There's A Problem With Kicking The Can Down The Road

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

There’s a problem with kicking the can down the road

 

Ben Bernanke, (December 12 2012)

 

Bernanke

I’ve taken this quote out of context — Bernanke was actually talking about the fiscal cliff, and not monetary policy. But kicking the can down the road is exactly what Bernanke is doing in his domain.

Instead of letting the shadow banking bubble burst and liquidate in 2008, Bernanke has allowed it to slowly deflate, all the while pumping up the traditional banking sector with heavy, heavy liquidity:

Shadow vs Traditional Cumulative Q3

It’s been one long, slow brutal grind:

The Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging – be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits – in the shadow banking system.

Trillions and trillions of liquidity later, Bernanke is barely keeping the system afloat:

Shadow vs Traditional Combined Q3_0

 

The reduction in shadow liabilities remains a massive deflationary and depressionary force (and probably the main reason why a tripling of the monetary base has not resulted in very severe inflation). We could have taken the pain in one go back in 2008 — let the failed banks and failed sectors fail, let the junk be written down, and let all efforts go toward rebuilding a more robust system less sensitive to counterparty risk. But we chose to kick the can down the road, and try to reinflate the biggest bubble in history through helicopter drops to the financial sector, the outcome of which has been booming incomes for the rich, and a total lack of growth and opportunity for the poor (except, perhaps for the dubious “opportunity” to join the masses of the long-term unemployment and claim a slice of the increasingly unsustainable welfare pie).

We chose the path of Japan (which has spent the last twenty years depressed) not the path of Iceland (which is emerging from its depression). We chose to kick the can down the road. Like Bernanke said, there is a problem with that. No amount of buying financial sector assets up to an unemployment or inflation or NGDP target — which empirically seems to do more to enrich the financial sector and the big banks than to create jobs  — will fix that. The system is rotten, and the debt load is unsustainable.

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knukles's picture

Does he go over the same cliff as the whale or a smaller less known unpicturesque one for the commoners?

(tapping toe waiting for instructions, so many to throw off the cliffs today)

Yen Cross's picture

Bernanke should have just dropped his drawers, bent over, and taken a big dump at the FOMC conference earlier... Did Bernanke really glean anything new, on his ILK?

 Same bearded talking horse, different day at the trough/ Buy Buy Buy...

ZeroAvatar's picture

The fuker is quite full of himself, there can be no doubt.  Even when he's not, he's STILL looking at himself in the mirror. Like Obummer.

Cursive's picture

The problem with NOT kicking the can down the road was that BernanQE's banker friends would be unemployed. You didn't think that the unelected society of private banking buddies also collectively known as the Federal Reserve Bank were going to take the fall for their crimes, did you? No, people are going to have to storm the ramparts, Les-Miserables-French-Revolution-style, before we stop kicking the can.

trav777's picture

That revolution set France back centuries.

knukles's picture

Agreed.
Took the women forever to figure out how to shave their armpits and bathe properly

nmewn's picture

Got two French women on the Hedge apparentleeeee!...that's good to know ;-)

knukles's picture

All the truthful serious insightful comments about the French draw a lot of reds.

Cursive's picture

@trav7777

Trolling again, eh bro?  Or are you just a fan of divine right monarchs?  It was the despots that set France back and the French people finally had enough of their crap.  Everything that came later was because France lacked the societal institutions to cope, a problem we are rapidly approaching here in America or maybe we've gone over the cliff.  In any case, it wasn't the revolution that set France back.  It was what led to the revolution.

trav777's picture

nah, you idiot, when they were beheading people like Lavoisier, they were WAY the fuck over the line of self-destruction.

The revolution didn't end when Marie got a little taken off the top, dude.

Cursive's picture

@trav7777

According to some textbooks, the French revolution never ended.  Regardless, is your answer to any problem that we should just accept the status quo?  Accepting the status quo is what got us in this mess.  I only bring up the French Revolution because it seems that the time for non-violent regime change is passing.  If America keeps going at this pace, with no changes to our current banking oligarchy, then the UAW protest from yesterday is just the beginning.  I hope and pray it doesn't come to violence because, just as with Danton, once the violence starts, there is no controlling it.  Look at Buenos Aires since 2001.  Daily protests, constant tumult, riots and innocents hurt.  Not good.

thedrickster's picture

La République n'a pas besoin de savants ni de chimistes ; le cours de la justice ne peut être suspendu

Freddie's picture

Yes but it made for a crackin good (gay) musical with the film version coming out.

haskelslocal's picture

But.. Who resolved Iceland's liabilities? You sure about that?

mjorden's picture

Watch out, talk and logic like that might get you in trouble, you might be labeled the T word ... rymes with Errorist ... 

10mm's picture

Kill what's left of a "REPUBLIC",everything else falls into place.

GreatUncle's picture

This extra liquidity.

You have one heck of a problem because even if it is controlled where it may enter the economic system the value of the system as a whole has changed.

An economic system so influenced adapts to the new normal and a new improved value.

Once it has finished adapting then the fundamental problem resurfaces so you are back where you started and that is Japan's position a decade later.

For me and a personal thought is this "how big is the problem". The problem, not a bank being too big to fail but a whole economy and the devastation that would occur globally.

On that last point the central bankers are trapped and the only thing they can do is carry on. Iceland was able to pretend to fail and Japan able to maintain its level of debt on the concept the rest of the world is there for them to trade with and keep going.

Iceland did not go bust it got a lifeline from the IMF and others to keep it going of $6bn. This is not the whole debt, it is the money needed to service an economy to allow it to carry on and very much like Greece.

Xanadu_doo's picture

BUt I can't be broke. I still have more checks.

cranky-old-geezer's picture

 

 

The fiscal cliff was back in '08.  Financial cliff in a broader sense.   That's when "regime change" occurred, when the Fed started printing like crazy and buying trash from big banks to keep them solvent.  It's when govt deficits really took off, other nations stopped buying our debt, and Fed started buying it en masse. 

We got to the edge of the cliff.  Fed came along and built a staircase to the bottom so we could step down to the bottom rather than fall to the bottom.  We're heading to the bottom either way.  Just slow rather than suddenly.

Preserve the dollar or preserve govt and banks.  They chose to sacrifice the dollar and preserve govt and banks. 

Preserve the economy or preserve govt and banks.  They chose to sacrifice the economy and preserve govt and banks. 

There is no cliff now.  Debt ceiling will be raised or abandoned.  Congress never has held their ground on the debt ceiling.  It always gets raised at the last minute. 

If Obama gets his wish, the debt ceiling will be abandoned pretty much.  When he can raise it by executive order, it becomes meaningless. 

toomanyfakeconservatives's picture

There is a problem with pissing on the Constitution. I'm not the only American who feels this way.

 

Believe me, more men and women in uniform are paying attention to this crap than the average citizen is. They know better than most that shit rolls downhill and the problem is at the top.

madcows's picture

Tyler, Ben is not concerned with helping the American people.  If he was, he would have let the banks go out of business, a la Iceland.  But, instead, he has turned Japanese.  Turning bankrupt banks into zombies allowed his banking buddies to continue living the dream.

Also, don't forget that the Fed holds a few trillion in US debt.  That's his cashcow for the next millenium.  He has to keep that going.  No resets allowed.

Above all else, remember that the Fed is a bank, not a charity.  They're not here to help you.  They're here to live off of you.