THE “BERNANKE PUT” AND THE FED’S TRILEMMA
“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done” – JM Keynes, General Theory of Employment, Interest and Money
Now that the equity market has rallied back to its pre-Lehman Brothers levels it’s becoming fashionable to shower the Federal Reserve with praise for their actions over the last few years. But let’s not forget that we’ve seen this movie one too many times before.
Over the last 15 years the Federal Reserve has essentially become a price fixing mechanism for an economy that has long struggled with severe structural problems. When problems have arisen in the economy the U.S. central bank has intervened to lessen the blow to the economy. In theory, this was intended to reduce the volatility of the business cycle. Unfortunately, many of their policies have simply exacerbated the problems or helped to generate even greater imbalances.
This all started well before the housing bubble or the Nasdaq bubble. After the 1987 crash Alan Greenspan was quick to reassure investors that the Fed was there to bolster markets. This “Greenspan put” was mastered with the bailout of LTCM as the Fed intervened in markets to make sure that losers didn’t have to become losers. LTCM was the epitome of failed economic theory at work in markets. A group of brilliant economists believed they had discovered the path to minting money in financial markets. On paper their equations appeared flawless. In reality, they were a disaster waiting to happen. In one fell swoop this collection of geniuses proved that EMH was flawed. And not two years later the Greenspan Put helped contribute to a market bubble like the United States had never seen. In the words of David Tepper, it was a “win win” market – or so they believed.
For 18 years Alan Greenspan ran the nations central bank based on theories and beliefs that he later referred to as being “flawed”. Despite this, much of his work influences the current central bank. In fact, today’s Fed is more involved in markets than Greenspan ever was. To some extent this tinkering with markets is justified. The role of lender of last resort is important, but the modern day Fed has taken its role to an entirely new level. They are no longer just the lender of last resort – they have become the bailout mechanism of the capitalist system and ultimately a plaque build-up in a system that is increasingly unhealthy. The Greenspan Put has become the Bernanke Put. And so the financialization of our markets continue. In fairness to Mr. Bernanke I can’t entirely place the blame on him. Due to political ignorance of our monetary system the Federal Reserve has been given the overbearing responsibility of being lender of last resort while also attempting to establish full employment and price stability. Talk about a trilemma if there ever was one….
What these men haven’t stopped to ponder is whether any of this intervention was actually healthy for the markets. Perhaps the market crashed in 1987 because an irrational 40% climb in 8 months had created instability? Perhaps the Nasdaq never should have approached 5,000? Perhaps LTCM needed to fail? Perhaps housing was never intended to be a speculative asset? Perhaps these assets needed to be allowed to decline? The result has been a slow deterioration in the foundation of the system with each and every bailout. I recently described why these imbalances continue to pose such a serious risk to the economy as we weaken the foundation from which each subsequent boom is built upon:
“What I fear most about the current cycle is that we have not allowed the markets to sufficiently clear. If that is the case you can think of the global economy like an obese man who fights to lose weight in an effort to fend off what is an almost certain heart attack. After a multi decade binge he suffers a massive heart attack (think LTCM circa 1998). The doctors save him by intervening, but they don’t actually help the man fix his inherent problems (dying internal organs and lack of discipline). In the case of the economy this is global imbalances, structural flaws in the banking system and a lack of regulation. The man vows to lose 50% of his total body weight, but after losing 20% of his total body weight he decides the process is too grueling and is taking too long. A fast food restaurant opens up next door (hello government bailouts!). He once again feels the need to stimulate his lust for food. So, he binges again (think Greenspan 2001). A new boom occurs before he ever becomes fully healthy. Over the ensuing 7 years his body weight doubles. He’s now 60% heavier than he was in 1998! Of course, this is unsustainable. His body begins to breakdown. Before you know it he is suffering a total system failure (think Lehman brothers). But again, thanks to modern medicine (or incessant Fed intervention) the man is once again saved. Over the following year he loses 25% of his body weight. It’s an arduous process and certainly not enjoyable, but it must be done. The good news is he’s 25% lighter. The bad news is he’s 20% heavier than he was in 1998 when he had his first setback. Nothing has changed inherently. He has the same failing internal organs and the same failing disciplines. But his next binge begins from a weaker starting point and a more dangerous level. You can imagine how this story ends.”
By continually creating a “can’t lose” market we have instilled a belief in investors and speculators that prices will not be allowed to sustain any sort of decline. In August Ben Bernanke panicked because jobless claims briefly hit 450K. He implemented an emergency round of quantitative easing. Since then, his attempts to control the long end of the curve have failed spectacularly and the economic data since has proven that QE2 was never necessary to begin with (not that it would have done anything anyhow). But what Mr. Bernanke has reinforced is this David Tepper “win win” mentality. And it’s nowhere more apparent than it is in the commodity markets today. After all, with an equity market and real estate bubble in less than 10 years where else can these speculators reliably turn to implement their Bernanke Put? Some people say the Fed is not creating imbalances again, but I beg to differ. The following charts show the imbalances that have reemerged in recent months as the Fed ensures that there are no losers:
(CRB Spot Index)
(CRB Metals Sub-Index)
(CRB Raw Industrials)
(CRB Foodstuffs)
Of course, there is a component of economic strength here. I am not attempting to downplay the recovery. It’s real and it’s here. But as the past has proven, a bubbly market combined with a Fed that won’t let losers be losers, is a potent mix and an environment ripe for imbalances and instability. It could take years for these imbalances to fully play out on the world stage, but they are building and the Fed’s constant interference in markets has only made matters worse.
QE2 has proven that the Federal Reserve can substantially influence market prices without creating the positive result (in this case lower rates) that it so desires. In my opinion, this is proof that the Fed’s interference is not furthering the prosperity of the private sector, but is merely interfering with natural market forces while creating market disruptions and imbalances. In the end, this does not help to smooth the business cycle and only helps contribute further to its instability and volatility.
The Federal Reserve’s only true purpose in the marketplace should be to serve as lender of last resort at its target rate. This rate should be permanently maintained at zero, the natural rate of interest, so as to maintain price stability and reduce market interference. This would not only reduce the Fed’s role in markets, but would help ensure greater output, price stability, eliminate the Bernanke Put and would substantially reduce the volatility/imbalances in the business cycle that have been largely generated by the Fed’s intervention.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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50 Comments
Sound reasoning as always, but you’re dreaming if you think the Fed will have a reduced role in markets. Not even Ron Paul will convince anyone of that.
Probably true, but one can wish….
It may be my memory is faulty, but I have a rather fond recollection of the Fed”s response to LTCM compared to Bernanke today…didn’t the banks with skin in the game eat the loss while the Fed provided a little temporary liquidity?
What a concept!
I have little argument with mostly reversible mistakes made in the heat of crises….it’s all these ongoing socializations of bad risks and privatization of profit that bother me.
The “Reverse Robin Hood” Fed.
What kind of capitalism is it when risks are socialized and money costs nothing?
The above article wrestles with a problem which Walter Bagehot wrestled with over a century ago: what support should a central bank give to markets (commercial banks in particular), when they’re in trouble?
The answer is that the EXACT degree of support does not matter too much as long as we STICK to it. Bagehot said (to paraphrase) “lend at punitive rates of interest and in return for quality collateral”. That is as good as anything. But it’s the constant relaxation of that sort of standard, i.e. falling for moral hazard that does the harm. That induces banks to push their luck. And given the frequency with which poachers, like Geithner, switch to being gamekeepers, there is little to stop banks robbing taxpayers.
Re the idea that interest rates should stay permanently at zero, I don’t agree, and for reasons I set out here:
http://ralphanomics.blogspot.com/2010/12/is-natural-rate-of-interest-really-zero.html
The primary point I am trying to make is that less Fed intervention is better. Should the Fed be interested in generating full employment? I say no. Ultimately, the Fed was created to fulfill the role of lender of last resort and ensure that panics such as 1907 don’t spiral out of control. But it appears to me as though they’ve been given a dual mandate they’ll never fulfill. So, let them serve their role as lender of last resort, but remove the dual mandate. They don’t have the tools to sustain it if they do achieve it and in their efforts to achieve it they have made matters worse.
Most professional investors can’t predict the business cycle. Why in the world do we assume a professor from Princeton can do it?
Operationally the FED has abandoned its dual mandate or it would have been demanding more help from the treasury on unemployment AND it would have asked that the bad banks be shut down once the immediate panic was over. They’ve become nothing but a tool by the big bankers to continue their bleeding of the economy.
TPC,
an excellent post, but again this MMT stuff leading you to strange conclusions / prescriptions.
Zero IR is not the “natural” IR. The natural IR is a result of time preference of consuming now vs. saving / consuming later.
Then, if the Fed’s role is lender of last resort, then it is not needed as there is FDIC already and new banks can be formed in the place of the failed ones, which would work more quickly and be healthier.
I have gathered a long list of (I suppose, as I am not sure) MMT induced views/policy prescription/conclusions of yours that I cannot see how can be rationally defended (I agree with the operational reality statement of MMT, but not with the conclusions / prescriptions):
Actually there are various points that struck me as strange at TPC, I do not know it they are a direct result of MMT or are they just Cullen’s own conclusions / policy prescriptions, based on MMT:
1. The “EUR is bad”, as it acts like a gold standard, causing PIIGS to have a deflationary recession. Well this omits that the EUR caused a 10-year massive credit boom prior to that. The payback may be bigger or smaller than the preceding gains, but you focus only on the “payback” period.
2. “Fiat currency is so much better than a gold standard”. Actually a gold standard with fractional reserve banking and where 95% of new money creation is via credit / shadow banking, there is no substantial difference between the two. Especially if gold and central banks (the reserves) are also both controlled by the banking cartel. And: The alleged flexibility of the FX rate adjustment for imbalances works only if the FX rate is not fixed / managed (“free market). The decision to impose austerity in Greece and Ireland (as opposed to taking debt writedowns) was a political one, not a “free market” one either. Here again banker’s interest trumps free markets and economic common sense.
3. The huge wealth creation in the USA in the last 30-70years is proof that there is no problem with fiat currencies / Central banks / MMT operational reality etc. The proper question here is: Is this wealth creation due or in spite of the current fiat system? And has this system not become a drag in the last 15-20 years? (credit overextension leading to drawing forward of future demand, but now negative marginal returns from keeping it)
4. “The FX pegs (China, EUR) have led to global imbalances, which have led to the crisis”. Actually as per NBER paper cited yourself, it was the excessive debt creation that led to instability, while the recycling of FX reserves (due to pegs) has “only” exacerbated the cycle.
5. TPC: “Unfortunately, because our leaders continue to be fooled into thinking that we are going bankrupt like Greece they continue to implement flawed policies that have contributed substantially to the very weak US economic recovery.”
Well, the Japanese have not acted as if they are revenue constrained. The result: tons of malinvestments, while binding the savers’ money against them. This is so much better that what the misguided deficit hawks are doing! [sarcasm off] You see that stimulus has led to avoiding real structural reform. By keeping the status quo, you keep a decaying zombie at artificial life. You want to not suffer because of the losers’ mistakes? Then what do you prefer: 10-20 years of muddle through or 2-3 years of severe recession + 20 years of prosperity?
Additionally: an interesting twist – a new bill proposal by Kucinic
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
This new bill proposal does 2 things:
1. Abolishes the Fed and takes money creation in the hands of congress. Thus money is not created as debt to private bankers (instead of Congress issuing treasuries at interest, no interest-bearing notes are issued)
2. Forbids fractional reserve lending (the real power of bankers), which has led to debt overexpansion and is the source of 95% of new money creation (also issued as debt with very low capital input by the bank (almost zero))
Especially because of point 2. I highly doubt this bill passes. Additionally people like Ron Paul will probably not support it because Congress printing will not be backed by gold (e.g. government is not reigned in), although government spends as much as it wants anyway by issuing treasuries (at interest to bankers though). And finally this billwould be quite deflationary, as no credit out of thin air will be able to be created, which is what the economy has been living off in the last 15-20 years.
What’s worse the F.E.D. or the Insane Clown Posse (congress)?
http://globaleconomicanalysis.blogspot.com/2010/12/fatally-flawed-end-fed-proposal-from.html
Fed would exist to lend in the overnight market.
Natural rate of govt bonds is zero. Just look at what happens to the rate with excess reserves in the banking system. It goes to zero unless the Fed intervenes.
EUR is bad only to the extent that there is no unification. Otherwise, it is as broken as the old gold standard.
Fiat currency is not “so much better than anything”. It just so happens that we tried a gold standard and it proved too inflexible for a global economy. It’s never coming back.
The system has become a drag because of the flawed rules and regulations in place. Any system that is run corruptly will fail. That doesn’t mean the system is inherently flawed. It just means the men/women using it are.
Pegs have almost always resulted in imbalances.
Japan thwarted what should have been far worse than the great depression. It’s a miracle that things have been as good as they’ve been. I’m not saying they did everything right, but I think it’s inaccurate to say that Japan is evidence of failed fiscal policy.
Ok TPC,
Are you talking gold standard with FRL? This is no gold standard at all. The difference to the current fiat system is negligible, as 95% of money comes from FRL. The international difference is also not so big (instead of gold drain, you get CA surplus recycling)
And on Japan: avoided depression, which would have been how deep and how long? And what would have been the subsequent growth?
Are you of the economists that are unable to see Bastiat’s unseen consequencies? And answering to questions by saying it is so, is not very convincing
When I reference the gold standard I am referring to a pure gold standard. It just wouldn’t work. And removing FRL is just not realistic. It will never happen. How do you rewind a system so deeply entrenched in its current format?
You reference Bastiat – do you think Japan should have just let the economy implode? Would they be better off if they had done nothing? Or could they have targeted their response better? Could they have had more failure like Sweden did at the same time? That is what I advocated in the USA. But we went Japan.
I think we might be generalizing a bit too much here. These blanket statements that imply all govt intervention or spending is bad are very misleading and inaccurate.
Yes, I mean the Swedish model. As you are pragmatic, you should see that US fiscal stimulus efforts are intended to kick the can down the road and paper over, and not cleanse the system and do something for productivity. Ok, now you get the tax cut, but only for the rich.
But saying that Japan did the right thing because it avoided depression is not as self-evident as you say, because this has slowed down their economy’s potential growth rate by avoiding the Schumpeterian creative destruction.
Regarding FRL: unbelievable, but you have a bill proposal to remove it now.
Are you saying that all govt spending is bad? Or that spending needs to be dramatically reduced? Or that it needs to be more efficient?
The FRL bill doesn’t have a chance in hell of passing. Bank lobbyists are smoking cigars and giggling about that bill as we speak.
yeah those lobbyist, the very same folks that Obama campaigned against, as well as closing or slowing that revolving door.
The Kucinich bill is not perfect, but is a good framework for constructing a bill that would rein in the uncontrolled activity of the FED cartel, and eliminate the FRL. FRL allows the banks to profit from creating ‘money’ out of thin air, with no risk due to the moral hazard of bailouts that push losses to the taxpayer. If the taxpayer is going to bear the risk, then the reward (interest) should accrue to the taxpayer.
This is where the national debate/discussion should be focused as most all other issues are economic in nature anyway.
There are some good things in the Bill, it would be most helpful if a large percentage of the population would get educated and engage in a push to reform the FED (or end the Fed, or absorb the FED as this Bill defines).
I am saying that bad govt spending (ineffective, pork, etc.) to paper over a depression is worse than a depression. In that sense I agree with you that a tax cut is a clever way to deficit spend, as every individual can decide for himself.
So only because there is fiscal stimulus it does not mead it is a good thing. One has to make sure it is also adding real value as oppose to make believe.
Kucinich – well I said myself that I highly doubt it passes.
Hi,
Is there any contradiction saying that government shoud bail out main street (helping them deleveraging as i understood) and saying the fed should deflates bubble? Isn’t leting the deleveraging failed the fact to let losers actually lose?
Thanks for enlighting me so far!
Bailing out main street doesn’t have to require bailing out their debts. There are ways to operationalize the mortgage mess – see the Federal Home Loan program of the 1930′s, but that aside the US government has the power to restore growth to trend and end unemployment. That is the bailout that mains street needs!
When I say “bailout” Main Street I am referring to broader policies and not a policy response that involves actually making losers whole. For instance, a stimulus plan in times of recession that focuses on rebuilding main st or helps get people back to work is what I am referring to. I’m not saying we should payoff everyone’s mortgage in Las Vegas…..
Exactly.
Use the government purse to build things now that we will need soon anyway and let people work off their debts from their resulting incomes as they normally would.
With foresight we might have done some incredible things…
It wouldn’t be easy or smooth…and there will be debt restructurings regardless, but it’s do-able and carries us past the toughest part.
Unfortunately we’re going to try it the hard way…
Your teenager blows all their money on an iPhone and doesn’t have enough gas to get back from the mall – do you bail them out? and if it happens again and again …
I believe the Fed is acting like old style fire prevention in national parks. The Fed is essentially putting out the normal fires which would usually clear out junk assets as well as junk firms and management. The problem is that these problems build up over time and eventually create an inferno that can’t be put out and wipes out a large part of the national park/economy.
well said
Best piece you have done TPC.
Imbalance is at the heart of our problems.
However not sure what you mean by the “target rate” of zero. Yes, lender of last resort is the only job that the fed should serve but the rate of interest to the borrower in that circumstance should be punitive. Capitalism only works if there are losers.
The Fed’s behavior since the beginning of the Greenspan years has been no different than the over-indulgent, over-protective parent who refuses to let his child learn from their mistakes. The parent who continually bails their child out of trouble, who continuously pick them up, places them back on their feet, hugs them and sends them back out into the world – where their next mistake is inevitably larger than their last.
The result for our economy will be no different.
Human Nature simply cannot be legislated or regulated.
The ONLY system of discipline that works is that of Natural & Logical Consequences.
Ignore this to your own peril.
Methinks you are too generous….
It seems to me the Fed is less an over-indulgent parent than a regulatory body captured by its industry.
TPC,
Correct me if I am wrong since I don’t know much about economics. Isn’t this what economists are trained to think and do? Jan Hatzius is awfully close to the thinking of Bernanke.
In a sense, they are not fighting a war. They are fighting battles. They keep winning and come to the believe the any battle lost is merely due to lack of determination and firepower. Think about how much more confidence you can rain and regain for each battle won. Why should they care about losing the war? They are soldiers, not long term, big picture thinkers.
Seriously maybe the Fed has had this playbook all along. Just that Lehman allowed it to pull the trigger.
“Isn’t this what economists are trained to think and do?”
Sadly no. Most may think so, but economics is more about asserting certain views and ideologies than in actually studying the economy and how things work.
That said there are economist out there who do treat it like a science but unfortunately they are a very small minority. Most economist prefer to pontificate than to understand operations of the economy.
Yeah, as Adam said, it’s all theoretical to these guys. Bernanke for instance, came into office swinging his big Monetarist textbook all over the place. Well, it turns out that Monetarism and the theories of Milton might not be everything they were trumped up to be. The money multiplier, for instance, is dead, but here we are still implementing policy like QE2. It’s outrageous. But in theory, it should work. Even though real world examples have proven otherwise.
I’ll take the wild ‘n willy technocrats of the Federal Reserve running monetary policy over the clowns in Congress any day of the week.
If Congress would run monetary policy? oh lord have mercy. But maybe a monetary policy tied to nominal GDP expectations, as is being floated around, would fit the bill.
No easy answers, IMO. But maybe the days of the activist Fed are nearing an end. What takes its place is anyone’s guess.
Excellent piece,TPC
That’s the point. With the FF rate at 0% permanently you don’t have anyone “running monetary policy”. All you have is a Fed who focuses on regulations and ensuring that banks can borrow at the overnight rate. Take the brainiacs out of the equation.
Actually the Kucinich bill fits perfectly and is an extension of MMT – if the govt is not financing anything, than there is no need to pay IR to the bankers (similar to your zero IR assertion).
TPC,
I remain a firm believer that this is nothing more than a replay of the 1933-1937 story. It is not a matter of if this house of cards will crash, but a matter of when. There is no one or group of people smart enough to create a soft landing for this overwhelming mountain of debt. And yes we have put off the inevitable now for almost as long as they did the Great Depression. I agree with you in that if we had played our hand differently at the beginning (2008) and allowed the TBTF to fail we probably could have come out of this after 2-3 really tough years with an upward moving sustainable market. Taking care of the TBTF banks and businesses was a fatal mistake IMHO.
When did having a recession become such a bad thing? It seems like all actions over the last decade by the FED have attempted to prevent a recession or slow-down only creating bigger problems. Just like in nature—our economy must have seasons in order to reinvent itself. I love Spring—but you need Fall and Winter for the system to cleanse itself.
Not all recessions are the same. This was (is) a financial system run amuck and the detination took out the real goods and service part of the economy with it. If policy makers actually understood how the system worked they could have contained the financial system implosion and allowed the real economy to go on. Instead we got the mess we have.
Exactly!
Well, not so quickly, as a lot of the pre-crisis real goods and services level was fake – based on demand pulled forward via credit and due to malinvestments (for example houses). So you need to clean up not only the overleverage financial players, but also some real world resource misallocations.
This business about this recession is different and it was caused by a financial system run amok is simply false. No body can force the US consumer to borrow today, and no one forced them to borrow at any other time. Take responsibility for it, and stop blaming banks, Bernanke, your mother and anybody else but those who did it, THE CONSUMERS! The money was cheap and plentiful, they wanted to borrow it and spend it, and they did. And they drove real estate prices over the top in the process, until there was no greater fool left to pay a higher price, and prices began to fall, and fall….as they always do. Recessions come to cleanse an out of balance economy, and that’s what is happening now, as it always has, no matter where you live, Australia, UK, USA, Canada, SE Asia. The problem today is that they (Gov, Fed) will not let the cleansing take place, so those that should suffer don’t, and those that shouldn’t do. I’ve lived and invested through every recession since the 1950s. The cause every time is greed run amok, crashed by fear run amok. Tell it truthfully like it is, and stop the blame game.
It is absolutely different. The typical recession is driven by over production leading to rising unsold inventories. Businesses respond by decreasing production and rising unemployment. The FED responds with lower interest rates which stimulate demand and inventories fall.
When the banking system started to implode credit was withdrawn from the market. During the height of the banking panic even credit was withdrawn from even credit worth borrowers particularly businesses. Without operating credit businesses could not fund day to day operations and many shut down or cut production. Not due to demand but due to lack of funding. Why do you think McDonald’s had to go to the FED for a loan during the panic?!?! The insolvency of the banks spilled over into the real economy and caused 9.8% unemployment. What does a personal foreclosure have to do with 9.8% unemployment? Nothing. A mess in the financial system caused a major credit contraction which crushed businesses and consumers. If instead the response had been about restoring aggregate demand and main street then the economy would have recovered. Would people still not have lost their homes? Sure would have, but again, what does a foreclosure have to do with a viable business seeking operating credit – nothing unless the bank issuing the credit was in trouble because of bad lending practices.
Is the fed really that bad or do bubbles like we’ve seen just so happen to come around every 80 years?
Would we have had a tech bubble without Greenspan? Probably. A hosing bubble? Maybe…
Look at a log chart of the SPX over history – the $hit has always gone up less the sideways action and guess what, the past 10 years have been no different.
mish is on a tirade about the bill in congress to end the fed and how bad he thinks it would be if congress “created money”.
and nobody can tell him or virtually anyone else that congress already creates it.
you have utterly failed in educating people as to how money is created.
You should ask him – if Congress and Fed don’t make money then who should be allowed to make it?
His answer would be private money like in the past. To me this bill is so much better that paying interest to the bankers and letting their representatives at Fed full discretion to do whatever they please.
Overall, the original post and the ensuing comments are very helpful and intelligent, not what one usually sees.
I think some further nuance on the consumer side may be helpful. It is true that consumers were not forced to borrow or spend, but that is only true up to a certain point, as many would recognize. Policy decisions by the Fed, Treasury, as well as strategic decisions within large corporations, institutional investors, and the very wealthy have a disproportionate, unavoidable shaping effect on the value of assets and accounts held by the majority of middle class and working class individuals. In order to maintain reasonable standards of living and to have a chance at any kind of retirement, individuals must work within the constraints of inflation, deflation, taxation, and so forth. For tens of millions in the U.S. who are now out of work, have lost their homes, have inadequate health care, and so forth, greed was not the primary cause of their dilemma. This has nothing to do with recommending any sort of unfundable social programs (which the past and current administrations have and are nevertheless engaged in). One must recognize who or what has been and continues to drive trends within the larger economy.
We missed an opportunity at orderly deleveraging after the collapse of 2008 that would have allowed the real economy to continue. There would have been a great deal of financial pain, but we would have addressed the underlying structural problems. Those who had a strong hand in the structural forces that brought about the crisis (bankers, among others) would have at least shared in the pain. Now, we will almost inevitably (99.9999%) be faced with a larger financial crisis (2+2=4) due to the exploding public debt, and it is likely to come sooner rather than later.
Almost anything can be the trigger, since we are in a multi-asset bubble: commodities including oil and precious metals; real estate is still overvalued substantially; stocks, bonds, even currencies although that problem is farther out by a few years. The trigger could be pulled within the eurozone due to sovereign debt, or Chinese real estate and inflation, geopolitical conflict in Korea, the Middle East, or related terrorist events which we have barely avoided several times right here in the U.S., hoarding of commodities and short-term high inflation, and any of a dozen other factors.
It’s as if we’ve inflated a balloon to its breaking point, and it can’t be stretched any more. We don’t know exactly where the balloon will pop, but it will. Nothing anyone here writes or what they try to do in congress is likely to affect the course of events all that much. In 2011 congress is likely to be in gridlock as all of its members lock their arms in greed and confusion.
However, it is helpful to let people know what is happening so that those with any margin for preparing a strategy can do so in a well-educated manner.
I just wanted to say that I have enjoyed your views throughout the year. Have a Merry Christmas and a Happy New Year. See ya next year.
hi TPC,
I hear what you’re saying here but how much of this is the Fed and how much of it is the FAILURE of the legislature and our reps to reign in lobbyists, businesses, and banks? I mean if they keep letting bubbles be created legally and even support them…then isn’t actually the Fed more the savior of last resort that has their hands tied? The Fed can’t exactly control employment nor banks ability to change their lending requirements nor what auditors say and do on their books, etc. But legislators can!?!?! And since they are not doing anything who is supposed to!??!! The Fed? I frankly don’t think so. The fed is apolitical…it is economical…and so if they have to keep staving off crisis after crisis so we don’t have huge long soup lines then so be it!!! For sure. What we need to be doing is stop blaming the Fed and start blaming our legislators, lobbyists, and business leaders for basically rallying up against the people all in the name of profits. THAT’S where the issue lies imo…legislative integrity. thoughts?
Stock market and economic crisis are slipping away, give us a lot to think about, China‘s economy is the most powerful, but the stock market downturn
dear lord man, while the writing is great, and the points aren’t bad, please…
“can’t fail” market? its done nothing but fail for 10 years AND MORE. we are still down nearly 20% from ELEVEN YEARS AGO, or 10 and 1/2.
worst decade ever or close?
negative real returns for what? 10 years? 15?
Way below the long term trendline of inflation + 7%?
How on gods green earth have equities been “easy risk” anywehre near lately? Just THIS YEAR we had a terrifying, panic in the streets, jump out of windows, near 20% correction. FERPETESSAke??
Painting black with the colors of sunshine solves nothing!