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Journey To The Center Of The Fed

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UNIDENTIFIED REPORTER #1, BYLINE: We are getting very close to PLANET MONEY's 1,000th episode. It is two episodes away. So to celebrate, we're gathering our favorite PLANET MONEY moments from the very first episode to now - almost 12 years of shows. So tell us your favorite PLANET MONEY moment of all time and what episode it's from. You can tag us on Twitter or Instagram. We're @planetmoney. Or you can email us -





Robert Smith, we're on a boat.


You can hear the roar of the engines. We're underneath the Brooklyn Bridge now. We're about to cross New York Harbor to Manhattan to go to the New York Federal Reserve.

GOLDSTEIN: This is a thing we do now. We wear masks. We stand 6 feet apart. We go outside. And we talk about the Fed.

SMITH: And we did an emergency show early on in the crisis about what the Fed was doing. We walked to the park. And we said, wow, they've done so many amazing things. It is not possible for them to do anything more. How can they do anything more?

GOLDSTEIN: And then a week after that show - seven days after that show - they did so much more. And week after week since then, the Fed has done more and more and more - more and more money, trillions and trillions of dollars going out to the U.S., all around the world. So I'm going to say the Fed is the most important - certainly economic institution in the world right now, maybe the most important - pardon us - institution in the world right now.

Hello. Welcome to PLANET MONEY. I'm Jacob Goldstein on a boat.

SMITH: I'm Robert Smith, also on the boat - same boat, in fact. Today on the show, what the Fed did, why they did it...

GOLDSTEIN: And what we should be worried about.


GOLDSTEIN: Tour guide Robert, go. Tell me everything you know about this area.

SMITH: All right. We're in the East River right now. We are underneath the Brooklyn Bridge. We're going from Dumbo, the neighborhood, over to Manhattan. Wall Street is right over there, and South Street Seaport right there.

GOLDSTEIN: Beautiful day. It's a beautiful day. I haven't been out of my neighborhood in a month and a half. Did I mention that? Truly, this is the farthest I've been from my home since March.


SMITH: The ferry arrived at Wall Street, and we walked over to the Federal Reserve through some pretty deserted streets in Lower Manhattan. This is the world financial capital right here - the Wall Street area of New York City - and I haven't spotted anyone in a suit and tie all morning long.

GOLDSTEIN: Your comment as we were walking over was, you should sell your stocks.

SMITH: It made me suspect...

GOLDSTEIN: Not investing in...

SMITH: ...Sell stocks...

GOLDSTEIN: Not investing in...

SMITH: ...Because it looks bad.

GOLDSTEIN: We're on the corner of Maiden Lane and Nassau right outside the New York Fed. This right here - I don't know if it's technically the cornerstone...

SMITH: It's a stone on the corner.

GOLDSTEIN: ...But it's a stone on the corner of this great, big fortress of a building. It says Federal Reserve Bank of New York, chartered 1914.

SMITH: We did not come here to interview anyone because the building is just firmly shut.

GOLDSTEIN: It's closed, and it's a fortress.

SMITH: And we're basically yelling at the stone right now. That is - that's the goal of the show, to yell at the stone. And there's a real reason for this, which is all the things you've been hearing about recently about economic stimulus to help us during this crisis, that has come mostly from Congress. You know, the stimulus checks, the Paycheck Protection Program for small businesses, the...

GOLDSTEIN: Expanded unemployment.

SMITH: ...All these things are congressional actions. But another thing that is extraordinarily important but we've heard much less about are the actions of the Federal Reserve, which is independent of Congress but has done extraordinary things for the economy.

GOLDSTEIN: And, Robert, you were saying when we talked about this before that, like, to understand what the Fed is doing now, we really do need to talk about sort of how the Fed got here.

SMITH: Because if you talk to anyone who has watched the history of the Fed or even lived through the last financial crisis, they are just amazed, stunned at what the Federal Reserve has been able to do. And part of that comes from how limited the original mission of the Federal Reserve was.

GOLDSTEIN: Although, at the core of the original mission - like, the essential thing the Fed was created to do - is a version of what it is doing now, right? So the original Fed, the 1914-era Fed - when this New York Fed was chartered, the essential thing it was supposed to do was lend money to prevent a financial crisis from taking the whole economy down.

SMITH: Yeah. And the techniques were a little bit different because back then, the Federal Reserve was a bank for banks - like, literally a bank like you'd see in Kansas City. Joe's Kansas City Bank of Kansas City would keep money at the Federal Reserve. And then if there was a run on the bank or some sort of stress on the financial system, the Federal Reserve could lend money to the bank. So it was just sort of a club for bankers.

GOLDSTEIN: First big test for the Fed came with the stock market crash in 1929. The New York Fed right here, they did exactly what a central bank is supposed to do. They started lending money to the banks - to the New York banks, the most important banks - and it helped. It really sort of prevented a massive immediate banking crisis. But a couple of years later, by, like, 1931, people start to get nervous of all this lending to banks, and the Fed decided to pull back, to stop lending so much money into the banking system.

SMITH: And that was when what could've been, you know, a minor depression became the Great Depression kind of because of the Federal Reserve. They didn't do enough. Cut to...

GOLDSTEIN: Cut to the financial crisis of 2008, right? That's really the next big moment, I think.

SMITH: Yeah. So the Fed over the years - they monitor the economy. They sort of help the boom and bust cycle, as they say, of an economy, lending money, setting interest rates, that sort of thing. Then comes the Great Recession of 2008. And the Federal Reserve is being run by a man named Ben Bernanke, who spent his entire career studying all the things the Fed did wrong in the Great Depression.

GOLDSTEIN: He's like a world expert in the Depression.

SMITH: And he's like, do-over.

GOLDSTEIN: And so the Fed was incredibly aggressive in lending into the financial crisis in 2008, but the financial system had changed in a really important way between the Depression and 2008. And as a result, the Fed's response was quite different, right? And the essential change was the financial system was no longer just banks, right? The Fed had been created as a bank for banks, but what Bernanke and the Fed realized in the Great Recession was that was no longer enough.

SMITH: Sure, because there were things that were banklike.

GOLDSTEIN: Sort of investment firms were transferring huge amounts of money around the world. Money market mutual funds were very banklike but not banks.

SMITH: Insurance companies were acting as banks. Even, like, GE - you know, GE that makes the light bulb and the jet engines - GE had this huge financial division.

GOLDSTEIN: Actually a financial company that makes jet engines and light bulbs on the side.

SMITH: Exactly. They're like, oh, my God, everyone's a bank, and we don't have the means. We need to help them, too.

GOLDSTEIN: So the Fed starts lending not just to banks, although definitely to banks, but also to all of these different financial institutions that have become the sort of shadow banking system. They're backing money market mutual funds. They're backing commercial paper. They've created this special entity to buy assets out of the shadow banking system. They actually called it Maiden Lane, which is the name of the street we're standing on here, with the New York Fed doing most of this work

SMITH: And essentially injecting money into all parts of the financial system. But it's hard to underestimate, like, how controversial it was at the time. The Fed had never tried any of this, and it took months and months and months to figure it out and how much were they going to do. And there was all this resistance. And people were like, is this even what the Federal Reserve is for?

GOLDSTEIN: And, I mean, I think an important detail at the time was, you know, because the crisis started in the financial system, there was a lot of justifiable anger where it's like, well, this financial system is what is causing all of our problems, and now the Fed is bending over backwards to save it, right? So...

SMITH: It felt icky.

GOLDSTEIN: Enraging.

SMITH: It felt weird, and it felt like a gift to bankers.

GOLDSTEIN: It felt not just. But in the end, it did prevent the 2008 financial crisis from becoming another Great Depression. The recovery was bad and long, and it took a long time for unemployment to get back. But it was not as bad as the Depression.

Look at that little dog. It's smaller than my dog. You don't see a lot of dogs smaller than my dog. There's one.

SMITH: Keep up there.

So that brings us to now. People still think of the Federal Reserve as a bank for banks, and they know that in extraordinary times, it can do some extraordinary things. What surprised Jacob and I, what surprised everyone who watched the Fed was how fast and how big and how creative the Federal Reserve has gotten in the last month.

GOLDSTEIN: It's gone way beyond. It's gone way beyond what it did even in 2008. And to be clear, those sort of first two phases, the original Fed and the 2008 Fed, all that stuff is still there, and they rolled that out, like, in a day, right?

SMITH: In less than a week, yeah.

GOLDSTEIN: So, yes, the original Fed discount window, the way regular banks borrow from the Fed, that is still there. And they lowered the rate and they encouraged banks to borrow from them, and banks came and borrowed from them. Original Fed - still happening. And then the, like, don't-call-it-Fed-2.0-but-it's-Fed-2.0 stuff from 2008 with all of the special facilities for, you know, to help money market mutual funds and the commercial paper market - all this stuff that's banklike but not actually banks, they got that out right away.

SMITH: And to great effect. You know, when we last did a show about the Fed a month ago, we pointed out that the initial moves of the Federal Reserve did bring calm into the financial markets. We were on the verge of a panic. And people said, oh, the money is there for banks and investment firms and insurance companies. It's - the money is there. We don't need to worry.

GOLDSTEIN: So there hasn't been a financial crisis.


GOLDSTEIN: But obviously, there is a huge economic collapse happening outside of the financial system right now. And the biggest, most striking, most surprising, most interesting things the Fed has done since our last show have gone beyond anything they've done before because now they're not just about the financial system. They're not just about banks. They're not just about banklike firms. They're really about everybody, right? The Fed has, like, exploded outside of its little financial universe and is suddenly not just the lender of last resort to finance but the lender of last resort to everybody. OK.

UNIDENTIFIED PERSON, BYLINE: By the way, the Federal Reserve police just rolled by.

SMITH: Oh, my God. Federal Reserve cops.

GOLDSTEIN: You know, I will tell you, not to brag, but I once did a standup in front of the People's Bank of China, and we got shut down there.


GOLDSTEIN: You won't be surprised.

SMITH: I've stood in front of central banks all around the world for basically no reason.


SMITH: OK. So let's go through some of the really, like, mind-bending things that the Fed has done recently that, frankly, that you thought that they would never do, could never do.

GOLDSTEIN: I made a spreadsheet. I made a spreadsheet. I'm pulling it up on my phone.


GOLDSTEIN: Never really done a spreadsheet on the phone, but I think it'll work.

SMITH: Hold it sideways.

GOLDSTEIN: All right, so we've got lending to banks, discount window.

SMITH: Got it. Got it. Got it.

GOLDSTEIN: Liquidity buffers - did that. Nonbank financial firms, (unintelligible) facility, commercial paper.

SMITH: Yup, yup, yup. Yup, yup, yup. Yeah, yeah, yeah.

GOLDSTEIN: QE - we didn't mention that, but we know what that is. OK, lending to everybody else.


GOLDSTEIN: So, OK. So there are a bunch of different sort of things, facilities that they've set up to lend to companies - to big and mid-sized companies - over a trillion dollars in lending to just, like, normal companies, like companies that, like...

SMITH: That - what? - make shoes, make cars, deliver food to restaurants. Put it this way. If you know the name of a company from the largest, you know, S&P 500 top companies in the nation...

GOLDSTEIN: Down to a company with, like, 500 employees - so not the smallest companies.

SMITH: So it's department stores and supermarkets and that sort of thing. And now let me explain why this blew my mind - because the Federal Reserve does not get involved in everyday business. And I know that sounds weird. It's the central bank and everything. But the idea is the Federal Reserve is responsible for the entire economy, for the stability of the currency. And then they say to banks, you decide, oh, this is a good company; we should lend to them. This is a bad company. This whole...

GOLDSTEIN: I mean, like, capital markets, bond markets, credit ratings agencies - there's a whole universe that assesses basically what companies should be able to borrow money, how expensive it should be. This is not the job of the Fed.

SMITH: There are no loan processors sitting in this building of the Fed here on Maiden Lane that we're standing in front of. And so for them to move into this business really does give some people pause because some people are going to get the money and some people may not get the money. And that is an actual choice being made by the Federal Reserve about which companies can succeed and which companies won't.

You had to have seen Jacob's expression. He did this expression that's like, that's not true. Maybe true? A little true.

GOLDSTEIN: True enough.

SMITH: True enough.

GOLDSTEIN: OK, that is companies, corporations. Another huge new thing to the tune of, as they say, $500 billion is the municipal lending facility. This is the Fed lending money directly to cities, states.

SMITH: And it's also an incredibly unusual and fraught decision for the Federal Reserve because you think it's hard to peer inside a company and determine how their finances work and lend money to a company. Imagine doing that for all the cities and states of the United States, which have budget problems and pension obligations. And the Fed is just essentially saying, you know what? Like, we are going to lend you money to get through this crisis.

So, Jacob, I have a question for you. What's the dollar figure at the bottom of your big spreadsheet? You've got the traditional things the Fed does. We've got supporting companies, corporations, businesses. We've got supporting cities, states, municipalities. What is the total amount of money?

GOLDSTEIN: I'm embarrassed to say I didn't add it up. I just used the spreadsheet as, like, a list with cells. It's trillions. Can we just say trillions? What's the difference? It's trillions.

NICK FOUNTAIN, BYLINE: What's the point of a spreadsheet?

GOLDSTEIN: Producer Nick Fountain. Good point.

SMITH: It's funny. My daughters were talking about how loud it is when I record the show from their bedroom. And my daughter did an imitation of me, and the imitation was just, trillions, trillions.

GOLDSTEIN: (Laughter).

SMITH: Yeah, it pretty much sums up this crisis.

GOLDSTEIN: That's really funny.

SMITH: Well, I will say that people who actually do understand what spreadsheets are for...


SMITH: ...Have given a range of what the Fed might spend in these loans, essentially money they're creating, and they have calculated that the Fed has the potential to spend, to essentially create $5 trillion to $6 trillion.

GOLDSTEIN: We should point out that this money is loans, most of which we imagine will be paid back.

SMITH: Tell you what. Why don't we take a break? And then afterwards, are all of these programs that we've gone over - are they working?


SMITH: So the big question, Jacob, is, are all these programs that we've gone over - are they working?


SMITH: Louder.

GOLDSTEIN: I mean, ish.

SMITH: I'm 6 feet away, cannot hear you.

GOLDSTEIN: Yes? I don't know, man. Look; so there is this thing we have talked about that points to yes, as the magic eight ball says, and that is this. You know, there was this moment at the beginning of the pandemic crisis - right? - say, late March - when lots of companies suddenly basically were locked out of being able to borrow money, right? The markets for lending money were freezing up. And this is the fundamental thing that the Fed is concerned with, right? The Fed is concerned with keeping the plumbing of the economy open. And so suddenly, companies like, say, whatever - Boeing, Carnival Cruise Lines - can't borrow money.

SMITH: For good reason (laughter).

GOLDSTEIN: Right. Like, I'm not going to lend money to a cruise line right now.


GOLDSTEIN: I'm not going to lend money to a company that builds airplanes for people to fly in when nobody's flying on your planes. Then the Fed comes out, and they say, we are going to start lending money to corporations.

SMITH: And even before they sent any money out the door...

GOLDSTEIN: They even now haven't sent much money out.

SMITH: They have not sent much money out. But just the sheer promise that they will in the future support these corporations allowed these corporations to all of a sudden borrow money from the open market, from...

GOLDSTEIN: From private investors.

SMITH: And I know that we overuse the word magic...

GOLDSTEIN: You use it every time we talk about the Fed.

SMITH: ...When it comes to the Federal Reserve, but bear with me now because this is the thing that I love the most about the Federal Reserve, which is they are so trusted, they have such a credibility, and, of course, they can print money. When they say they are going to do something, it is as if it has already happened. People believe them when they say they are going to support municipalities and corporations and businesses. People believe them absolutely, and so they act as if it has already happened.

GOLDSTEIN: So just the promise of action is meaningful action.

SMITH: I think that deserves a little bit of pause before we get to part three.

GOLDSTEIN: What can go wrong?

SMITH: And there's some things that come to mind immediately that are easy to dismiss - things like hyperinflation.

GOLDSTEIN: Yeah, there's probably not going to be hyperinflation. You know, we're not going to be a Venezuela or Zimbabwe, have $100 trillion bills. We talked about that a lot in a show a few weeks ago, but pretty clear that's not going to happen.

SMITH: OK. So what are you worried about?


SMITH: You've put your foot up on a...

GOLDSTEIN: I'm ready.

SMITH: ...Pedestal (ph) here in front of the Fed.

GOLDSTEIN: I'm worried that the Fed will lose its independence. So, you know, obviously, the Fed is part of the government. The leaders of the Fed are appointed by the president and confirmed by the Congress. But, you know, compare the Fed, for example, to, like, the Supreme Court, right? Think of how political every Supreme Court appointment is. Like, clearly, we don't think of the Fed that way, right? Like, Jerome Powell, head of the Fed, is like a technocrat, right? He has this very down-the-middle approach, and you don't think of him as, like, oh, he's the Republican appointee or the Democratic appointee. He's just the head of the Fed. He's just the guy, like, running the numbers. And I frankly think that is good.

And I recognize that the Fed needs to do all this now, arguably because of the crisis. But, you know, it is working so closely with Congress now. And these loan programs, it's actually like a joint venture with Congress. Congress is calling on the Fed to do these specific things.

And as importantly, it's getting so far beyond finance - right? - it's lending to normal corporations; it's lending to cities and states - that I feel like there's a good chance that in a year or two, it'll become much more politicized and that that will be bad for the Fed. It'll make it harder for the Fed to do its just basic bread-and-butter, setting interest rates, keeping the financial system plumbing clear job.

SMITH: Because you don't want Congressional hearings yelling at the Fed being like, well, wait a minute. Why did you back this industry and not that industry? Why did this company get more loans than that company? Or why did you save Birmingham and not Chicago?

GOLDSTEIN: Well, and those...

SMITH: Yeah.

GOLDSTEIN: ...Might be reasonable questions to ask, right? We should care about those things. But I think the argument is that, like, that shouldn't be the Fed's business, right? The Fed is doing these things because it has to, but it has to because Congress is telling it to because Congress isn't doing it itself, right? Like, the business of deciding whether to save Birmingham is Congress' business, and that's an appropriate question for people who are elected. And the Fed is only jumping in because it has to.

And Jerome Powell himself said - I think last week, he just said, look; Congress needs to do more. Like, the Fed is doing all this because it has to. But it would be better if Congress did more and the Fed maybe did less.


SMITH: If you would like to make bold predictions about the economy and Jacob and I can walk to your house and yell in front of it, we are happy to do so.

GOLDSTEIN: As long as it's in walking distance from our house.

SMITH: Email us - planetmoney...

GOLDSTEIN: You can also find us on social media at @planetmoney. Our show today was produced by a cold Nick Fountain...

SMITH: Standing 6 feet from us right now.

GOLDSTEIN: Our editor is Bryant Urstadt. Our supervising producer is Alex Goldmark. If you like PLANET MONEY, please tell a friend.

SMITH: That would be a nice and kind thing to do.

GOLDSTEIN: I'm Jacob Goldstein.

SMITH: And I'm Robert Smith. This is NPR. Thanks for listening.


SMITH: And we're back.

GOLDSTEIN: And we're back.

SMITH: (Laughter).

GOLDSTEIN: Maiden Lane and Nassau Street, New York Fed, standing in front of an empty building, yelling up at it.

SMITH: Yelling about the Fed, yelling at the Fed, yelling near the Fed, I'm Robert Smith.

GOLDSTEIN: I'm Jacob Goldstein.

SMITH: And it's not the first time I've stood outside the Fed for no reason, and it won't be the last. I'm on a street. Listen. Woohoo - can't fake that happy. You know, a lot of other podcasts, it sounds like they're in their spare bedroom - not this podcast.

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