In 2011, Senator Bernie Sanders asked me to serve on his Fed reform committee. We had one mission…

To look into the Federal Reserve’s dark ways during the financial crisis of 2008. That’s when Ben Bernanke – who just won the Nobel Prize in Economics this month – was at the helm of the Fed.

Joining me on the committee were a Nobel economist and other acclaimed experts. But we were never able to make any headway with Bernanke’s Fed.

That doesn’t mean there was nothing shady going on back then. In fact, we’re feeling the consequences of Bernanke’s easy money policy today.

With inflation close to 40-year highs, and the Federal Reserve scrambling to raise interest rates to “cool” the economy… we’re seeing what happens when the Fed suddenly has to withdraw its monetary stimulus.

Today and tomorrow, I’ll show you how Bernanke’s easy money policies got us here, and what it means for your money.

Bernanke Takes a Page Out of Japan’s Book

Last Thursday, I showed you how Bernanke did a poor job of steering the U.S. economy through the 2007-2008 financial crisis.

I also showed you how, despite having clear warnings about a looming crisis, he did nothing to stop it.

It’s why I called Bernanke’s Nobel Prize win ridiculous. But today, I want to dig a little deeper.

See, Bernanke is the guy who brought quantitative easing (QE) to the U.S.

The Japanese came up with it originally. But Bernanke saw what they’d been doing in Japan to jump-start their moribund economy, and he decided to give it a shot here.

If you know anything about Japan’s economy over the last four decades, it makes you wonder why he thought it was a good idea.

Starting in the late 1980s, the Bank of Japan introduced an easy money policy, which included more than 15 years of QE.

By the late 1990s, however, it was pretty clear that QE wasn’t doing anything to boost the country’s real economy.

In fact, the 1990s were Japan’s so-called “lost decade,” characterized by its slow growth and deflation.

This lasted from about 1991 to 2001. But even today – multiple rounds of QE later – Japan’s previously bustling economy remains mired in stagnation.

How the Fed Conjures Up Money Out of Thin Air

You’d think that a student of financial crises, like Bernanke, would have put two and two together.

But in 2008, Bernanke decided to give QE its debut in America.

Now, as longtime Rogue readers know, QE is basically helicopter money for “too big to fail” banks, corporations, and even the U.S. government. Here’s how it works…

The government issues bonds and sells them through big banks, called “primary dealers.” With QE, the Fed steps in and purchases long-term Treasuries in the open market from these financial institutions.

They may also buy other financial assets, such as mortgage bonds or other corporate bonds – like they did as part of an emergency maneuver in 2020.

But here’s the catch: The Fed doesn’t create any real value when it does this. It simply adds the amount it agreed to pay the bank for its bonds to the bank’s account balance at the Fed.

In other words, the Fed conjures up cash from thin air. Which is why a lot of people call it “money printing.”

Now, since banks can create up to $10 in new loans for every $1 increase in the reserves they keep with the Fed, this allows them to extend more credit. Supposedly, to stimulate the real economy.

Imagine if you could increase the balance on your bank account with just a few keystrokes on your computer… without adding any real money to your account. That’s QE in a nutshell.

All Hell Breaks Loose

The Fed did its first round of QE in 2008. It bought $1.4 trillion worth of housing debt and $300 billion in Treasuries.

But then, all hell broke loose. The banks wanted more money from the Fed in return for dumping their bonds on the Fed’s books.

The Fed said, “Why not?” And it launched three more rounds of QE, all the way up until October 2014.

The net result? The Fed’s book swelled from $800 billion before the crisis to $4.5 trillion in 2014. All with money it created out of thin air.

It claimed this would “stimulate the economy.” Instead, the Fed ended up creating the biggest financial bubble in history.

Much of the money the Fed created found its way into the stock market by way of Wall Street.

To illustrate, U.S. stocks rose by more than 400% from late 2008 until the Fed started to hike rates this year. You can see this in the chart below.


But it wasn’t just stocks. Almost every asset market value got a boost – bonds, housing, credit. That is why we call this era the “everything bubble.”

But, as regular readers know, there was one major problem.

This loose monetary policy supercharged The Great Distortion that had been growing between the markets and the real economy – a distortion that, as regular readers know, is now permanent.

Tune in tomorrow to find out how this turned the Fed into a lender of last resort for Wall Street… along with the implications for investors today.



Nomi Prins
Editor, Inside Wall Street with Nomi Prins