Guest Post: Inevitable Catastrophe - The Fruits Of Moral Hazard On A Global Scale

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Inevitable Catastrophe: The Fruits Of Moral Hazard On A Global Scale

Insulate participants from risk with policies like the Bernanke Put and you guarantee destruction of both the market and institutional legitimacy.

Identify the common characteristic of these three statements:

1. The Federal Reserve will never let the stock market decline, i.e. the "Bernanke put"

2. The Chinese government will never let property prices decline

3. The European Central Bank will never let Greece default

The answer of course is moral hazard: a person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government. The global financial authorities’ success in propping up assets (stocks in the U.S., real estate in China, banks in Europe, etc.) over the past three years has strengthened this asymmetric disregard for systemic risk into a dangerously quasi-religious faith that central banks and governments have essentially unlimited power to keep asset prices aloft via printing money, manipulation of markets and financialization of their economies.

What happens if markets crumble despite massive, sustained central bank and government intervention? The institutions that created moral hazard will be revealed as false gods, and that faith will be destroyed.

This loss of faith in the transparent functioning of markets will trigger what I call the delegitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets.

We can see the global scale of this central bank-cnetral State induced moral hazard in the tight correlation of all markets: the stock exchanges rise and fall in near-perfect unison, oil and gold rise and fall in parallel with equities, and so on.

As I have noted before, beneath the surface there is really only one trade in the entire global marketplace: all assets on one side and the U.S. dollar on the other. Correlation is not causation, of course, but it is more than peculiar that every decline in global equities is matched by a concurrent rise in the dollar.

Transparent, independent markets do not move in lockstep. The campaign to prop up all asset classes with implicit guarantees of intervention has completely insulated institutions and punters who believe that the Bernanke Put and the Chinese government's equivalent prop under real estate is not just policy but a guarantee of god-like power.

Thus the gains from gargantuan speculative bets are yours to keep, and any losses will be made good by the central bank or government. This is the ideal recipe for misallocation of capital and speculative derangement on an unprecedented scale.

Moral hazard is the ultimate perverse incentive: it rewards all that is unproductive and risky and punishes long-term investment and prudent risk assessment.

A second feature of the global central bank's moral hazard is the necessity to punish any punters who dare to bet against the banks' manipulations. Thus Fed Chairman Bernanke could opine that oil would decline and presto-magico, a "surprise" release of oil by central authorities occurs the next day.

This second feature of central bank manipulation leaves a market devoid of short sellers and thus of any buyers as markets crumble.

Once trust is lost, it cannot be won back. Once participants' faith in the markets and in the god-like power of central bank intervention is crushed, the markets will lose participation on a grand scale. The authorities' favorite game, goosing asset prices to create an illusion of recovery and rising wealth, will be revealed as a global fraud.

Announcements of future interventions will be scornfully dismissed and thus they will have lost their power to prop up the markets.

All of this flows from the very nature of moral hazard: insulate participants from risk and give them unlimited leverage and "free money" to play with, and what you eventually end up with is catastrophe. There is no other possible end state.

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Josh Randall's picture

$hit on a Shingle: it's whats for Dinner

ethnik's picture

last move of players like Bernake or EB's to collect value of paper money from regular people, to take your savings. They are pretty aware of this. thats why they manipulate precious metals till its still possible.

apberusdisvet's picture

The new market mantra:

go long pitchforks and nooses

go short breathing politicians and banksters

Spirit Of Truth's picture


Dance with the devil of statism and ultimately you are inviting the devil to take charge:

Sometimes the most important role of government is in enforcing the FREEDOM TO FAIL. Not doing so invites collective suicide IMHO. We're going down The Road to Serfdom...

jeff montanye's picture

and the irony is that in the fall of '08 there was enough capital between the shareholders and the bondholders in the financial sector to support a profound reorganization without spending taxpayer money and while avoiding moral hazard.  

Reptil's picture

Bingo. A missed opportunity of gigantic proportions.

Flakmeister's picture

Instead we got a financial coup d'etat in TARP....

Haircuts are for little people....

snowball777's picture

Because, because, because, because, because...because of the wonderful things he does.

- Chick from Kansas and Friends


There is No Spoon's picture

Bernanke jumped the shark with his decision to do press conferences. He voluntarily pulled back the curtain on himself, revealing that the Wizard of Oz is powerless and it's all a mirage. He's revealed himself to be a one trick pony. Since qe2 didn't work, he's been rendered useless and will surprise everyone by stepping down by the end of the year.

topcallingtroll's picture

Qe2 did work, if by work you mean that we avoided a great far.

It has been almost free money, because bond vigilantes are nowhere to be found.

baby_BLYTHE's picture

housing prices haven't seen declines like these since the 1930s

CompassionateFascist's picture

Real unemployment is now about the same as it was during the worst of the "great" depression. QE2 did nothing but further enrich banksters and other speculators...and ensure that the Great-er depression will be terminal for the entire System.

DoChenRollingBearing's picture


I suspect that QE2 worked only in the sense that by kicking the can further down the road will only make the reckoning even worse than if we had taken our medicine in 2008 - 2009.

I also suspect that almost free money will lead to very bad results.

Re bond vigilantes, I guess they all became bond buyers...

Hedgetard55's picture

He did make the end result that much worse.


There is no "free money". Everyone who owns dollars and cash equivalents got nicked for the money through debasement and the theft of potential interest income.

Mark Noonan's picture

Precisely - and that is why no matter how kooky everyone tries to make it out to be, we must get back to gold currency.

mayhem_korner's picture

Qe2 did work, if by work you mean that we avoided a great depression

Er...huh?  Avoid or defer and exacerbate?

Qe2 turned the M-80 we were holding into Tsar Bomba...

topcallingtroll's picture

Lets see how monday goes. If i dont think ive caught a temporary inflection point time to get out of the stock market again.

If you cant beat moral hazard then join the party, but i might be getting back in too soon.

DoChenRollingBearing's picture

While I will not get into the stock market (other than more selling), I see nothing in your remarks that merits junks.

TimmyM's picture

Too bad for you TCT. Once everyone has embraced your confusing of liquidity with price continuity, the market will crash on an uptick.

viator's picture

Dear Ben,

We just heard on Bloomberg TV that prices at the pump have fallen 21 days in a row.

We know that while prices were going up every day, you got a lot of crap from people about inflation, and how you weren't doing enough. So we just wanted to say: Thank you!

Now sure, we don't drive -- we live in New York after all -- but that doesn't mean we can't sympathize with those people out there who do drive, and for whom gas prices were taking a bigger and bigger bite out of their paycheck.

So again, big thanks.


Joe Weisenthal
Kayman's picture

We just heard on Bloomberg TV that.... the federal debt is "just a number".

What a relief. I can tell my children and grandchildren that they have nothing to sweat about.

I feel so much better now.

Cruel Aid's picture

I've heard that 'debt doesn't matter' bullshit being spewed.

It doesn't matter till it does! And then it is too late.

Also, this is the buy the dip pause in the market. On cue.

Hacked Economy's picture

But it doesn't long as you encourage more debt from consumers below you, and inflate the credit side of the ledger books, which in turn inflates the economy.  Yay!

Unless there's a recession, and unemployment, and lower tax revenues, and a debt-fueled spending binge, and...


EDIT:  Looks like a junk troll made his/her rounds on this thread.  Look at how many people in a row got a single junk.  Jerk.

Robslob's picture

I had a thought...

We will all have the last laugh...when we die.

Deepskyy's picture

Once again, Charles lays out the ugliness around us in concise and simple terms.  Now if we can just get J6P to stop being concerned about Kim Kardashian's ass and start paying attention to the thieves all around them, we might get this ship righted.



I won't hold my breath.

km4's picture

The U.S. is too big to fail, right? MarketWatch

We are not Greece, many argue, but our country is clearly on an unsustainable path of deficits and increasing national debt and we must take steps to curb government spending and reduce debt levels.

The U.S. is too big to fail, right? But who would (could) bail the U.S. out?

Brian Edmonds is head of interest rates trading at Cantor Fitzgerald. He has worked in bond trading for several financial firms over his nearly 25-year career. Edmonds also formerly served as chairman of the Bond Market Association’s Primary Dealer Committee.

Piranhanoia's picture

These monarchs must have really nice places to bug out when/if their larceny is again considered a crime rather than a resume.

HileTroy's picture

Wow! That makes perfect sense all currency made of paper just gets printed and life goes on!!

 One small problem even though the world is filled with sheeple there are a few wolves left over from "Productive Industries" that have had there asses handed to them by dudes looking at six computer screens and playing games with the "Wall Street Economy"

Long bullets short Bankers Politician/Lawyers

When the Sheeple cant get there free cheese us wolves will point them in the right directions to stampede.


What am i missing ???? There is a shit stome of baddness heading for the human race, I see it in the eyes of men less capable on the MSM every night. Natural selection me thinks will make a big come back.

What a intresting time to be alive.


reposted from another thread cuz I think I'm such a clever pus.



css1971's picture

Y'know if you get them real mad, and you manage to rip their eyes away from the TV or Facebook? Put them out of a job, out of a home.


You know what they'll do?


They'll vote.

RiverRoad's picture

Lies, lies, and damned lies.....

sitenine's picture

4. The US will never be allowed to loose its AAA rating.

Thomas's picture

Not necessarily. Remember the banking cartel is global, so the US will indeed lose its AAA credit rating when this borderless (and despicable) group decide it should.

sitenine's picture

Fair enough statement, but do recall that Hong Kong considers Treasuries junk, and Germany's Feri recently downgraded US debt. S&P shills? Right, we know who owns them ;)

sasebo's picture

CHS, astute observation, as usual.

As usual we don't have to do anything, just sit back & watch the assholes go under. Give them plenty of rope.

DoChenRollingBearing's picture

Sitting back and watching will feel a whole lot better if you are prepared.  Popcorn and gold, great companions as we watch them go under.

10kby2k's picture


Why do you think its called a depression?  It sucks and is depressing. Here it comes and there is no stopping it.

NidStyles's picture

It's more of an Ethical Hazard. As no matter what it's detrimental to everyone, where as a moral hazard would be beneficial to someone at the expense of other's. Devaluing the monetary gain's and putting the entire system on tilt is detrimental to everyone.

VyseLegendaire's picture

Good concise summary here.

midnight's picture

ZH, an hardcore bull speculators blog/forum, whining about moral hazard. Wow!

Atomizer's picture

Considering Bernanke has openly admitted uncertainty on his policies, the time is approaching quickly. Cutting out the middleman shall become the handwriting on wall. Some will push for a new replacement. The real problem is in broad daylight.

Itsalie's picture

moral hazard breeds lower and lower risk premia, widespread correlation of all assets and soon, (like now) all participants are locked up in a death embrace. Investors, pension funds, mutual/hedge/money-market/SWF/japanese Mssrs watanabes/bankstas, the whole lot - some providing liquidity, others providing leverage, yet others gambling pensioners' (401) and taxpayers' money. Oh, and those who believe the Bernank is somehow rendering patriotic service by printing money to wage war against the CCP or trying to destory euro, fat chance! They are all trapped in the titanic, sailing towards the invisible iceberg waiting to lurk. Its too late, there's no bailing out now.

RockyRacoon's picture

Moral hazard has been a problem before there was a phrase to describe it.

Go back to the guarantee of bank deposits, the FDIC.   Why should folks who have money in a bad bank have deposits guaranteed?   Folks would be keeping an eye on the goings-on in their banks if they were not lulled into a sense of security that the government would cover losses.   Fraud can be prosecuted if it happens, but cutting off the losses prevents discovery of wrong doing.  Look how the concept has morphed into the present banking system for proof.

If one is libertarian enough and fully for limited government, it must go the full monty and include all aspects of governmental meddling.

Fancy Bear's picture

Look at the weekly of the dow. We're about to leave the channel in place since March 09.

And about "TPTB". They're an illusion. There are people with epic power but don't delude yourself into thinking that they are omnipotent puppetmasters. Sure, they can often leverage things in their favor. But that's about it. Instead, what we're seeing is that greed and a corruptable system have created the emergent property of the appearance of a multigenerational plot to consolidate money and power and to reduce the global population aka TPTB.

To be clear: this situation is absolutely out the control of individuals and small groups.

If you need a good example of modern emergent phenomena, look up the TED talk "what technology wants."

The current global debt crisis is the result of "what crony-capitalism wants."

zaknick's picture

Well said, except it isn't a corruptible system but a thoroughly corrupt one since, at least, 1913.

It's gonna be one heck of a ride to see Amerika awakened from its morally corrupt "Roman Empire II" narcissism.

Yeehaaaw, bitches!