency,

backed by gold.

But the Fed had created
far more dollars

than it could ever redeem in gold,

and now the US could no
longer keep that promise.

By 1971,

it was clear the dollar

could no longer be
exchanged into gold.

Finally, President Nixon, in
front of a television camera,

bumping, I think,
Gunsmoke off the air,

maybe it was Bonanza.

Bonanza will be shown

after a special
report from NBC News.

I have directed the
Secretary of the Treasury

to suspend, temporarily,
the convertibility

of the dollar into gold
or other reserve assets.

And that began the modern
age... of inflation.

For the first time in history,

the dollar was just
a piece of paper,

backed only by faith
in the Federal Reserve

and its policies.

Now what does this mean for you?

Your dollar will be worth

just as much tomorrow
as it is today.

That promise was only as good

as the Fed actions behind it.

But bowing to pressure from Nixon

and clinging to flawed
economic theories,

the Fed refused to raise rates.

Over the next decade,

the cost of living
more than doubled,

as the dollar lost more
than half its value.

They would tell each other,

"We're not going to let the
inflation get out of hand."

Then the unemployment
rate would rise

and all that would be forgotten.

Because the political pressures

would grow. Where
did they come from?

They came from Congress,

from the administration,
from the business community,

from the labour unions.

And it was just
very hard to resist.

The whole climate of
opinion was against them.

And Arthur Burns,
Chairman of the Fed,

did not do what a good
central banker should do

and raise rates to
break the inflation.

And by the time the '70s
ended, it was a total mess.

Prices went up infamously
during the Carter presidency.

Inflation was increasing,

and unemployment was
increasing at the same time.

That wasn't supposed to happen.

Inflation hits everybody.
Unemployment, even at its worst,

hits only about 10% of the
population at any one time.

And so the public
shifted its concern

from unemployment to
inflation in a massive way.

People began to say,
"We don't want it.

We won't stand for policies
that create ongoing inflation."

I really hate it, because you
pay so much for so little.

Good evening. Prices
in the United States

during the first
three months of 1979

went up at an annual rate of 13%.

The question is: how
long will this go on,

inflation running out of control?

The answer: probably for years.

President Carter found
himself on the defensive,

because inflation was
becoming very unpopular.

Inflation is our friend.

And that's when Carter
appointed Paul Volcker.

When I was appointed
by Jimmy Carter,

he was kinda up against it. It
was a very difficult period.

I told him we were going to
have to adopt tighter policies,

and I felt very strongly

about the independence
of the Federal Reserve

and that's the way I
thought we should act.

Burns said in a speech
after he left office,

"We knew", meaning
we, central bankers,

"we had to reduce
money growth in 1964

or we'd have inflation."

And he lists all the reasons
why he couldn't do it.

It was that meeting
that Paul Volcker left

to do what Burns said
couldn't be done.

People don't like to
raise interest rates,

it's not very popular, and
there was some resistance

and fear of creating a
recession and so forth.

It was a close thing for Volcker

even to pull it off internally.

He had substantial battle
within the Federal Reserve.

Volcker had tried to
get the Fed governors

to nudge interest rates
upward, without success.

So he tried a different tack:

persuading them to focus on
controlling the money supply.

It was a sleight of hand,

because the two are
essentially the same.

But it was a politically
palatable tactic, and it worked.

And when he slowed the money
growth rate, predictably,

the interest rate went way up.

Neither he, nor I,
nor anyone else,

had any idea how high the
interest rate was going to be.

- Eight to nine to 10 percent.
- Fifteen percent.

- Eighteen, 19, 20%.
- Twenty-one percent.

Really, the highest levels
in American history.

He told me, "I never thought
we'd have to go to 20%."

But he did. That took courage.

Paul Volcker was villainised
for his inflation suppression.

It was a very tough period.

There was a lot of
opposition, no doubt about it.

And somebody got the
idea of sending in

all these sawed-up 2x4s.

Builders would throw 2x4s
on the steps of the Fed

- to protest Volcker's policies.
- There was a lot of criticism,

but people forget there
was a lot of support, too.

People wanted some leadership
to get something done.

Now, the Fed was aware

that it would almost
certainly produce a recession.

And Volcker says, "I'm going
to stick with my policy."

Even though the recession
that begins in 1981

was the longest recession
in postwar history.

In that period of
a couple of years,

the world's view,
the political view,

of the role of the Federal Reserve

and its importance in the
country changed dramatically.

And I don't believe it
would've been possible

without a man of Paul
Volcker's stature,

who understood the business of
central banking from soup to nuts,

who understood the costs of
not dealing with inflation.

Had those decisions been
left to politicians,

it's inconceivable that
they would've "voted"

for such a deep recession

to bring the inflation rate down.

That's sort of a generic
flaw of political systems:

ask members of Congress
to vote for things

that cause short-term pain
for long-term benefits,

and it's pretty hard
to get the votes.

It's nice that we have
leaders who step up

and do the right
thing now and then,

take a long-term view.

We could use more of it.

Paul Volcker has advised
me of his decision

not to accept a third term
as a member and chairman

of the Federal Reserve Board.

With inflation tamed
Volcker was expendable,

and President Reagan would not
reappoint him to a third term.

But Volcker had restored
faith in the dollar

and in our central bank,

and he'd laid the foundation

for an era of
unprecedented prosperity.

It would be up to the next
chairman to keep it alive.

And for many years,
it looked like he had.

It's morning again in America.

The period from
about the mid-1980s

till about 2007

was an era characterised
by mild recessions

and measured expansions

and by seeming
limitless visibility.

The economists called
it the Great Moderation.

It reflects the idea that
the Fed is on top of things,

and the feeling that the
Fed deserves the credit.

And you know, they
kinda took credit.

We had a pretty good run

from the 1980s into
the early 2000s.

The economy did very well,
we had rising stock market,

the Cold War came to an end,

most of the world
became more interested

in market economies.

The economy was growing,

unemployment was low.

But surprisingly,

at the same time, we had
very little inflation.

And as a result of that,

this was a golden age for the Fed.

And I think there was a
change in the public attitude

toward the role of government.

Government is not the
solution to our problem;

government is the problem.

In the last 25 or 30 years,

the view that the market
usually gets things right,

and that the government
only messes things up

became more and more dominant.

Now the Vice President will
swear Alan Greenspan in

as the 13th Chairman...

It was in this atmosphere
of faith in markets,

and a lack of faith in government,

that Alan Greenspan,

a free-market advocate
who mistrusted government,

was chosen to lead

the government's
most powerful agency.

Greenspan's widely
known, was in the day,

a disciple of the radical
individualist Ayn Rand.

I am for an absolute
laissez-faire, free,

unregulated economy.

If you separate the
government from economics,

you will have peaceful cooperation

and harmony and justice among men.

One of the great
ironies of his career,

and of our national life:

Greenspan, the so-called
"Ayn Rand guy,"

became the chief
price-fixer of money.

Greenspan's first test
would come immediately.

In the last five years,

the US stock market had
more than tripled in value,

as a result of falling
interest rates,

low inflation,

and a rediscovered faith
in American capitalism.

The point is, ladies
and gentlemen,

that greed, for lack
of a better word,

is good.

Though greed wasn't
new to Wall Street,

the means for satisfying it were.

For the first time, the market
was making widespread use

of complex financial
products like derivatives.

Some, like portfolio insurance,

were supposed to protect
investors from big losses.

This was the early use of
mathematics in the stock market.

Dumbest thing anybody
ever believed,

that everybody could sell at once.

But this was what the
mathematics said you could do.

This has been the worst day ever

in the history of the
New York Stock Exchange.

The Dow off more than 500 points,

paper losses more
than $500 billion...

The market suffered its
largest one-day drop ever,

and held its breath,

wondering if the Fed
and its new Chairman

were about to repeat history.

There was a point,
before lunch, that looked

like the gates of hell were
about to burst open again

and we were going, you
know, another 20, 25% down.

The fear in the
market quickly spread,

and so the Federal Reserve
lowered rates very rapidly,

provided liquidity very openly.

Alan Greenspan handled that
event very successfully:

reassured the markets,
eased monetary policy.

You say this is really good,

this is why you want this monetary
policy to be the way it is.

And so there was a lesson there:
you know, you can intervene,

you can end the crisis.

It was a historic moment.

Nearly 75 years
after its founding,

the institution created
to prevent banking panics

had succeeded in
doing precisely that.

But it came with a
dangerous precedent.

From now on, the Fed would
be expected to lower rates

based not just on problems
in the real economy,

but in the stock market as well.

And you end up with a Fed

whose original...

narrow mission
expanded dramatically.

Fed Chairman Alan Greenspan
didn't wanna see any regulation

of banks and markets;
and on the other hand,

he's pulling switches and
moving levers, you know,

more than any Fed
Chairman before or since.

Having cast aside his
ideals to rescue the market,

Greenspan would soon master
the art of intervention.

In Alan Greenspan's case,

I think it's important
to understand

no one but Alan Greenspan
had ever engineered

what we call a soft landing.

That is, you've had
interest rates low,

the economy's accelerating,

you then raise rates, you
slow the economy down,

without letting inflation
get out of control

or without throwing the
economy back into a recession.

So the plane is
supposed to come in

and just barely touch
the ground as it lands.

That's what you always shoot for,

usually, you get a bump.

'94, '95, Alan Greenspan,

Chairman of the Fed,
raised rates very rapidly,

punched the bond market
in the nose in '94,

because he wanted to
cool the economy down.

The economy keeps growing,
inflation doesn't accelerate,

and we get an investment boom
in the middle years of the '90s.

That was really amazing,
it hadn't been done before.

What followed was the
longest economic expansion

and largest stock-market
boom in US history.

An economist with no
prior banking experience

had become The Maestro.

Well, I was on the Fed

from around the middle
of 1994 until 1996.

I was Vice Chairman.

Now, that's not as
high a job as it sounds

when Alan Greenspan
is the Chairman.

It's not quite right to
call him dictatorial;

that was never his demeanour.
But he ran the show.

We all know when Chairman

Greenspan talks,
the world listens.

So by the time all those
things had happened,

Alan Greenspan was
about as close to God

as one can come and
still be on this Earth.

First of all, nobody
should ever be deified,

because none of us is God.

That did happen to Greenspan,

and one corollary of deification
is people think you know

and people think you'll
always get it right.

The concrete
manifestation of that,

inside the Federal Reserve,
is that it became very hard

to criticise Greenspan in any way.

I mean, who wants
to stand up to God?

But playing God with
the business cycle

had consequences,

and the Fed soon
faced a new challenge

and a new kind of inflation.

By the time the
1990s rolled around,

inflation of things, at
the checkout counter,

was rather a receding memory.

But it was succeeded
by a kind of inflation

that we have learnt to
call "asset inflation."

That is, prices not
of goods going up,

but of stocks, bonds, real estate,

and other investment
assets going up.

On Wall Street, that's known as a

bull market, and
everyone's for it.

We've never had, in this country,

a period when the stock
market was going up 15% a year

for a sustained period of time,

and people thought that
was going to continue.

Everybody loves a boom.
Who is there who dislikes it?

But Greenspan was concerned

that the boom was really a bubble.

So he raised a red flag.

In 1996, Alan Greenspan
gave a speech.

In characteristically
multisyllabic formulation,

he didn't say, "Isn't
this market crazy?" No.

"Might there not be
irrational exuberance?"

How do we know when
irrational exuberance

has unduly escalated asset values,

which then become subject

to unexpected and
prolonged contractions,

as they have in Japan
over the past decade?

Japan was a cautionary
tale of what can happen

when stock-market and
real-estate bubbles explode

in a frenzy of speculation,

as they did in Tokyo in the 1980s.

Creating a bubble
and having it break

is utterly dangerous. In
fact, there has never been...

a great depression, a
very severe recession,

that was not preceded
by an asset bubble

in the entire twentieth century.

At the peak of the bubbles,

a three-square-mile area in Tokyo

was worth more than the
entire state of California.

But in 1989,

the stock market collapsed,
followed by real estate,

and the Japanese
economy has experienced

deflation and slow
growth ever since.

The Japanese are
essentially in their economy

where they were 17 years ago.

They've had two decades
of going nowhere.

Greenspan had responsibly
waved the warning flag,

but the markets refused to listen,

and instead turned
on the messenger.

The financial world drew
in its breath in shock

and disapproval

over the Fed's
stepping over the line.

People were saying, "Have your
Chairman stay out of our business.

Don't talk down the stock market."

So Greenspan,

who likes to be liked almost
above all other things,

gave this up, this idea that
the stock market was too high,

and instead began to cheer it on.

Greenspan would never again

lean against the wind
of popular opinion.

As stocks soared
to record heights,

he refused to use his power
to cool overheated markets,

and would instead
intervene aggressively

at the first sign of weakness.

Investors were rocked
by the near-collapse

of a huge financial operation

run by Wall Street's
version of a Dream Team.

Long-Term Capital Management
was a large hedge fund

run by some very smart people.

But they guessed wrong.

And they were in deep trouble,

and it turned out they
had borrowed a lot

from major financial
institutions in New York,

and if they went bankrupt,
might bring the system down.

The US Federal Reserve arranged

for a $3.5 billion bailout
by Long-Term's creditors.

Without that help...

In what was to become an
all-too-familiar pattern,

an institution considered
too big to fail

had been protected
from the market.

That was the dress rehearsal
for this current collapse.

You had a lot of leverage,

theories that have
proven to be false,

hard-to-value derivatives,

and a tremendous
wasted opportunity

to impose some lessons, some
discipline, on those banks.

The bailout also saved

Wall Street firm Lehman Brothers,

which was at risk of bankruptcy

after firing the one man
who saw the crisis coming.

I ran derivatives
at Lehman Brothers,

and I was actually fired

because I did not want
to do these trades

with Long-Term Capital Management.

The comment I got fired for was,

"I'm an expert on
derivatives, but my bosses

don't really understand
the risk that I'm taking."

Lehman's CEO never
did learn about risk.

By 2008, he'd
borrowed $600 billion

to become the biggest mortgage
player on Wall Street,

and the biggest
bankruptcy in history,

confident to the end the
Fed would never let a firm

four times larger
than LTCM go bust.

So this alleged Libertarian
was presiding over

the socialisation of
risk in our economy.

It was perfect.

So we're not a free market,
then? There is an invisible,

there's a benevolent hand.

God, no. That's
the way it comes off,

but that's not the
way to think about it.

Six days after rescuing
Long Term Capital,

in the middle of the largest
stock bubble in US history,

the Fed backed the bailout
with an interest-rate cut.

It would cut rates twice
more in weeks to come.

And cutting interest rates...

exacerbated the
boom, in retrospect.

Greenspan was acting

in ways his
predecessors never had.

So much so, that Wall
Street gave it a name:

the "Greenspan Put."

So the Greenspan Put is the idea:

you can take any
risk, and you can,

in effect, "put" it to the Fed.

Look, if the market gets
too far out of hand,

I'll rescue you.

That's essentially how
traders interpret it.

In other words, it's a backstop.

Something under you that
supports you in adverse times.

And it encouraged a whole
lot of excess trading,

and more leverage. That's
what moral hazard is.

When you rescue people
from their own behaviour,

they're more likely to engage

in riskier and riskier behaviour.

The Fed thought it
could protect the market

with easy money,

but its promise of a safety net

unleashed a surge of
borrowing, debt and risk.

It would not just
transform the economy,

but distort it.

During Greenspan's reign,
the financial sector

would double its
share of the economy.

Companies that once sold
products would now sell loans.

General Electric essentially
was a hedge fund.

General Motors,
etcetera, car companies.

They didn't make
money selling cars;

they made money financing cars.

And firms that had once worked

in service to their clients

would now make enormous
profits trading for themselves,

engineering evermore
exotic financial products

like derivatives, which,
unlike traditional assets,

were bought and sold in secret

and left completely unregulated.

Financial derivatives have
grown at a phenomenal pace.

Despite the concerns

these complex
instruments have induced,

they have contributed
to the development

of a far more flexible and
efficient financial system.

Despite the fact that derivatives

lay at the heart of
both the '87 crash

and the LTCM bailout,

Greenspan resisted any
attempt to regulate them,

even leading the charge
against Brooksley Born

when she tried to monitor

this exploding market
under existing laws.

I am very concerned

that we will put in place

a set of new forms of
government regulation

of all sorts, which will not work.

I see no evidence to suggest

that this is a troubled market.

What are you trying to protect?

We're trying to protect the
money of the American public,

which is at risk in these markets.

If you're going to let companies

write this form of insurance
against extreme events...

someone has to figure out

whether it's innovation or a scam.

So someone's got to police
that. The mistake I made,

in my own thoughts, at
the end of the '90s,

was assuming that
would take place,

and it didn't.

Greenspan's ideology won out,

and 10 years later,

the US taxpayer would
spend over $182 billion

bailing out insurance giant AIG's

unregulated derivatives unit.

Greenspan also repeatedly declined

to enforce the Glass-Steagall Act,

which separated traditional banks

from Wall Street.

The message was clear:

the nation's most
powerful banking regulator

considered regulation
itself obsolete.

Coming out of the 1970s under
Paul Volcker's leadership,

the strength of the banking system

was very high up on the agenda.

But there was then a generation
of monetary economists

who were taking the
banking system for granted.

And it was like: supervision
will take care of itself.

There is a presumption
that regulators

will have a better insight
into the nature of the problems

than the markets themselves.

Now, I know most of the
people who would be in charge

of making the types of judgements
that would be required for that,

and I will tell you

that they don't have a
clue as to what to do.

And that was the hubris
that was infecting us,

because of the period
of Great Moderation.

So the ideology
became very strong,

and... as you know,
it all broke down.

The smart folks that run
the financial markets

are so skilful that
they can take care

of all these problems themselves.

That sounds like a caricature,
but people really believe that.

Lots of people
really believe that,

and some of them were running
major regulatory agencies,

such as Alan Greenspan.

The Fed was offering the
markets an amazing deal:

no regulation to
prevent you taking risk,

but if your bets went wrong,

lower interest
rates to rescue you.

US stocks soon became
more overvalued

than at any other time in history.

Stocks got to just
astronomical levels.

People were forming new companies

without any business plans;

investors were giving
them money and saying,

"Build your website, your
reputation, we don't care.

The faster you spend
it, the better."

I mean, it was
absolutely ridiculous.

We were worried about
that at the Fed,

and we talked about it a lot.

Should we raise interest rates

in an attempt to prick the bubble

before it got too bad or
not, and we decided not.

Bubbles generally are perceptible

only after the fact.

To spot a bubble in advance
requires a judgement

that hundreds of thousands
of informed investors

have it all wrong

Greenspan said, "Who
am I to interfere

with thousands of investors?"

In other words, "the
market's sufficient

despite the fact that
I'm manipulating it."

So he let it go.

It was only the June meeting,

from 1999, where
everybody looked around

at each other and said,
"This is unsustainable."

There was a unanimous agreement
this was not going to end well.

Then people said,

"Well, I guess what we should do
is move interest rates up gently

and wait for the bubble to burst.

This is something the general
public doesn't really realise:

when times are good and
equity prices are moving up,

people wanna believe.

Prices, in housing or equity,
when they're on their way up,

they're on their way up
because the general public

has a feeling of
buoyancy, of optimism,

some might say delusion.

Four, three, two, one...

Happy 2000.

At the millennium,
people still believed,

believed that we had entered
a new era of prosperity

and that we had indeed
created a new kind of economy.

Like those monetary
experts of the '60s,

we thought we'd found
the perfect formula.

And we were supremely
confident that Alan Greenspan,

as he had done in '87 and '98,
could easily save us again.

One earlier Fed
Chairman famously said,

"The role of the Fed is to
take away the punch bowl

just when the party gets rolling."

Alan Greenspan's attitude was
180 degrees away from that.

Greenspan came to the idea

that the Fed could not identify
a bubble as it was inflating.

Now many of us would disagree
with that rather vigorously.

It couldn't identify, really,
if the market had gotten ahead

of itself, was too high,
let alone when it was crazy.

So the role of the Fed is simply
to wait till the bubble breaks,

and then pick up the pieces.

While bubbles that burst
are scarcely benign,

the consequences need not be
catastrophic for the economy.

That was Greenspan's view.

And it has been subsequently
ravaged by experience.

The Fed has no such power.

Three months after
the ball dropped,

so did the stock market.

The dot-com collapse
and 9/11 attacks

put to the test Greenspan's view

that bubbles could be
cleaned up afterwards.

And he quickly responded with
a series of interest-rate cuts

to soften the blow.

There was a big fear after 9/11

that we were headed
for a huge recession.

That didn't happen.

So I think the people
who held this view,

coming through the
2000 bubble collapse,

felt very vindicated
that it was...

a reasonable approach.

If this is the bust,

the boom was sure
as hell worth it.

You agree with that, right?

It looked like Greenspan
had done it again,

but there was a catch.

The Fed had softened
the dot-com crash

with aggressive
interest-rate cuts,

and now those same cuts
set off another boom.

The Federal Reserve
created so much money,

it had to go somewhere,

we actually found it
was kind of interesting

and stimulating to
put it into houses.

Lower rates mean lower
mortgage payments.

The cost of money was less,

so the next guy who came along
could afford to pay you more.

Which created an unsustainable
bubble in housing.

In today's struggling economy,

many Americans have taken refuge

by investing in the
real-estate market.

The Fed says the
housing market is solid,

but others say there's
reason for caution.

The ongoing strength
in the housing market

has raised concerns about
the possible emergence

of a bubble in home prices.

However the analogy often made

to the building and bursting
of a stock-price bubble

is imperfect.

The national housing market

is scarcely tinder for
speculative conflagration.

Housing doesn't easily bubble.

Homeowners are not
looking to speculate

anywhere near the degree
of stock investors.

So you have to try, and
the Fed did precisely that.

The extraction of
equity from homes

has been a significant
support to consumer spending.

Were it not for this phenomenon,

economic activity would
have been notably weaker.

So we ended up encouraging
a housing boom.

We, being the Federal Reserve,

ended up encouraging
a housing boom.

I will continue to
defend those decisions,

because we had no
employment growth

after the bottom of the recession.

The Fed got it into its head

that we were on the
precipice of deflation,

a state in which
prices generally fall.

Even though house
prices were soaring,

globalisation and new technology
were keeping goods prices low.

But what was great
news for shoppers

set off alarms at the Fed,

where still-falling stock prices

conjured fears of a
Japan-style collapse.

The NASDAQ was down almost 80%,

and we had Fed
Chairman Alan Greenspan

come along and say,

"I don't want to be
the guy that goes out

with a period of weak growth
it will be my legacy."

Although that's the
normal business cycle;

that's what's supposed to happen.

So instead of
suffering the hangover,

he went for the hair
of the dog that bit us.

Chairman Greenspan,
who's an old friend,

invited me down to talk
to him about deflation.

And I told him that I thought
the chance of deflation

was very small.

I can tell you that
I left the meeting

knowing that I had
not made a sale.

And by 2002,

quite serious people,
including Ben Bernanke,

who subsequently became
Chairman of the Federal Reserve,

were talking about the
dangers of deflation,

why we didn't want
to wind up like Japan

and what we might have
to do to avoid that.

Ben Bernanke, a professor who
had just been hired by the Fed,

said, "We're not going
to let prices fall.

We are going to create
enough dollar bills

to lift the prices of
everything by a little."

So because of this
fear of deflation,

we didn't have a deflation,

the Fed continued to follow
an expansionary policy.

And the Fed proceeded

to press down this rate
of interest controls,

the so-called "federal funds
rate," all the way down to 1%.

You could scarcely see
it, it was so tiny.

I really think that was
looking at the wrong thing,

but all of that led
to, as you know,

a big boom and a big bust.

If you allow interest rates
to remain unusually low

for a long period of time,

you are creating the
environment in which a bubble,

or in which a rapid credit
expansion can occur.

Deep down, monetary policy
screws around with our heads.

And it influences
the amount of risk

you and I are prepared to take.

If we think interest rates are
going to be low a long time,

we're comfortable borrowing money.

If we think interest rates
are going to be very high

for a long time, that induces us

to feel like leaving
that money in the bank.

We're going to
lower interest rates

to find speculators who
said, "Let me take a shot

at building condos."

At a higher rate, they
may not take that chance.

Part of that was intentional
on the part of the Fed

to get us all to take more risk
than we would otherwise take.

I love that house,
plus the schools.

The kids are three and one.

They're going to grow up. What?

This listing is special,
John. You guys can do this.

- We can do this.
- Okay.

Are you kidding me?

And as the housing
bubble built up,

cheap credit sort of sustained it.

The fuel for the
subprime mortgage crisis

was the accommodative
monetary policy by the Fed.

The Federal Reserve stands
prepared to maintain

a highly accommodative
stance of policy

for as long as needed

to promote satisfactory
economic performance.

Greenspan had been hitting
home runs for so long

that he thought he couldn't fail.

Determined to get
growth at any cost,

his plan was to swap
one boom for another

and juice the economy
with low interest rates.

But far from solving the problem,

he would trap the Fed
in a vicious cycle

from which it has
still not escaped.

They took rates down really low.

They hadn't been
that low for 46 years

and they never stayed
that low that long.

By lowering the price of money,

the Fed was raising
the prices of things

bought with borrowed money.

We favoured real
estate, for example,

because we didn't want to
see people out of jobs.

Well-intentioned, but
the consequences are:

we created the
incentives to borrow.

And we brought
households to debt levels

that no one would've
imagined 20 years ago,

not just 50 years ago.

When you looked at it
that way you'd say, "-oh."

But Greenspan was theory-bound,
and his theory said

you didn't get nationwide
recessions in housing.

The Fed thought its
policies were safe,

provided inflation remained low.

But had it been
measuring inflation

the way it did during
the Volcker years,

inflation would've
been far higher.

Not only were
exploding house prices

excluded from the
Fed's new calculation,

but rising food and
gas costs as well.

So the Fed kept filling
up the punch bowl.

And as opposed to going into
inflation of goods prices,

it went into an inflation
of asset prices.

That's inflation in the same way,

but it's not called inflation.

So if the stock market goes
up and doubles, we don't say,

"Oh, my God, there's
been inflation."

Or if housing prices double,
we don't say, "Oh, my God,

there's been this
enormous inflation."

We say, "Oh, how
much richer we are."

But the problem is,
we're not richer.

It's simply an
illusion of richness.

President Bush signed
a housing bill,

which was part of his
Ownership Society,

and he said how good it
was that people had houses.

New home construction,

the highest in almost 20 years.

Home ownership rates,
the highest ever.

But they didn't have any
investment in the house.

They didn't have any
equity in the house.

So what did they own?
They didn't own anything.

They owned a mortgage,
which, if things got bad,

they could default. And they did.

Now there are a lot of
people who wanna criticise

the American household
for being dumb.

Americans borrowed too much.

In part because they
did not understand

how to save prudently,
how to borrow responsibly,

and they did not understand fully

that pension values
and house prices

will not always rise.

I think that's mistaken.
I think I would never short

the intelligence of
the American consumer.

Sort of the collective wisdom,
I think is usually pretty good.

We gave them really low
interest rates in 2003-4,

and guess what, they
borrowed a lot of money.

So it looked like the
Fed had done a great job,

and they were kinda patting
themselves on the back.

Our strategy of addressing
the bubble's consequences,

rather than the bubble
itself, has been successful.

It was not a good year

for optimistic predictions.

Greenspan had kept
rates so low for so long

that he'd turned an
overheated housing market

into the greatest credit
bubble in history.

It would alter the course
of the American economy

for decades to come.

You know, the way a
healthy economy grows

is people earn money and
they go out and spend it.

The way an unhealthy economy grows

is people borrow money and
they go out and spend it.

The US in '03, '04, '05,
06' was phantom recovery.

It was all borrowed money.

So instead of building
factories that produce income,

we wind up building condos
that don't produce anything.

And then we build too many condos.

So this Great Moderation

has only been keeping
the economy going,

keeping the economy going,

at the same time as making
it less and less productive,

till there was not enough
income supporting that debt,

and it implodes on itself.

I think there are several strands

to understanding how we got
in this deep a financial mess.

And I like to be clear,
I'm not a subscriber

to what I call the Great
Coincidence Theory.

That every individual facet
of our financial system

seems to have fallen
apart at the same time

as part of a great coincidence.

The accounting was all wrong,
the bonuses were all wrong,

the capital was all wrong,

the risk management was all wrong,

the regulation was all wrong.

Each and every one of
these things was all wrong.

I think when a boiler explodes,

that's a little like blaming
each individual rivet.

Now, something fundamental
connected all of these things.

Monetary policy was
just way too easy,

and the concepts underpinning...

financial regulation were flawed.

And I believed
markets and capitalism

had been unfairly criticised,

because it's been
bastardised by the government

and the Federal
Reserve skewing things

so that we had these
massive imbalances.

The Fed's low rates

helped spur a doubling
of mortgage debt,

turning the American
dream into a tragedy

for millions of families.

But the real borrowing spree
didn't happen on Main Street.

Seduced by the same low rates,
the world's biggest banks

jumped at the chance to
multiply their profits,

with massive borrowing
of their own,

or as they say on Wall
Street, with leverage.

And this is where the
real egregiousness

in interest rates
manifests itself.

The Federal Reserve's
main policy interest rate

was only 1%.

Now, the inflation
rate more like 2%.

We had negative, real
two-year interest rates.

That means that to borrow
money for two years is free.

Now, this is a problem.

The big banks lend that money out

on a mortgage at 5 or 6%.

Now, if I can borrow money
at 1% and lend it out at 6%,

I'm going to make a
tremendous profit from that.

That was the problem with
the low interest rates.

Financial institutions
borrowed too much,

became careless in
the lending they did.

Able to borrow money for nothing

and earn huge fees
for lending it out,

Wall Street began simply
giving money away.

You know, firms
like Lehman Brothers

borrowed at those
low interest rates,

made mortgage-backed
securities on the base of it,

and spread it around the world.

And then we look back at
the overall effect and say,

"Gee, we don't like this.

There's something
wrong with the market."

But they're actually following
the incentive structure

the Fed set up.

Banks at the peak of this crisis

were levered from 30 to 50 to 1,

so 2% equity,

98% debt.

That kind of leverage,

it's "money for nothing,
chicks for free."

It's as good as it gets.

Capitalism really doesn't work
very well if money's free.

And when it's free for too
long, we corrupt the system.

Now, just remember that this thing

isn't as black as it appeared.

All of us remember the
movie It's A Wonderful Life

with Jimmy Stewart and the
Bailey Building and Loan.

Well, the Bailey Building
and Loan made mortgages

borrowing money from
depositors and lending it out,

in this case, into homeowners.

And the bank doesn't have it,
it's not stuck in the vaults.

The money's not here.
Your money's in Joe's house,

and in the Kennedy house
and Mrs Macklin's house

- and 100 others.
- Well, that meant

that the Bailey Buildings
and Loans of the world

had a very big vested interest

in knowing to whom
they lent that money,

and knowing that those people
had the ability to repay it.

Except from 2002 to 2007,

and that's where the
borrower's ability

to make the payments
became irrelevant.

It was the lender's
ability to sell it

to Wall Street securitisers
that was what mattered.

I mean, the whole
system was perverse.

And that's how you end up

with all the insane
stories we heard about.

- Lots of subprime loans...
- Interest only...

Zero percent down and
we'll give you 10% back.

Ninja loans.

No income, no jobs, and no assets.

And that was a Ponzi scheme.

A Ponzi scheme connived

in by Federal agencies.

We certainly don't want
there to be a fine print

preventing people from
owning their home.

We can change the print.

It was the furthest from
the Bailey Building and Loan

you could possibly get.

American consumers might benefit

if lenders provided alternatives

to the traditional
fixed-rate mortgage.

A growing family
with a lot of debt.

A young couple with
no down payment.

A business owner whose
income was hard to document.

Every one of them was
turned down for a home loan

by three different lenders.
I'm with Countrywide,

and I got them all approved.

Now, the Fed didn't do
that, the banks did that,

but the Fed could have
and should have prevented

these crazy mortgages
from being granted.

I have a lot of faith in markets.

However, I still need rules
and I still need a referee.

Because otherwise you
get a chaotic environment

and very bad outcomes.

The Fed could've cut off this
speculation quite easily,

but the atmosphere in Washington
then was quite the opposite.

We have an excessive
concern about home ownership

and its role in the economy.

This is not the dot-com situation.

Homes that are occupied

may see an ebb and
flow in the price,

but you're not going
to see the collapse

that you see when people
talk about a bubble.

To set standards for
mortgages would've been going

straight against the
political environment.

The Federal Reserve
would've been pretty brave.

They should have, in retrospect.

Despite being the only agency

charged with protecting
the financial system,

the Fed remained on the sidelines,

later claiming it
lacked the authority

to regulate Wall Street's
mortgage machine.

But in 1994, Congress had passed

the Homeowner Owner Ownership
and Equity Protection Act,

which gave the Fed,
and the Fed alone,

specific power to prevent unfair
and deceptive mortgage lending.

The Fed had unique authority

to regulate all mortgage lenders.

It finally used it in 2008.

They could've stopped the
subprime unit of Lehman.

You had the authority to prevent

irresponsible lending practises

that led to the subprime
mortgage crisis.

You were advised to
do so by many others,

and now our whole economy
is paying its price.

They could not believe it
was a nationwide problem.

Okay, they just didn't get it.

Nobody in the entire
Federal Reserve system.

Only one guy,

Gramlich was the only one,
and they didn't listen to him.

My late colleague, Edward
Gramlich, known as Ned,

was very worried about
the subprime crisis.

And he did want
the Federal Reserve

to police lax lending standards,

but Alan Greenspan
did not push forward

with what Ned was recommending.

As Alan Greenspan's
term drew to a close,

his transformation of the
American economy was complete:

a financial sector of
outsized proportions,

housing bloated by borrowing,

a dismantled regulatory system,

and a collective delusion
that all was well.

And there's tragedy in
what's happened now,

but I think the boom
that our economy had,

and the millions of
people who got jobs

who wouldn't otherwise
have them in the '90s,

is something we owe to
Alan Greenspan, too.

Where do you think you
made a mistake, then?

I made a mistake in presuming
that the self-interests

of banks and others were such
as that they were best capable

of protecting their own firms.

They just assumed

that this is what the
private market was doing

and people in the private market
knew what they were doing.

That still leaves
open the question,

which historians are going to
be looking at a very long time:

suppose Greenspan and
the Fed had this belief.

Why did not the events,
as they were transpiring,

shake that belief?

One of the President's
most important appointments

is Chairman of the
Federal Reserve.

My first priority will
be to maintain continuity

with the policies
and policy strategies

established during
the Greenspan years.

As a Fed Governor, Ben Bernanke

had spent the peak years
of the housing bubble

promoting his mentor's easy
money and lax regulation.

Taking over the helm,

he had no idea he would
reap what he'd sown.

We have so many economists
coming on our air and saying,

"Oh, this is a bubble
and it's going to burst."

What is the worst-case scenario
if in fact we were to see prices

come down substantially
across the country?

Well, I guess I don't
buy your premise.

It's a pretty
unlikely possibility.

We've never had a decline
in house prices nationwide.

- What I think is more likely...
- Bernanke should've said,

"It has never declined because
it's never had a bubble before."

Robert Shiller's
data shows 100 years

of incredibly flat price
series followed by, suddenly,

a Himalayan mountain
going up very rapidly.

Bernanke is the perfect academic.

He's not looking at house prices.

He so profoundly believes
in market efficiency

that there can't possibly
be a housing bubble,

so why bother to look for it?

The Bernanke Fed really blew it.

They just... they just
didn't see it coming.

Both Bernanke and Greenspan
would later maintain

that only a tiny group of
experts foresaw the crisis.

But there were many who did,

and were either dismissed
as alarmists or ignored.

Some of us were writing
then, "Guys this is absurd.

This can't happen. It's
going to end in tears."

In the case of housing,

I started to detect bubble
proportions in 2002.

That forecast was
met with derision.

We worried that encouraging
people to borrow money

in the interests of spending it

would come back and haunt us.

All you had to do was
crack a history book.

Every bubble breaks.

It's not that I saw something
that wasn't there to see.

It was all there for
other people to pick up,

but I think there was
this sense of comfort

that it wouldn't happen
and even if it did happen,

we knew how to deal
with the problem.

So you have to understand

academic economists live in
an island unto themselves.

These were people trained in
mathematics, not in markets.

And trying to apply the
mathematics to markets

and to human emotion
basically, they stumble.

In the academic models
used by the Fed,

debt is not a source of danger.

In fact, in most of these models,

debt isn't even there.
In the academic models,

the financial sector
isn't even there.

So if it wasn't there,
it couldn't do any harm.

And because their
intellectual framework

didn't allow for a
big crisis to happen,

there were no efforts made
to prevent the crisis.

When they got into it,

the whole idea was that
we'd soon be out of it.

The problems in
the subprime market

seems likely to be contained.

So the magnitude of what
was to come down the road

was completely discounted.

And then, at some moment,

people realised they really
overextended themselves.

So that what looks like
the Great Moderation

has within it the seeds of
its own... of its own end.

- Stocks crushed today.
- Financials hit really hard.

Bank of America down 40%.

One of the worst days
ever on Wall Street.

This is a market driven by fear.

Alan Greenspan told everyone
to take a teaser rate,

and Bernanke is being an academic.

He has no idea how
bad it is out there.

As the crisis unravelled,

the Fed only dimly perceived
its true dimensions.

It was a bank run, but
one that bore no relation

to those of the past,

involving not just the banks
the Fed was created to protect,

but the hedge funds,
investment banks,

and insurance conglomerates

the Fed had allowed to
hide from its oversight.

It was a run provoked by
the excessive derivatives,

leverage and loans that
had flourished in the dark.

Government officials

scrambling to prevent the collapse

of the giant investment
bank Lehman Brothers.

So Lehman Brothers wasn't
necessarily, you know,

a culprit in and of itself,
it was more a symptom

of an endemic way
of doing business.

The bill from the Great Moderation

was at last coming due.

A decade of easy money
and lax regulation

had created a system
only the Fed could save.

Company's called AIG.

It's in big trouble
they need money,

which nobody has to
give right about now.

The failure of AIG
would have meant

a run on the 50 largest
banks in the world.

They would not have
survived the capital hit.

We saw what happened
when one or two

large firms came close to failure.

Imagine if 10 or 12 or
15 firms had failed,

which is where we almost were.

You have to have
credit to operate.

Whether we kept rates
too low for too long,

that's history.

Confronted with the situation
where the heart stopped pumping,

we had to be the pacemaker
and make it work again.

American taxpayers
woke up this morning

to learn their money
makes up a bailout package

the Federal Reserve slammed
together to save AIG.

Over the course of the crisis,

the Fed would pump
trillions of dollars

in emergency loans to
banks, corporations,

and governments around the world.

Though the moves were
a logical extension

of the Fed's ideology,
they were unprecedented.

Are you committing
in this interview

that you are not going to
let any of these banks fail?

That no matter what
their balance sheet

actually looks like, they
are not going to fail?

They are not going to fail.

Bernanke single-handedly
stopped the run.

But when his bailout failed
to jump start recovery,

the Fed upped the ante.

With interest rates
already at zero,

the Fed's only way
to juice the economy

was to print more money

with a technique called
Quantitative Easing,

or Q.E.

Beginning in 2009,
the Fed purchased

over $1.3 trillion
of mortgages and debt

from failed lenders Fannie
Mae and Freddie Mac.

It was a temporary nationalisation

of the mortgage market.

What followed was the single
biggest stock rally since 1932,

when markets faltered in 2010,

the Fed announced a
second round: QE2.

If the Greenspan Put
had been whispered,

the Bernanke Put was
now loud and clear.

Hedge-fund heavyweight
David Tepper

raked in a record $7.5 billion
by investing in financials.

How did you do it in
09? What did you see?

It was easy. The government
said they want the market up,

so I'm going to say, "No,
Fed, I disagree with you"?

So I got two different situations:

one, the economy gets
better by itself.

The other situation is the
Fed comes in with money.

Now up to the point the
Fed comes in with money,

the stock market can
go down a little bit,

but not that much,
because I got a "put."

You got to love a "put,"

especially when the
government's issuing it.

Bernanke had saved the system.

Or had he?

It was still riddled
with the same bad loans

and institutions too big to fail,

only now spared from
the free market's

law of survival of the fittest.

Bear Stearns was
supposed to go belly up,

that's what happens,

that's the market
correcting their excesses.

And the same thing
with AIG and Citigroup,

and go down the list of
everybody bailed out.

We just threw enough cash at it

that we papered over
the structural flaws.

We're at a point now
where the consumer

is in no position
to keep borrowing,

banks are in no position to lend.

The banking system is still,
in my opinion, insolvent.

It's still broken.

Ben Bernanke has led the Fed

through one of the
worst financial crises

that this nation and the
world has ever faced.

The Great Moderation began

as an homage to the free market,

but today it could not be
further from that ideal.

The two chairmen,

appointed by both Republican
and Democratic presidents,

created an economy more centrally
planned than ever in our history,

one entirely dependent
on ever-cheaper credit

from our central bank.

From 20% to zero,

drops in interest rates
bailed out investors

in any number of transactions.

Every time,

the response is more
debt fuelling growth.

But while this mountain of debt

provided rocket fuel
for housing and finance,

overall growth actually slowed,

as more of our resources
and many of our best minds

pursued not medicine
nor engineering,

but the zero-sum game of
financial speculation.

Creating financial
transactions is not production.

It does nothing to your
standard of living,

except for a few people who
are able to work at a bank,

watch their stock price
go up, sell the stock,

and then they have the wealth.

But they have to sell the
stock in order to do it.

So understand what happens
when stock prices go up,

the same with housing.

It doesn't make us better off.

It helps those
people who own stock,

and it hurts people
who don't own stock.

You know, tremendous wealth was
created in financial markets

which didn't seem to be paralleled

by any great improvement
in the economy,

in the incomes of other people.

And so what we see is
this increase in wealth

is actually just a redistribution

to those who own wealth,

away from those who don't.

So you have an illusion of wealth.

Certain people at the
Fed bought into that.

I've always believed

we underestimate the
impact of stock prices

on economic activity.

I don't know where the
stock market is going,

but I will say this:

that if it continues higher,

this will do more to
stimulate the economy

than anything we've been
talking about to date,

or anything anybody
else is talking about.

But for all the booms, bailouts,

and easy money, since 2000,

no net jobs have been
created in the US

And per-capita growth
in the private sector

has been stuck at zero.

So it is not working, and
all one can say with respect

to this current crisis
is, here we go again.

Ben Bernanke to the rescue.
The FOMC announced today

that its zero interest
rate would be extended

through the middle of
2013, two years from now.

And yes, it wound up triggering
a massive stock-market rally.

What's going on right now is,

the most profound
coordinated effort

in the history of mankind

to really promote the
financial markets,

promote risky assets, give
the drunk another drink.

What the Fed is doing
is we push investors

into other kinds of investments

like the stock market.

Bernanke still insists

that money poured into a
broken financial system

will trickle down
to the real economy.

And I care about Wall
Street for one reason,

and one reason only,
because what happens

on Wall Street matters
to Main Street.

But can a problem created
by money for nothing

really be solved by
evermore of the same?

The major banks are
racking up profits,

and yet lending to
small businesses

actually declined in
the third quarter.

Our problem is,

we have a very distorted economy.

High-income individuals
just had $800 billion

added to their 401Ks,

and are carrying what
consumption there is.

Bernanke has been wrong before.

In 2002, he promised
that cheap money

would help us avoid a
deflation like Japan's.

Instead it gave us a
mountain of new debt,

and an economy
trapped by 0% rates,

just like Japan's.

And while the chairmen bragged
about rising stock prices...

S&P 500 is up about 20%-plus,

and the Russel 2000, which
is about small-cap stocks,

is up 30%-plus.

He's been less eager to discuss

the food and gas prices
that rose with them.

Inflation falls
disproportionately on the poor.

You know, the cost of
heating your home goes up,

and you don't have the money,
you're in real trouble.

Or the trillions of dollars

his 0% rates are taking
from the pockets of savers.

Somebody's paying the price

for low interest rates.

It's you and me who have...

money-market accounts
which are earning 0.27%.

Which, by the way,

punishes the elderly and
people on a fixed salary.

I mean, I worked
to save that money,

and now in one swoop,

the Fed decides I get
nothing for that money,

in order to bail out the banks.
That, to me, is outrageous.

So here you have a group

that instigates movements
and asset prices

to get the economy going
the following year.

The Federal Reserve
today announced plans

to buy $40 billion of
mortgage bonds a month

until further notice.

These policies bring
interest rates down,

it affects stock prices,
it affects home prices.

If people feel better because
their 401k looks better,

their house is worth more, they're
more willing to go out and spend.

They don't try and stop that
or moderate it in any way,

so they have a bigger
collapse the next time,

and a bigger one the time after.

To see that,

and then see it all crash,
and to learn nothing?

Quantitative easing is
the last desperate gambit

on this game of
stimulating asset prices.

You have what degree of confidence

- in your ability to control this?
- Hundred percent.

There oughta be a greater
degree of humility

on the part of those
who are operating,

or pretending to
operate, complex systems.

You know, rates can
only go to zero.

And at that point,

free money doesn't enable

asset values to keep growing.

And the only tool they have
left at their disposal now

really is psychology,

people's belief that the
Fed can solve problems.

But mechanically, they
can't, at this point.

Can the Fed effectively reduce

long-term unemployment?

As the situation drags on,

it becomes really out of the
scope of monetary policy.

Stimulating the economy
through monetary policy

really does almost nothing

to contribute to low
unemployment rates

or high employment
in the long term.

The Fed's lowered from
5.25 to essentially zero

over the last two years.

Unemployment rate's
gone from 4.5% to 9%.

So it's clear we can't
control unemployment rates

with any precision whatsoever.

Which means it should
never be given a mandate

to worry about the economy,
to worry about employment.

Because if it has to do that,
it will manipulate asset prices,

which is what it does.

It is no longer just outsiders

who criticise Bernanke's efforts

to play the hero for
financial markets.

I don't know what
the equilibrium rate

of interest is, exactly,

but I'm very confident
that it's not zero.

Printing money doesn't
produce goods and services.

It doesn't hire people.

It may seem like the
right short-term medicine,

but can the cure be worse

than the disease in some cases?

I don't think we want to
build the next recovery

on another housing boom.

We should be focused on keeping
the purchasing power of money

as stable as possible over time.

And doing that, keeping
inflation low and stable,

is the best way we can contribute

to maximising growth,
minimising unemployment,

and contributing to the
well-being of Americans.

But if we fail at it,

we lose credibility.
We lose trust.

Ben Bernanke,

brought our economy to its knees,

has been reappointed.
Does this give you hope

for being re-elected
governor of New York?

May I remind you, he
screwed everybody.

There is no authority
in the Constitution

authorising a central bank,

which means there should be
no Federal Reserve System.

No.

Ironically, as the calls
for accountability mount,

only our independent central bank

can protect the dollar from
a dysfunctional Congress

and government debt
spinning out of control.

It's our job to guarantee

that whatever happens to the
federal deficit and debt,

that it does not
translate into inflation.

Each new bailout
comes with a catch.

This time,

instead of writing off bad debts

and reforming our banking system,

we've simply swapped spending
households couldn't afford

for spending and tax cuts
our government can't afford.

Once again, financed
by ultra-low rates

from the Federal Reserve.

We can borrow tonnes
and tonnes of money

at very low interest rates,
and we can continue to do that

for some time.

The problem comes in the long run:

how long is this going to last?

When is this game going to end
and how is it going to end?

Free of the gold
standard's restraint,

the only limit on our
government's ability

to borrow and print

is the confidence people
around the world place

in our IOUs.

It's a first in our
nation's history,

cutting the country's
top AAA rating to AA+.

But how long can a
dollar-based system last

if we take that
confidence for granted?

The United States can
pay any debt it has,

because we can always
print money to do that,

so there is zero
probability of default.

How can the dollar be
anything except the world's

greatest monetary brand,
the Coca-Cola of money?

How can it be anything else but?

Well, if you produce enough of
these green pieces of paper,

if you throw around
your weight too far

as the world's one
and only superpower,

bad things happen.

For years the country
lived beyond its mean.

As a member of the
Euro currency...

As a debt crisis
that began in Greece

now threatens all of Europe,

it's clear that easy money

has been no kinder to governments

than it was to homeowners.

And while the US
may not be Greece,

the lesson is cautionary.

No nation, however powerful,

is too big to fail.

And then you get the
mother of all crises:

big countries going down,

unable to save the
system and collapsing.

That's the crisis we
have to worry about.

The time to have made good choices

was back in the '90s
and the early 2000s.

And we didn't make good
choices as a country,

as an American polity.

And now we're faced

with a number of bad choices.

But if we fail to make the
uncomfortable choice today,

we're going to create

even more uncomfortable
choices down the road.

♪ How many times ♪

♪ Have you heard someone say ♪

♪ If I had his money ♪

♪ I would do things my way ♪

At some point over
the last 20 years,

we seem to have lost
sight of who we are,

and we were more concerned

with the types of
houses we lived in

and the speed of the
cars that we drove.

The United States has consumed
more than it's produced,

systematically, for
at least a decade.

What country, ask
yourself, in history,

can do that indefinitely, forever?

The government and
the Federal Reserve

are continuing to encourage
people to spend their money.

That is not a stable economy.

That's the wrong
policy for the future.

What we need to do

is encourage
investment and saving.

That'll make it
harder for our economy

to grow the way it
has in the past,

with consumption being the engine.

So in other words, the US economy

probably won't grow as fast
as possible, but that's fine,

if we can learn to be
happy with what we have,

as opposed to this
system fully designed

around getting people to want
more than what they have,

and they're unhappy unless
they have that more.

♪ Little they know ♪

♪ That it's so hard to find ♪

♪ One rich man in ten ♪

♪ With a satisfied mind ♪

My generation, the baby boomers,

basically participated in
inter-generational theft.

We borrowed from our children,

and in some cases,
from our grandchildren.

I hope we don't go as far
as our great-grandchildren.

And I don't know one parent
who's willing to say,

"Let me enjoy my life at
the expense of my children."

But that seems to
be what's happening.

Now, the interesting question is,

when you've been on
that path that long,

and the imbalances
have grown up that big,

what's the process for
getting off the bad path

onto a better one?

You've got to create
something the world wants,

and that's what we've got to get
back to in the United States.

What drives long-term growth
is the real world, education,

capital spending, the
quality of your workers.

They're the things you
should worry about.

There's a myth that's grown
up that the United States

is a weak tiger, that
it can't produce goods

that people want to
sell. Far from the truth.

We're still the largest
exporter in the world.

We have the human
capital, the knowledge;

we need to just
have the incentives.

Somehow we need to
go to an economy

that is using its resources,

operating at full employment,

but doing so in a way
that isn't reliant

on bubbles any place,

that is a solid,

responsible use of resources.

That means you need
to have interest rates

that don't discourage savings.

Less subsidies for housing,

and debt and domestic consumption,

prices closer to...

what they more
naturally should be.

So you can get the growth
going again in a healthier way,

then the burden of the debt

gradually gets less
and less and less.

But of course the transition
is bound to be painful,

and then the question becomes:

how much short-term pain

for how much long-term gain?

The end of inflation, that
happened because the public

wanted it to happen. This
is a democratic country.

What do we want the Federal
Reserve to do for us,

for the citizenry?

We want them to
provide low inflation

and relatively stable growth.

They can't smooth out all
the bumps in the road,

and we can't expect them
to. But we can expect them

to do a better job over the future

than they have on
average in the past.

It's tempting to believe
the crisis is over,

but we may be simply passing
through the eye of the storm.

To break free of the
cycle of booms and busts,

the Fed must find
a new way forward.

So it's a very important
crossroads for us.

Will we be willing to
support the central bank

as it raises interest rates
to levels where savings

becomes something
that you value again

so that our society

can really begin to
build for the future.

Easy for me to sit here and say
"This is how we need to do it,"

but very difficult to
implement for anyone.

For the Congress,
for the president,

and for the Central Bank
of the United States.

More than ever in
its 100-year history,

the Federal Reserve
holds the future

of our economic
system in its hands.

Can the Fed help foster an
economy that's built to last?

One not based on stock
or housing bubbles,

but on sensible,
productive investments

that will enrich
not just some of us,

but all?

Or will it continue to
offer the empty promise

of money for nothing?