Guest Post: The Federal Reserve And The Pathology of Power

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Federal Reserve and the Pathology of Power

The Federal Reserve is an example not just of run-of-the-mill hubris but of the far more profound Pathology of Power.

The rule of law has been supplanted in the U.S. by self-serving propaganda campaigns serving State and financial Elites: this is the Pathology of Power. The Federal Reserve is an instructive example because it is so blatant.

Despite the dearth of evidence that goosing the stock market actually generates a "wealth effect" which "trickles down" from the top 10% who own the vast majority of equities to the bottom 90%, the Fed has waged a ceaseless propaganda campaign claiming this policy goal is now essential for the nation's well-being.

As Ben Bernanke recently made clear: "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending (that) will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

No mention of its positive effect on Wall Street; cui bono (to whose benefit?) indeed. To better understand the pathology of power, we should turn first to Pathology Of Power by Norman Cousins, published in 1988.

Cousins was particularly concerned with the National Security State, a.k.a. the military-industrial complex, which at that point in U.S. history was engaged in a Cold War with the mighty Soviet Empire.

In a classic case of structural decay and destabilization (including failed coups), the Soviet Empire dissolved in December 1991. Nonetheless, Cousins' description of the pathology of power is an uncannily accurate account of the Fed and all the Central State fiefdoms.

    "Connected to the tendency of power to corrupt are yet other tendencies that emerge from the pages of the historians:

    1. The tendency of power to drive intelligence underground;
    2. The tendency of power to become a theology, admitting no other gods before it;
    3. The tendency of power to distort and damage the traditions and institutions it was designed to protect;
    4. The tendency of power to create a language of its own, making other forms of communication incoherent and irrelevant;
    5. The tendency of power to set the stage for its own use.

In broader terms, we might add: the tendency of power to manifest hubris, arrogance, bullying and the substitution of rule by Elites for rule of law.

Thus we have a Federal Reserve in which:

-- PhD economists declare that only PhD economists are qualified to critique Fed policy, even as the Fed's grandiose failures suggest that PhD economists are the least qualified citizens to set economic policy (see items 1 & 2).

-- A Fed that bullies domestic and international critics and attempts to impose its "save American Financial Elites at all costs" goals on the rest of the planet.

-- A Fed that claims transparency in its balance sheets and actions would undermine its actions, meanwhile its actions have undermined democracy and the Republic by remaining secret and unaccountable.

-- A Fed that is a private bank acting as the central bank for the Republic, pursuing policies and manipulations which are not accountable to the public's elected representatives.

-- A Fed which defends its failures and responds to criticism with evocations of magical thinking ("step aside, little people, we are the Fed..." see item 3)

-- A Fed which has overstepped its mandate, which is limited to "maintaining monetary and credit aggregates commensurate with the economy's potential to increase production, so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates."

In other words, the Fed is supposed to manage the nation's supply of money and credit, not its economy or stock market. Yet that is precisely what the Fed is explicitly pursuing by goosing the stock market.

There are two fatal errors in this policy: one is a fundamental misunderstanding of capitalism, and the other is a misunderstanding of the stock market.

Capitalism operates on a "business cycle" in which expansion leads to increased credit, borrowing, investment and consumption, until credit-based speculation based on future growth extends beyond borrowers' ability to service debt. Investment become mal-investment, and the credit cycle reverses into contraction: credit shrinks as bad debt is written off and leveraged borrowers and lenders go bankrupt. Assets are written down and sold off for a fraction of their previous worth.

This squeezing out of excess credit and capacity sets up the solid foundation for the next cycle of expansion and investment.

After the deep 1981-82 recession, the Fed decided to revoke the painful part of the business cycle, and leave only the "happy part" of expanding credit, rising speculation and endless credit-fueled investment in new plant and buildings.

This is a catastrophic misunderstanding of Capitalism. Yet fully intoxicated with the pathology of power, the Fed has an institutional belief that it can revoke the business cycle by inflating serial assets bubbles.

This is hubris, ignorance and arrogance writ large.

The stock market is not a public-relations device, it is a transparent market where price is "found" and capital is raised. Yes, speculation is part of the game, but that is part of providing liquidity.

In constructing its Palace of Pathology, the Fed has extended its mandate to manipulating the stock market via injections of "free" cash, bidding up of futures contracts pre-market via proxies, and any number of other manipulative techniques.

By gaming the stock market as a tool in its propaganda campaign to convince the American public and the world at large that U.S. equities are the leading indicator of the U.S. economy, the Fed has eroded trust in the market as an open market.

I addressed this in The Loss of Trust and the Great Unraveling To Come (October 18, 2010).

The reason, of course, is not to create the "virtuous cycle" Bernanke mentioned, but to protect the financial Power Elites which have the most to lose should reality and/or democracy wrest power away from the Federal Reserve.

Ultimately, the Fed's Pathology of Power is like any other psychopathology: self-absorbed, unable to differentiate between an inner world in which the Fed is all-powerful and reality, and obsessed with retaining and extending its powers, regardless of the cost to others.

Like all other sociopaths, the Fed's policy makers are unable to accurately discern others' emotions and intentions, instead ascribing them whatever motivations fit the inner world in which an all-powerful Fed "knows best."

Thus Congressional oversight of the Fed--a necessity if the word Democracy has any meaning left in America--is "meddling with the Gods" that will bring the nation to ruin. This psychological bullying, braggadocio and supreme arrogance also typifies a dangerously unstable, aggressive and unpredictable sociopathology.

The Fed has the ability to create limitless Hubris along with unlimited credit. For more on the Fed's (and the entire financial sector's) sociopathology and grandiose failures of imagination and policy:

The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest
(October 15, 2010)

The Normalization of Sociopathology in America
(October 16, 2010)

Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders?
(November 1, 2010)

Dependency, The Fed and the Market
(November 8, 2010)

The Banality of (Financial) Evil
(November 9, 2010)

Fed's QE2 Misadventure Costs U.S. Households $4.6 trillion

(November 10, 2010)

Fraud and Complicity Are Now the Lifeblood of the Status Quo (Banality of Financial Evil, Part 2)
(November 12, 2010)


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jus_lite_reading's picture

The Chinese just love the Fed's actions. They admire Ben's courage to stand up to their threats; DF21 missiles be damned! In fact, the Fed's mandate has changed yet again: It is now the primary objective to make every man woman and child in the USSA a wealthy citizen; every man has a castle.

Cognitive Dissonance's picture

I continued to delight in seeing more and more articles and guest posts on ZH discussing the psychology and mental process that goes into markets in general and the insanity of the Ponzi. Only when we begin to understand the root cause of our problems can we find the internal courage needed to overcome them.

In medicine, pathology is the study and diagnosis of disease. The related scientific study of disease processes is called "general pathology". Medical pathology is divided into two main branches, anatomical pathology and clinical pathology. Medical pathologists work through examination of organs, tissues, bodily fluids, and whole bodies (autopsies).


The term "pathology" has a broader meaning in the sciences to refer to the study of disease, not specifically in the domain of biology. For example in psychology, the term "psychopathology", or simply "pathology," considers paths within its domain (mental, emotional and behavioral) to be forms of "illness" or "disease."

downrodeo's picture

YES! We must understand our moneky-minds. In my opinion, one of the most blatantly flawed concepts in economics is the notion that 'people act rationally'. This is false; people act emotionally. As a matter of fact, most of us aren't even acting out much of anything. Rather, they're reacting to whatever emotional stimuli is most pressing at the time. Just look at commercials. Commercials don't play to one's reason. They do cater to impulse and feeling.  

B9K9's picture

I'm tired of pathology; I'm pleased to see that CHS and others are beginning to finally address the real meaning(s) behind the actions we see taking place on a daily basis. The bottom line is that the entire construct is one of an organized criminal take-down.

The tools are time-tested methods well known to generations dating back many, many millenia. The mechanics of money lending are incredibly simple - no one lends at a rate less than the organic underlying growth rate (otherwise bankers would lose money). Therefore, the nature of exponents DICTATES that compounding principle+interest will ALWAYS outrun the ability to service the debt.

I mean, this is an iron-clad rule on the same level as men will pay for/fight over pussy, opium/nicotine/meth have chemical effects that induce physical addiction, and men are born, mature & die. QED

Once one understands that the People have been subject to grand experiment that has paid off literally $trillions in dividends to the masters who engineered the game, then the point isn't really to rationalize and/or attempt to explain their actions, but to play out end-game scenarios.

Ultimately, it's a binary rather than analog affect. That is, they either win or lose. So, how do they win? They win if the system can find another growth avenue in which to cover up past crimes aka bubbles. They lose if the system can no longer expand.

If you think there are potential growth avenues, then play the leverage long game. If not, then it might behoove one to think about what happens when the system is no longer functioning, rather than worry/wonder/analyze about how/why we got here in the first place.

Things that go bump's picture

I think this time they've done it.  We're toast.

Oso's picture

Did anyone see the Secretary of Labor on today claiming "each $1 in Unemployment Insurance generates $2 in economic activity" ?  The dilusions are everywhere.  HAHAHAHAHA

Cognitive Dissonance's picture

"For each year that I grow older, I become twice as attractive to the opposite sex half my age."

Hey, this is actually fun. Anyone else wish to try?

Cognitive Dissonance's picture

"Fed meth. Gotta love it."

Fixed it for you. :>)

Ripped Chunk's picture

That's what I thought CD.

Fed are like meth heads. Outsiders see the disintegration clearly but when they look in the mirror they see brilliance.


piceridu's picture

let me give it a whirl:

1 oz = 2 ozs

4 inches = 8 inches

A's = DD's

I kinda like this world.

nevadan's picture

This from the WSJ article in the Frontrunning post......

Skyrocketing prices in the agricultural futures markets won't translate into as big a bump in food costs for consumers, U.S. Department of Agriculture Secretary Tom Vilsack said on Wednesday.

"I'm not sure that commodity prices necessarily translate directly and proportionately into food costs," Mr. Vilsack said in an interview, adding, "They go up and down all the time."

Sean7k's picture

Let's not forget just how ingrained untruths can become. The author uses one of my favorites: The business cycle. 

The business cycle is a result of Keynsian and other economics that employ the use of leverage. It is leverage and the expansion of credit that causes malinvestment and the inevitable cycle of clearance. 

Credit based on sound money does not create inflation. There will still be malinvestment, because entrepreneurs will continue to make bad choices, but that will not create inflation- thus the business cycle remains essentially unchanged. In fact, deflation, as a result of innovation and productivity increases will keep prices stable. 

This is why the Austrians are silenced- they are Michael's sword in the heart of every banker's demon.

B9K9's picture

Any theory, economic or otherwise, that assumes a system comprised of checks & balances will not be quickly compromised, is an utter waste of time.

I've read enough of your posts (and have applauded many of them) to realize that you know this. A slight slip back to wishful thinking is normal, so this is just a friendly reminder.

Darwin was right in so many ways. Nature isn't a beautiful, peaceful environment, but a desperate fight for survival, with all/any tools available treated as fair game.

While 99.99% of the population many have a "live & let live" philosophy, there are significant numbers of others who see idiot sheep peacefully grazing just begging to be slaughtered.

It doesn't matter what system is in place, means & ways of corrupting it to further advance the objectives of certain parties are abso-fucking-lutely guaranteed.

Bag the philosophy and focus on results. They are out to literally take you down, lion vs zebra style. How are you gonna survive? That's the question.

Sean7k's picture

We both talk philosophically, for that is the language of persuasion. Just as I never worry about you and many others here who have made the necessary mental adjustments, you can rest assured- I have created a complete backup structure for as many scenarios as I can foresee. 

Still, I will always harbor hope, for I am a bit of an optimist, that enough people- properly educated- could take this sucker down. Then, replace it with absolutely nothing but the protection of private property. A silly dream, an anarcho capitalist dream, but life has little flavor when it lacks the seasoning from dreams.

Marla And Me's picture

Hey B9,

You are one of the few commenters whose comments are still worth reading regularly.  As such, I usually cut through the noise by tracking your posts directly from your user page, but now the website is giving me the "access denied" page, when it worked just this morning.  What gives?  Did you make a special request to go ghost to Tyler et al.?

Edit - I just realized that this is happening for every commenter.  Tyler, why the change to the website?  Getting too many hits from Langley?

Dick Buttkiss's picture

Absolutely right, Sean, except that in a truly sound-money economy, innovation and productivity increases would increase purchasing power, thus driving prices down, and relentlessly so.  Which is to say that what is bad in a credit-money economy is good in a sound-money economy.  Hence the inherent conflict of the former with the best interests of the people, while the latter is fully commensurate with those interests.

Sean7k's picture

Yep and a hearty "the state can kiss my ass" back at you.

DaveyJones's picture

I can make a rock so heavy I can't lift it

this strategy has none

I've given a lot of thought into the fact that I'm not introspective

Let me boast about my humility &

 I do a devil of a job with God's work

8pence's picture

The Fed said the latest QE could add 1 million jobs. Lets add it up, $600 billion will produce 1 million jobs. That's $600,000 for each job. I have an idea that would save them tons of money, just pay me $100,000 a year to not work. They pay farmers not to plant wheat, so why not? The Fed could produce 6 million non-jobs. It makes more sense to me than ineffective stimulus. What a circus of follies. Bubble Ben has had too much to drink from well of illusory ominpotence again.

kaiserhoff's picture

Some things are so stupid, they could only be said by an intellectual.

                                            Calvin Trillin

SheepDog-One's picture

Sounds like Crackhead'o'nomics to me, lets put Ashy Larry in as FED chief next.

jus_lite_reading's picture

Yes, it creates $2 in economic activity in China, India, Brazil, Pakistan etc etc etc, anywhere BUT the US. We on the other hand have $1 less dollar to spend HERE!


Their syntax is correct- the fact that it remains a deception is the problem.

kaiserhoff's picture

For every bottle of wine I drink, two more majically appear in my cellar.  Wow.  Love this new religion.  Thanks Oso.  Do we have a tax exempt number yet?

G-R-U-N-T's picture

Just a reminder....

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

-Joseph Goebbels


Cognitive Dissonance's picture

This quote should be repeated on a daily basis here and anywhere else you and I post. It also explains why The National Security State must and will grow stronger and more vicious.

Anyone hoping this will get better on it's own doesn't understand how long and devastating to slide to hell can be.

Dick Buttkiss's picture
Free Radical referred to the "Big Lie" in his own hit piece on the pathology of power:
G-R-U-N-T's picture

I am right there with you on this CD and I would like to share my thoughts on this later, but right now I am creating and producing so myself and my family can have a future. Just a quick note: depending on the level of mind programing sometimes it is almost impossible to deprogram certain pathologies. I am fascinated by this subject and I am very disturbed by what I see happening here in America. More on this later.

Hugh_Jorgan's picture

Coincidence then, that Goebbels wrote in his diary that the Nazis learned propaganda from Bernays who served in the cabinet of Woodrow Wilson, the President that gave us the Fed? That was the beginning of that whole Progressive era thing, hmm...

G-R-U-N-T's picture


I am not an expert on Goebbels pathologies, however he was dead on accurate on his statement.

His words on this piece of truth are succinct cutting through all the spin to the contrary. Perfectly thought out.

Hugh_Jorgan's picture

I do not dispute the truth in his statement, not at all. I only wished to point out that these insideous, evil strategies were originally perfected by Americans. Goebbels and Hitler's policies are accepted benchmarks for disatrous ideology and abhorrent atrocity, yet these very same strategies and techniques for propaganda are in resurgence, here once again. All Americans should be outraged, but sadly few know and care enough about the truth to speak out right now...

G-R-U-N-T's picture

Indeed, I agree! That's why I post the quote from time to time, but few respond.


SWRichmond's picture

It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.!


JimboJammer's picture

The  Fed  is  a  Special  Intrest  Group...

The  Senate  Must  be  Bigger  than  the  Fed..

Banks  must   not  be  tied  to  Government

Nat Turner's picture

When Americans wake up I hope to be in Jamaica.

TBT or not TBT's picture

Right.  Things will go swimmingly well in Jamaica.

kaiserhoff's picture

Great post.  Power corrupts and absolute power corrupts absolutely, but the details are always worth study.  The odd thing is that for decades, serious people argued in favor of "independence" for the fed.  That simply shields them from accountability.

None dare call it treason, except a few of us here on ZH.

Traianus Augustus's picture

To know all this and still have no accountability is the greatest tragedy of our time.  The brainwashing of the american people and their willful disregard for their own freedoms is devastating IMO. 

SheepDog-One's picture

At this point its just a show to watch. Personally Im tired of doing videos laying out for people whats really going on. Fuck it, they dont care.
Theres tons of proof positive 9-11's govt official story is a complete fabrication, and it makes no difference, nothing is done about it and no one really cares.
Its now mainstream on 60 Minutes and Discovery Channel showing how the FED and govt are totaly corrupt and puropsely bankrupting the country. Everyone just goes about their business, less wealthy each day but no one really cares.
So screw it, just buy a few years worth of food and self defense items and sit back and watch the show...when it does finally implode it will be a spectacular show.

samsara's picture

 Everyone just goes about their business,

Sheep Dog, 

Read this one.  It's clinical about Americans.

The Limits of Incompetence

It's why we don't call "Bullshit" on anything.

Your(and mine and many others) thinking is different than most.  Critical thinking and calling bullshit on 911 etc. 

 It's also why this happened.  Read the above, and then this one makes sense.

Chinese Students Laugh At Tim Geithner

Sean7k's picture

The problem is this: once they fashion 320 million sets of chains, they will be damned and determined to use them- even if you refuse a pair. Of course, I will be sitting in a place hoping to stop delivery,see you there.

Kat's picture

The U.S. is a Banana Republic.  It's just going to take a few years to destroy what it took hundreds of years to create in this country.

This year, the population made its displeasure known politely via tea parties.  If this bullshit doesn't stop, I think the streets will run red with the blood of politicians and bureacrats.  I don't think Americans have that fatalistic culture of Europeans.

Tyler, this is why I think you're mistaken in harping on about dark pools and HFT.  Both are a natural result of the SEC's creation of a completely unnatural, Frankenstein market structure.  Thanks to the SEC's and the Fed's central planning, what we have can in no way be described as a "market" in any meaningful way.  We have fascist control where the government creates outcomes with a kicker of hideous externalities (unintended consequences) that are routinely blamed on the non-existent free market.  THAT'S what we have to keep whacking at.  The externalities of HFT and dark pools will NEVER be dealt with as long as we have this hot mess the regulators created. 

Oh, and I literally just got off a conference call with regulators.  Their response to the ill effects of rulemaking on the market?  "We don't care".  They are owned by the too big to fails and will exist as long as they do.  Why would they care?


tickhound's picture

As the ponzi becomes visible and the truth about the Fed goes viral... It only seems to move Americans quickly through the 3 stages of truth...

1st they ridiculed me, then they violently opposed me, now they accept it as self-evident...

Now back to Ice Road Truckers.

Cognitive Dissonance's picture

Now back to Ice Road Truckers.

Lisa Kelly is so much easier on the eyes than asshole Rick. Whoops, was that my out loud voice?

tickhound's picture

Hear ya and on a related note... We'll know the shtf when the UFC and lingerie football find a way to merge. 

Cognitive Dissonance's picture



Nirvana for the powers that be.......a pacified public.

tickhound's picture

case and point... tickhound <===== sufficiently distracted by your links

Cognitive Dissonance's picture

I admire the integrity you display by calling a stroke (pun intended) on yourself. :>)