For Jerome Powell to claim ignorance of one of the most important statistics used to monitor excess leverage in the financial system — the scale of margin debt — is an insult to the American people.
By Pam Martens and Russ Martens of Wall Street on Parade.
When Jerome Powell, the Chairman of the Federal Reserve, appeared for an interview this past Sunday night on the CBS investigative program, 60 Minutes, he asserted complete ignorance of the amount of margin debt currently being used to inflate the stock market to one new historic high after another. The exchange between Powell and 60 Minutes host, Scott Pelley, went as follows:
Pelley: “The securities industry has reported that $814 billion has been borrowed by people investing in the stock market, borrowed against their portfolios. That’s a 49 percent increase over last year.
“And the last time it grew that much was in 2007, before the Great Recession. And the time it grew that much before that was 1999, just before the dot com implosion. At what point does the Federal Reserve start to rein in this speculative bidding up of stock prices based on borrowed money?”
Powell: “That sounds like margin debt. I don’t know that statistic. I really can’t react to that statistic. I would say the main thing that we do is we make sure that the financial institutions that we regulate and supervise understand the risks that they’re running, manage them well, have lots of capital, lots of liquidity, and highly evolved risk management systems so that they do understand the risks they’re running and have plans to deal with them. And that way, when there are shocks, for example, if there were to be a big market correction, you will see financial institutions that are strong enough to stand up to that. Not just private financial institutions, but also markets and things like that, payment utilities and things like that. That’s really what we do.”
For just how well Powell’s plan of action held up as the pandemic took hold in the spring of last year, see here.
Pelley provided Powell with perfect examples of how excessive levels of leverage and unfettered risk-taking on Wall Street blow up markets and the U.S. economy, citing 2007 and 1999. Today, the Fed supervises some of the most highly leveraged financial institutions in the world – including Wall Street banks that are fueling not only their own internal leverage but also fueling obscene levels of leverage by loaning out hundreds of billions of dollars to hedge funds. For Powell to claim ignorance of one of the most important statistics used to monitor excess leverage in the financial system is an insult to the American people.