The Power of the Fed

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>> The coronavirus pandemic has left millions of Americans

out of work...

>> People have gone now without four, five, or six, or seven

paychecks and it's starting to catch up-- they need food, it's

the most basic thing.

>> JACOBY: Over the past year, we've seen how many Americans

are living on the edge.

>> Have you got any income at the moment?

>> No, no-- and we have kids too, so.

>> So you're not making any money at the moment?

>> No.

>> JACOBY: But while businesses were shuttered, and millions

were left unemployed, one place has been thriving like never

before.

>> Stocks surging even as America enters its darkest

chapter yet of this pandemic.

>> JACOBY: On Wall Street, it was a banner year.

>> The market has been open for 30 minutes and we've gone

straight up.

>> The Dow rising nearly 18%, its best performance since 1987.

>> JACOBY: After a major dive, markets reached record highs.

The pandemic would turn out to be a blip in the longest bull

market ever.

The price of stocks have skyrocketed-- and so has the

wealth of those who own them.

>> Elon Musk has added over $10 billion to his wealth-- just

this week!

>> JACOBY: Some see signs of mania...

>> This GameStop situation, we will never encounter a setup

like this again.

>> JACOBY: As more Americans try to get in on the party.

>> Right now we're in a raging mania.

>> JACOBY: Some worry a crash is to come.

>> It's the burst of euphoria that typically brings these

things to an end.

>> JACOBY: As the financial world has been diverging from

the real world, I've been trying to understand the many

forces at play.

And I found one institution has been at the center of it all:

the Federal Reserve-- the nation's central bank.

>> It is the most powerful and least understood institution in

the country.

It really is difficult to overstate how important this

story is, and how big this story is, and how much it matters.

>> JACOBY: I've been speaking to current and former Fed

officials...

Is that really the first time you're in a suit since

COVID?

>> From the waist down.

>> Can I take my mask off?

>> JACOBY: ...Economists, and titans of finance.

>> Nobody knows how this is gonna turn out.

This is an experiment.

>> JACOBY: I've heard that over and over-- that we're living

through an epic experiment run by the Fed.

>> I believe this is the economic story of our time.

>> JACOBY: An experiment that's been dramatically changing the

American economy.

>> Right now, breaking news

here, stocks all around the world are tanking.

>> JACOBY: If you want to understand how today's financial

world has grown so far removed from the real world-- and the

role of the Federal Reserve-- you need to go back to 2008,

when investors, speculators, and Wall Street bankers nearly

brought down the global economy.

>> Get on the train!

Otherwise it is gonna leave the station without you.

>> Wall Street shaken to its very foundation today.

repair, and reform our banking system and get credit flowing

again to families and businesses.

>> JACOBY: The new president and Congress spent hundreds of

billions of dollars to restart the economy, but at the center

of the rescue effort was the Federal Reserve.

Richard Fisher was the head of the Fed's bank in Dallas at

the time.

>> What the Federal Reserve does is provide the blood supply

for the body of our capitalist economy.

And what happened in 2008 is all the veins and the capillaries

and the arteries collapsed.

So every financial function had failed.

It had collapsed and we had to restore them.

>> JACOBY: That's when the Fed stepped in.

Its job is to promote employment and keep inflation in check,

primarily by raising and lowering short-term interest

rates.

In 2008, Fed officials decided to do something they hadn't done

in half a century-- they began dropping rates, eventually to

almost zero.

>> Those massive rate cuts have not been stimulating the

economy.

>> JACOBY: With Americans still suffering and the banking system

on the verge of collapse, Fed officials there at the time

told me they felt compelled to go even further.

>> And then the question was, "What else can we do?"

And the committee came up with the idea of quantitative easing.

>> Quantitative easing, what in the world is it that?

>> Quantitative easing, that's just a Greek term to a lot of

people.

>> A lot of people want to know what they're gonna say about

what we call quantitative easing, what are some of the...

>> JACOBY: Quantitative easing, or QE, was championed by Ben

Bernanke, then the Fed chairman.

>> Mr. Bernanke, what does this do to the financial crisis?

>> The Federal Reserve has been putting the pedal to the metal.

So we're doing everything we can to support the economy, and

we hope that that's going to, you know, get us going next year

sometime.

>> JACOBY: QE was an experimental way for the Fed to

inject money into the financial system and lower long-term

interest rates.

The way they did it was to literally create new money and

use it to buy huge amounts of things like mortgage-backed

securities and government debt from banks and other

institutions.

Their hope was that the lower rates would spark more spending

and borrowing throughout the economy.

>> It's almost like alchemy.

You can create money out of thin air if you're at the Central

Bank.

So creating more money puts more money in the banking

system, put more money out there for the economy to take it and

put it to work and to grow, and to restore itself.

>> JACOBY: As news of the Fed's actions spread throughout the

financial world, Andrew Huszar, a former Fed official who'd left

to work on Wall Street, got the offer of a lifetime.

>> I was sitting in a cafeteria in Stamford, Connecticut, when I

got the call.

I was eating a sandwich, I almost choked on it at the time

Basically I realized very

quickly what I was being asked.

I was being asked if I would manage the largest financial

markets intervention by a government in world history.

>> JACOBY: The job was to join the Fed office in Manhattan and

manage a massive expansion of its power in the financial

markets under QE-- buying more than a trillion dollars in

mortgage bonds from the banks as quickly as possible.

>> The idea was that the Fed was trying to get more credit

and cheaper credit into the hands of the average American.

There were millions of people losing their jobs, millions of

people in mortgages that they couldn't afford, and how could

the Fed use its financial tools to actually help the average

American?

>> JACOBY: Is this something that had ever been attempted

before?

>> No.

You have to realize we were in the midst of the next Great

Depression, this was an incredible collapse of the

fundamental structure of the U.S. economy in a very short

period of time and we were building the plane while we

were flying it.

is a confidence game.

So, the Fed exists to restore confidence when all confidence

is lost.

>> JACOBY: William Cohan is a writer and former banker who

worked with us during our months reporting this story.

>> JACOBY: The idea of lowering interest rates and the idea of

quantitative easing was basically pulling out all the

stops to make it cheaper to borrow.

>> Basically by making money so inexpensive, by suddenly it

being abundant and cheap and easy to get, they just flooded

the zone with capital.

>> JACOBY: Easy money.

>> Easy money-- trillions of dollars of easy money.

Like, the greatest experiment in easy money in history.

>> JACOBY: All that easy money

sparked a rally in the stock market.

>> We saw it take its effect almost immediately.

The market reacted.

I was a little bit surprised it took off that fast.

>> JACOBY: How is that viewed inside of the boardroom?

Was that seen as success?

>> Yes, it validated what we thought would happen-- that's

what we thought would happen.

When you drive interest rates down all the way out, it forces

investors into taking bigger steps on the risk spectrum.

Cheap money is the fuel for a financial speculator and for a

financial investor.

>> JACOBY: What Fisher and other former Fed insiders told me is

that the stock market rally was no accident.

By design, the Fed's QE program effectively lowered long-term

interest rates, making safer investments like bonds less

attractive, and riskier assets like stocks more attractive.

It was hard to argue with the results.

Stock prices kept going up.

>> The old saying is don't fight the Fed.

>> Don't fight the Fed.

>> Don't fight the Fed.

>> Rule number one as a young trader you're taught is don't

fight the Fed.

>> I don't know what the hangover's gonna look like down

the road from all this extraordinary stimulus, but for

now, the markets love it.

Don't fight the Fed.

>> A cam roll one...

>> JACOBY: You look at me.

So we're approximating an in-person interview.

It'll work, it'll work.

Mohamed El-Erian remembers it well.