The irony was palpable. An interview with a Federal Reserve Bank official from last fall, claiming that “we’re a long, long way from any kind of disruption” to the financial system — followed in short order by television clips showing the failure of Silicon Valley Bank.
But as “Age of Easy Money” shows, the recent bailout of Silicon Valley Bank represents only the latest example of the Fed disrupting the economy and banking system — almost always with long-term consequences. The two-hour documentary, an episode of the PBS series “Frontline,” was more than two years in the making. Some of the interviews aired as part of an earlier one-hour “Frontline” program broadcast in July 2021.
For a program so long in production, its airdate proved auspicious. The events of recent days have brought into renewed focus the way in which the Federal Reserve has distorted financial markets with interventionist policies and how unwinding those policies will not come quickly — or easily.
An Unaccountable Institution
Several themes stand out in “Age of Easy Money,” beginning with the fact that the Federal Reserve’s unprecedented actions in recent years came to an institution that lacks direct accountability. With the exception of the infamous TARP bailout vote in 2008, the rescue attempts made during the financial crisis, the quantitative easing programs that effectively saw the central bank printing new money, the emergency measures during the Covid-19 lockdowns, and the bailout declaration for depositors in Silicon Valley Bank — none of these decisions were voted on by Congress.
In many ways, the Fed’s actions were not just undemocratic but anti-democratic. The special notes that the Fed announced its second round of quantitative easing measures the day after Republicans regained control of the House of Representatives in the November 2010 midterm elections.
Because the divided Congress would not pass additional “stimulus” measures — after Republicans won an electoral mandate to stop the bailouts and over-spending — the Fed decided to act itself, effectively defying the clearly expressed wishes of voters. The decision represented a crossing of the proverbial Rubicon, as it showed the Federal Reserve as trying to expand its remit from being confined solely to monetary policy into broader economic and fiscal policy.
Encouraging Risky Behavior
While “Age of Easy Money” attempts to take a long view by examining the financial crisis in 2008 and the Fed’s response, one could easily argue that the Federal Reserve’s fingerprints precede — and in some ways helped create — the crisis itself.
The documentary (unfortunately) does not dwell on this topic, but experts refer to this fact in interviews. An editor at the Financial Times referenced how even before the financial crisis, interest “rates have been going down and down and down and debt has been going up and up and up.” Economist Nouriel Roubini, who famously predicted the financial crisis, noted that “we have had literally a few decades of ever-increasing bubbles that have been fed and supported by central banks.”
Consider that in November 2002 — more than one year after 9/11 and well after the end of the dot-com recession — the Federal Reserve did not raise interest rates but lowered them by half a percent, down to 1.25 percent. The Fed lowered rates a second time the following June, down to 1 percent, and kept them there for over a year. Interest rates stayed below 2 percent for three years, from November 2001 to November 2004, and did not hit 4 percent until November 2005.
What did investors do during this era of prolonged ultra-low interest rates? They’re doing exactly what they have done since the initial financial crisis, taking on additional risk in search of greater returns.
In the early 2000s, investors piled into mortgage-backed securities linked to subprime loans. Most investors thought them a surefire way to get higher returns than ordinary bonds were offering until these supposedly “safe” investments suddenly imploded, taking the economy down in the process. Following the financial crisis, companies used ultra-cheap interest rates to take on additional debt and often used that debt to buy back shares — $6 trillion worth, the documentary notes — to goose their stock price.
When the Fed engaged in quantitative easing after Covid hit, investors moved into speculative assets like cryptocurrencies and non-fungible tokens. Stock and housing prices also soared — even as the “regular” economy struggled in many places to recover from the pandemic hit.
With short-term rates at zero as recently as last March, Silicon Valley Bank bought long-term Treasury securities in a search for higher yield, only to have to sell them for a loss when tech investors needing cash started to withdraw their deposits. (Treasury securities have prices inversely related to their yields, such that when interest rates rise — as they have over the past year, and as everyone knew they would when interest rates stood at zero — their price falls.)
Granted, the Federal Reserve did not engage in quantitative easing until after the financial crisis hit in 2008. But for more than two decades, the Fed has engaged in what amounts to a “boom-and-bust” management of the economy, keeping interest rates so low after the last recession that asset prices artificially inflate, leading to yet more pain when the bubbles necessarily pop.
Stop the Insanity
The program noted the Fed’s unimpressive track record. Billionaires grew their wealth by $1.3 trillion from March 2020 through February 2021, thanks in large part to Fed bailouts raising stock prices. Conversely, ordinary Americans have quite literally paid the price for those bailouts, as evidenced by “Frontline’s” trip to a Phoenix food bank. Inflation has eroded the value of ordinary Americans’ wages so much that many struggle to make ends meet.
The total effects of this Federal Reserve-inspired era of debt bring to mind Ronald Reagan’s axiom that the nine most terrifying words in the English language are “I’m from the government, and I’m here to help.” Rather than new bailouts or more “stimulus” spending, start by making uninsured depositors at Silicon Valley Bank — most of them sophisticated Big Tech businessmen who knowingly accepted above-average interest rates on their deposits in exchange for the bank’s greater risks — take a haircut on their deposits. And end the age of bailouts, once and for all.
The “Frontline” program “Age of Easy Money” is available online, via the PBS app, or via your local PBS affiliate.
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