Guest Post: Why the Federal Reserve's and Administration's Policies Will Not Work

Tyler Durden's picture

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WaterWings's picture

Damn straight - serving up wings and beer are the most important part of the equation. So, in an optimistic scenario, how long do we have to live, doc?

crzyhun's picture

I printed out the 3 pages...and needed a 8 count Vicodine for the pain.

If this is remotely so and it appears so, there so many people drinking kool aid that their stock price will surely rise. In the land of the blind the one eyed is king.


Ripped Chunk's picture


Current policies are employed in order to buy time and calm the masses. Why buy time???  The time is needed to assemble the forces necessary to control the masses, or at least to secure locations that are considered crucial for ongoing control.


Assetman's picture

While I'm still unsure on the "deflation vs. hyperinflation" debate, there are two things I do know:

(1) Debt deflation will be a constant force, for the simple reason there is too much debt to service, and not enough aggregate income to handle it.

(2) The reflation efforts to date have required government intervention-- and will likely require additional rounds of government intervention to keep deflationary forces at bay.

To this point, reflationary efforts have just about offset the effects we have seen from deflation-- though telling that to someone who has been unemployed for almost a year won't give you much sympathy.

So we're left to trusting the Fed to print "as much money as it takes" to offset the constant force of debt deflation.  Yet, really, the net effect is no meaningful reduction in aggregate debt levels, as the government takes in both good and bad (mostly bad) debt as their own.

Now, banks could start lending again (as the government seems to wish) and prime the pump for higher money velocity and higher inflation-- but it does nothing about the debt problem, except make things worse.  Banks are making easy money right now, without have to take those risks. 

Sure, the hope is that we can "earn our way" out of this indebtedness, as implied by our fearless leaders.  The reality is that the government has done a very poor job of allocating resources during this crisis, and have had no success at all in lowering debt levels.  And those job losses and stagnant wages isn't really doing much good, now, are they?

Strangely enough, I'm almost convinced that the Fed will just continue printing money until those in government finally get it right-- and they divert resources to things that actually produce something.  So far, we've wasted a minimum of $3 trillion saving a system that has produced very little, save "innovative financial products" and "outstanding bonuses".

Call me unimpressed.

Anonymous's picture

I really, really hate to say this, because it goes against every bit of morality and common sense I possess (reality can be like that), but:

For a post-industrial finance-based economy like the U.S., THE PROBLEM with debt deflation is actually not the debt part but the deflation part. I may be personally anti-debt (I have none myself), but the fact is all our commercial and consumer systems - the entire American Way of Life at the level everyone expects to live it - REQUIRES aggregate debt to be a multiple of Gross Domestic Product and to continue to increase annually. It is the contraction of that debt which stops commerce and consumption in its tracks and results in bankruptcies, home foreclosures, business failures and job losses - outcomes we probably all agree we don't like.

The "tipping point" issues of debt-servicing and asset bubble blowing/busting come with the territory, as we have known for hundreds of years, and even though they stongly affect (first for better, then for worse) people living close to the point of inflection, in the long run they don't change this finance-driven pattern of economic development at all.

It may seem now that it was a bad thing we developed this kind of economy, but we have proudly glorified and promoted this debt-based finance economy for thirty years, spread it all over the world, and happily took all the goodies it provided. Along the way it has become essential to our survival. Like nuclear weapons, once we invented, used, disseminated, and made our fundamental security dependent on debt we changed the world forever and we can't go back to an earlier Edenic non-nuclear utopia.

Hence, the Fed, Treasury, Congress, President, and everyone else (completely independent of which individuals happen to occupy those offices) really have NO CHOICE except to try to prevent debt deflation and restore debt growth. If they fail completely, what we will experience in the aggregate will be far, far worse than the Great Depression (a time when we produced 85% of the world's oil and essentially all our federal debt was held domestically). If they muddle along as they are we will look much like Japan has for the last 20 years - great profits for highly-concentrated and gov't subsidized businesses and little or no economic growth for everyone else. If they succeed completely, it's off to the races with debt growth and more prosperity until the next crisis - which is what the vast majority of Americans really want.

Given the American macho self-image, love of risk, lack of self-discipline, and sense of entitlement to wealth, I'm betting that debt-deflation isn't going advance that far before the binging starts up again (as it already is in Asia and the U.S. corporate world) and we'll be watching Bernanke proudly collect the Nobel Peace Prize for saving Debt from trash-heap of history.

B9K9's picture

Excellent points; as others have noted, there is simply no better substitute for ZH that enjoys the same level of insightful & knowledgeable commentary.

You are entirely correct regarding the essential facts underlying our particular set of circumstances: we MUST have credit expansion and asset inflation. It is the very heart & soul - the essence of our global economy.

But here's the nit: as trav777 and others have pointed out, the only way in which we can create another bubble is to have sufficient economic output to service the debt (never principle - that gets rolled over/inflated away). Notwithstanding some incredible advance in energy optimization or economic efficiency, it's hard to see what might occur.

What caused the housing bubble? In my mind it was a one-time affair driven by off-shoring of production to Asia (China). That is, a truly unique secular occasion which produced incredible cost reductions and resulted in massive savings that flowed right back to Western countries searching for returns.

Absent some other kind of tectonic shift, we'll have to instead deal with the numerator - the total debt load will have to be devalued/defaulted to the point where it can be supported by remaining "real" GDP.

It is that level of necessary contraction, and the impact it will have on our way of life, that has caused (driven, actually) the PTB to abandon all pretenses as to Constitutional constraint & due process. This sucker is going down, and they're simply heaving a 'Hail Mary' on a hope & prayer.

It ain't gonna work this time - the retrenchment is going to be brutal. In the end, I fully expect to see the USA dissolve no different than what occurred almost 20 years ago to the USSR.


Mark Beck's picture

Assetman. Good points. I have been in conversations where the magnitude of debt de-leverage has reached consensus. What is interesting , and not readily agreed upon, is the de-leverage time line and the steps and events along the way. The FED is actually part of the de-leverage process in how it treats the MBS securities on its balance sheet. What to do? How long will it take? The FED's priority was to save the banks, not to encourage economic growth.

Mark Beck

Assetman's picture

I'll try to make a few additional points in reference to the very insightful comments above:

Economies based on credit expansion/ fiat money creation, do indeed, perform to it's indended purposes up to a point.  And as B9K9 pointed out, it's really that "point" is where aggrgate output (income) can't keep up with the debt servicing that's needed.

Debt deflation isn't the problem, it's actually part of the solution.  The other part of the "servicing solution" is to increase aggregate incomes to the point where additional debt can actually be handled within the finanical system.

The issue over the last several years is that the debt/debt servicing burden has increased at a much greater rate than incomes.  It's been a very rare occurance to see aggrgate debt levels actually go down, so this will be new territory for policymakers.  I think B9K9's assessment on the general population is pretty accurate, unfortunately.

As for the unwinding process, it's very hard to tell how long the process plays out, but it will be a very nasty affair.  My theory is that the gameplan involves rounds of deflating debt and reflation, but it simply may not be successful. 

One important thing to note is that all the risk asset support and capital raising (especially among the banks) has been done to absorb the next round of debt deflation.  The Fed/USG had hoped to see something self sustaining to restart aggregate output, i.e., banks making loans to small businesses to keep people employed.

We know how well that's turned out.  The banks preferred to keep the free money to bolster thier own balance sheets, pocket the poorly earned bonuses--  and prepare for the next round of writeoffs in 2010.  Knowing what I know from activity at BofA and Wells, those defaults ARE coming... as early as January.

Neo of Zion's picture
once i was afraid, i was petrified.. I felt like I couldn't make money on short side. I spent oh so many days, seeing markets moving wrong but i stood strong, i figured out how to go long! The market's back, from deep deep space I am wiping that sad sad look off of my face. I should have closed that stupid put I should have bought gold lock and key If I'd know for just one year that you'd rally without me! Go on now Go! Rally out the door Don't turn lower now, Ben don't welcome that no more. Weren't you the one who tried to hurt me with QE And I've crumbled, but I wont lay down and die!   Oh no not I! I will survive! As long as I know how to trade I know I'll stay alive. I ve got all my life to short, the Fed will never go to court. I will Survive! I will survive! HEY HEY!
Daedal's picture

This site is being overrun with poets, rappers, and musicians. Oh well, LoL!

A Nanny Moose's picture

Philosophers? It is said that Human Doings will solve all their problems once they stop taking themselves so seriously.

Anonymous's picture

Lmao! Excellent Neo

Anonymous's picture

You can't divide a nominal variable like total mortgage debt by a real variable. Part of the trend up is due to inflation...I'm sure the effect is still there, but we can't see it from the time trend.

mtguy's picture

Although I agree with Assetman, it leads to a list of questions, or what we might call variables. Unfortunately these variables are a moving target. For instance, if the FED continues to print money, what about the effects on the dollar? Are we willing to piss off the nation's who have lent us trillions?

If we raise rates, that will exacerbate the housing problem. What then?

As I see it, if we raise rates we're screwed (or at least those with housing debt are). If we keep rates this low for too long , we're screwed. Hmm, seems like we're screwed!

Can anyone enlighten me as to a situation historically, where a central bank has printed money so freely that hasn't ended up in a disaster?

And, since poetry seems so popular this timeof year:

Here we are with guns a totin'

as the Fed keeps all that currency floatin,

I for one won't sit here bein' quiet

It's time we get mad and start to riot!!



Anonymous's picture

Why Is Obama Such a Failure?

"What's costing the president are three things: a laissez faire style of leadership that appears weak and removed to everyday Americans, a failure to articulate and defend any coherent ideological position on virtually anything, and a widespread perception that he cares more about special interests like bank, credit card, oil and coal, and health and pharmaceutical companies than he does about the people they are shafting." Drew Westen, Leadership Obama Style

Blindweb's picture

The policies won't work in their current form.  The larger the problem the more likely an extreme game-changing paradigm-shifting blackswan type policy will be inplemented. 

PAPA ROACH's picture

"Your mother is dying of a heart attack". So you give CPR to your father. Good luck.


When will everyone wake up and realize that nothing will solve the root problem, (which is a debt laden consumer), until you relieve them directly? Can't pay my house note, so BofA gets help, nice one, that'll do it for sure!

All the ills can get relieved at least, by the FED giving homeowners a 1% 30 yr fixed rate, do the math on that, I did and it is a large sum each and every month. Nobody is getting a free ride, principal stays the same, it is a simple change in interest rate. If the FED will loan to banks at 0.000, why not loan to the taxpayers at 1.000??  Bernanke and Geithner, two incompetent idiots that couldn't hit water if you threw them off a boat, cannot figure out you save the people in debt, and the banks will be saved bottom up.

Assetman's picture

When the idea first floated about providing subsidies to borrowers who faced either being underwater or delinquent on their loans, my first impression was "no thanks, to much moral hazard as it punishes savers over borrowers".

Given where the "subsidies" have gone, and how little has been accomplished... I almost want to take back my first thought.

PAPA ROACH's picture

The majority of this country falls in the borrower category rather than saver, and they can ruin everything for everyone, which I think is quickly being realized in hindsight.

Austrian and Keynesian economics DO NOT WORK in this modern time, like trying to cure strep throat with a voodoo shamen.

It is not too late still to enact such a fix, but they better hurry, or shall I say better fucking hurry.

sgt_doom's picture

If, by majority, you are describing all those debt-financed billionaires, then you are on target.

Seriously, though, unless your math kung fu is stronger than mine, you are missing out on the rather obvious factoids:

there is no economy (other than the majority financial engineering bubble), there is no tax base (without corps paying fed taxes, and offshoring jobs, there are fewer and fewer workers paying taxes -- the fed w/h has pretty much blown up), and with little to no amortization (that's FDI out the country along with those offshored jobs, factories, production facilities, R&D, etc., etc., etc.).

Brett in Manhattan's picture

The whole Fed policy is based on bullshit. Keeping people in homes beyond what they can afford does them more harm than good. It does help the banks viz. fewer defaults they have to deal with.

sgt_doom's picture

It only makes sense, and in the present case it does make sense by their standards, when the dollar is based upon mortgages (or, more specifically, mortgage loans).

Yes, a temporary Alice-in-Wonderland economy....

glenlloyd's picture

I view the administration's actions as slowing everything down enough that 1) few will have the attention span necessary to follow it through to conclusion and 2) so that the suffering will be long, drawn-out and as much disconnected from those who control the system.

In essense, deniability is created because of the time lag that comes from intermediate measures like stimuli, QE etc.

It's all a house of cards and the bottom layer is starting to buckle. Not much to do except sit, wait and watch...until it collapses.

Anonymous's picture

Exactly. And all the policy measures are about keeping things normal on the surface so that the crooks get to loot the middle class one more time before the whole system finally collapses.

The posture of Wall Street clearly indicates they no longer care about their image as it is already damaged beyond repair, all they care now is to prolong the final period of pillaging.

Trifecta Man's picture

My solution to the debt mess.

All debt in FRNs from everybody (yes everybody) is handed over to the Fed with proof.  The debtors and loaners are identified in a database with the principle.  The Fed prints up the money to repay the principle to the loaner in a new currency.  The debtor owes nothing.

The entire debt of the US governments and states is also converted into new currency for the benefit of the government.  They can use this windfall to pay future obligations until used up.  And that means eventually changing future obligations.

A constitutional amendment is passed forbidding governments from borrowing.  Governments must now live within their means.  Or print up scratch cards.  Taxes are by consent.

Old money is then exchanged for new currency.  Call this "new currency for clunker dollars".

Then no new money is ever printed again.  Old money is burned.  The Fed is abolished.

Anonymous's picture

All of us, that's the only thing that going to get burned.

Anonymous's picture

So show me the fucking content already.

Jean Valjean's picture

Debt Jubilee. It would hurt but it's a solution.
Ancient Israel did it every 7 years.
We are more sophisticated now, I propose every 15 years.

This combined with a commodity backed currency would bring about an econimic boom, ruin the bankers and make the Fed unnecessary all at the same time!

Back to the future. What's not to like?