All language subtitles for Money.for.Nothing.Inside.the.Federal.Reserve.2013.1080p.WEB DL.H264

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 U.S. 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 U.S. 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 U.S. 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 stabilize 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-uh.

- 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 gonna 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 recognize

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 U.S. 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 U.S. 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.

Traveling 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,

"Uh-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 decentralized 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 U.S. 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 -

um... 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 recognize

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 stabilizing 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 U.S.,
its new Federal Reserve,

and a gold-backed
currency emerged preeminent.

- The United States rose up
and supplanted Britain,

and the pound was demoted

from being the world's
great reserve currency.

- The U.S. becomes the
financial leader of the world

almost, sort of, overnight.

While
the world economy struggled,

America's boomed,
and the Fed realized

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 U.S. 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 learned...

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 U.S. dollar
would be linked to gold,

and the rest of the world
would link their currencies

to the U.S. 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:

stabilizing 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, D.C.

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 U.S.
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 U.S. 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 U.S. 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 gonna 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 gonna
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 villainized
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 gonna
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 characterized
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 U.S. 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 U.S. 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 criticize 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 learned 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 U.S.
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 socialization 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 U.S. 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 gonna 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 U.S. 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 judgments
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.

U.S. 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 judgment

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 realize:

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,

globalization 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 gonna
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 gonna 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, "Uh-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 criticize

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 U.S. 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 criticized,

because it's been bastardized
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 gonna 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 securitizers
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 practices

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 gonna
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 realized 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 gonna fail?

- They are not gonna fail.

Bernanke
singlehandedly stopped the run.

But when his bailout failed
to jumpstart 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
nationalization

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 gonna 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 gotta 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 U.S.

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 triggerig
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 criticize 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 maximizing growth,
minimizing 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

authorizing 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
tons and tons 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 gonna 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 U.S.
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 gonna 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 U.S. 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 anyplace,

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?

Subtitling: CNST, Montreal