Monetary Malpratice: Deceptions, Distortions & Delusions

Tyler Durden's picture

Submitted by Gordon T Long

MONETARY MALPRACTICE: Deceptions, Distortions & Delusions (pdf link)


The Hippocratic Oath is an oath taken by physicians swearing to practice medicine ethically, honestly and above all, to do no harm to the patient. Unelected central bankers do not take such an oath. They do however swear allegiance to the Constitution.

On February 6, 2006, Ben Bernanke took an oath to the Constitution at his swearing-in ceremony as Chairman of the Board of Governors of the Federal Reserve System. The significance of this is that as a federal officer, despite being the front man for a privately owned, quasi government bank, he can be prosecuted for any violations of the Constitution that he swore to uphold.

Bernanke is likely never to be charged with a crime against the constitution, but he is certainly guilty of malpractice. As a result of  his untested and uncharted monetary policies, he has created broad based Moral Hazard and Unintended Consequences that have inflicted immeasurable and potentially fatal harm to the America he swore allegiance to.


By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.


  • Low interest rates and massive transfers of capital from Fed to banks has allowed banks to become hedge funds, making most of their money through proprietary trading and the creation of ever-more exotic instruments (moral hazard). This has lead to a merger of the banks, government and military/industrial complex into one entity (unintended consequence) that is not focused on expanding its power rather than serving its original constituents.
  • Low interest rates and easy money have lead to massive concentrations of wealth as bankers and corporate CEOs take ever-greater risks, keeping the profits and handing the losses off to taxpayers (moral hazard). Wealth disparities have exploded (unintended consequences), creating in effect an aristocracy – and a disaffected majority. Political instability has risen (unintended consequence), leading the government to build a police state apparatus. The coming confrontation will look like Greece, with the addition of advanced technology on all sides (very unintended consequence).

"An environment where financial crises are seen to be a regular part of the landscape is one where people might actually take more precautions. People would maintain a margin of safety in all their decisions, investment and otherwise, regulations would be well thought out and diligently enforced, and the unscrupulous and the incompetent would quickly fail and disappear from the scene. Modern day attempts to abolish failure only serve to ensure it, as moral hazard - the likelihood that people's behavior changes in response to artificial supports or guarantees - surges. Attempts to prevent or wish away future crises only make them more likely. Only by allowing, even welcoming, episodic failure do we have a chance of reducing the likelihood and magnitude of future financial crises."


On The Morality Of The Fed 12/21/12 The Baupost Group


In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk

  • A moral hazard may occur where the actions of one party may change to the detriment of another after a transaction has taken place.

Example: persons with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company.

  • A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party isolated from risk behaves differently from how it would if it were fully exposed to the risk.

Example: the Euro debt crisis, in which the troika of relief funds (aka the ECB, the IMF, and the EC) for heavily indebted nations like Greece are waiting as long as possible to act. The risks of a money run, and the consequential market crash in Europe is by far not as detrimental to these institutions as to the indebted nations themselves.

  • An individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.
  • One party in a transaction has more information than another.

In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

  • One party, called an agent, acts on behalf of another party, called the principal.

The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

“A party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk”

Moral Hazard  >  Mal-investment > Corruption

  • Bad bankers run good bankers (i.e. those reluctant to lend to bad credits) out of the business.

Result: banks become hedge funds, predatory, corrupt.

  • Big banks use their too-big-to-fail status to borrow much cheaply than well-run smaller banks, and then proceed to push the latter out of mortgages and other lucrative business lines.

Big banks then accelerate their growth.

Result: financial oligarchy in which the banks/government/military industrial complex merge into one organization. Bernanke, Jamie Diamond and Obama are division heads in this empire.

FINAL RESULT: Police state in which the Bill of Rights is ignored and technology is used to suppress dissent while inflation siphons wealth from the 99% to the 1%.

  • Real estate appraisers forced to meet the number.

Result: Buyers end up underwater on day one.

  • Governments begin to lie about economic stats to obscure the impact of bad policy.
  • Businesses take excessive risks because borrowing is so easy and government stats paint a too-rosy picture.

Result: Massive Mal-investment

  • Banks create unlimited amounts of derivatives and asset backed securities because financing is so easy and they know that, should the market fail, governments will have no choice but to bail them out.
  • Individuals borrow excessively because credit is extremely easy to get. The market signals that they’re highly credit-worthy and that the future is brighter than it actually is.
  • Investors move further out on the risk spectrum because:
  1. There’s no yield available in low-risk paper,
  2. Government stats paint a too-rosy picture, and
  3. The conventional wisdom is that the government can’t let high-risk investment fail.

        Result:   Extremely fragile national balance sheet,
        Result:  Overexposure to stocks and junk bonds,
        Result:  Retirees with capital at risk that might never be recovered.



Unintended consequences (sometimes unanticipated consequences or unforeseen consequences) are outcomes that are not the ones intended by a purposeful action.

Unintended consequences can be roughly grouped into three types:

1.    A positive, unexpected benefit (usually referred to as luck, serendipity or a windfall).

2.    A negative, unexpected detriment occurring in addition to the desired effect of the policy (e.g., while irrigation schemes provide people with water for agriculture, they can increase waterborne diseases that have devastating health effects).

3.    A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse), such as when a policy has a perverse incentive that causes actions opposite to what was intended.

“Unintended consequences are outcomes that are not the ones intended by a purposeful action”

    Unintended Consequences


       >  Dysfunctional Markets 

    > Instability




Dysfunctional Markets are considered operating when normal and expected 'causes and effects' no longer occur.

Dysfunctional Markets exhibit characteristics such as Malpractice, Malfeasance, Mispricing & Malinvestment.




MALPRACTICE: Instead of allowing excessive peripheral country debt to be wiped out, ECB is guaranteeing it.

RESULT: Investors buying bonds they wouldn’t otherwise buy, and Spain and Greece continuing to build up debt


MALPRACTICE: Low interest rates lead to a vast oversupply of houses. But instead of letting prices fall to market clearing levels, the Fed lowered rates even further and is now buying mortgage bonds as part of QE3.

RESULT: Mortgage rates are at near-record lows and home building is rising again, even though we still have too many houses (malinvestment), flipping is back (moral hazard), first-time home buyers are being priced out of starter homes (unintended consequence) and mortgage debt is beginning to rise again (moral hazard). Important to understand is that homes are not productive assets. They eat capital and the more big houses we have the less productive we are as a society (unintended consequence).

MALPRCTICE: Low interest rates are pushing pension funds and individuals into riskier assets.


  1. They were forced to buy equities and junk bonds to achieve decent yields.
  2. Now the yields on those two classes have been lowered to the point where they don’t work, so pension funds are moving back into collateralized loan obligations (CLOs), securities created from pools of corporate loans. 
  3. JP Morgan forecasts three times as many CLOs will be created this year as in 2011.

MALPRACTICE: The Fed’s willingness to monetize debt prevents the US from living within its means.

RESULT:  Without a printing press we would have to prioritize and limit spending. But with a printing press we don’t. The US can run a global military empire and a cradle to grave welfare state, and simply print the money it needs (moral hazard).

An ongoing, accelerating debt buildup (unintended consequence) that:

  1. Makes it harder to live within our means because we first have to pay interest on this rising debt, and
  2. Increases the odds of a catastrophic meltdown as rising debt renders the system more unstable (unintended consequence).


"We must question the morality of Fed programs that trick people (as if they were Pavlov's dogs) into behaviors that are adverse to their own long-term best interest. What kind of government entity cajoles savers to spend, when years of under-saving and over-spending have left the consumer in terrible shape? What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retiree's savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? Not the kind that should play this large a role in the economy."


On The Morality Of The Fed 12/21/12 The Baupost Group


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Snakeeyes's picture

Just remember, The Fed is dedicated to trying to create ANOTHER house price bubble and reduce bank losses on real estate. Also, to aid the Administration's lavish loan modification programs.

Look at charts of mortgage rates and house prices. The Fed may be helping, but at an outrageous cost.

Schmuck Raker's picture

"Just remember to click the link to my blog, which I provide with EVERY post I make (stroking ZH members)."

Pumpkin's picture

The fed is dedicated to nothing but stealing your labor for themselves.  Once one understands that, the success of the fed becomes apparent.

Rathmullan's picture

With this market so utterly broken and dysfunctional and strung out on every form of artificial stimuli known to the pseudo sciences, do you get the feeling that Kevin is actually selling today over there on "Liberty" Street.

All Risk No Reward's picture

What kind of mass delusion is at work that evey one of the establishment and promoted counter-establishment crowd talks all around the big elephant in the room all day long?

Debt based money is a fraud - that's the big elephant in the middle of the room none of these clowns wants to talk about.

Keeping it simple...  if I lend you $20 at 5% interest, you owe me $21 in one year.

I only gave you $20 and the only way you can pay be back is if I ALLOW you to.  If I want your collateral, I could let you work for me or let you sell me 99 cents worth of stuff... but you still owe me a penny that I won't let you earn from my accrued interest.

Therefore, I simply take you labor, your stuff and your collateral...  beeeeyatch.

I own your dumb-*ss nonfinancial mind *ss.

Just like you can't sell an item at a loss and make it up on volume, you can't create $20 unpayable debt notes and somehow make the total payable.  Yes, some of the early $20 bills are payable as they create more $20 debt notes, but the whole isn't payable.

Also keep in mind that the only way society can pay their debts off is if the money creators ZERO OUT THEIR MONEY - because their money is our debt!

It is simple.

If you don't get it, it is because you willfully choose not to get it.  That delusion doesn't change reality.

Money is debt.  One person's wealth is another person's, or group of person's, unpayable debt.

The system is a fraud.

How do you truly conquer a people?  Convince them to not even make the effort to fight back.

Grill Boss's picture

It is hilarious that people STILL THINK BANKS ARE AT RISK OF LOSSES!

How does a loand originate? YOU CREATE THE CREDIT FOR YOU, you are lending to yourself, and don't even know it.... banks have ZERO RISK when they 'create' a mortgage, the money is lent out off of the security that is you...

all explained here very simply how it works!

the govt gives banks money because the banks ask for it, and the bankruptcy of the usa (in place since 1933) goes on...

Coupled with the ESF that nobody seems to know or care about.... good luck USA, your food stamps are really a prison lunch line

blunderdog's picture

Wow, lookit that.  A Marxist!

agent default's picture

The greatest case of malpractice with criminal intent is the money printing that is going on.  The premise of printing until we get inflation to a desirable level, is idiotic, unrealistic and the result of a downright crackpot.

Here is an equivalent example: You have a piece of Uranium, it's not doing anything useful by it self, so what do you do with it? 

The Bernak approach:  Keep piling up Uranium until you get some reaction out of the pile.  Ok, bozo, once you get the chain reaction going (inflation) how the fuck do you propose to contain it?  Unless you think you can withdraw all this excess liquidity overnight, and not cause the economy to thoroughly crash to levels that will make 1929 look like a minor incident . 

These people are not just dangerous, they are total sociopaths.\rant

JustObserving's picture

Wars and destruction cannot happen without money.

The Vietnam war forced US off the gold standard on August 15, 1971.

Now with unlimited printing by Bernanke, the US can engage in wars in Afghanistan, Pakistan, Yemen, Somalia, Libya, Syria and Iran.

Unlimited printing leads to unlimited wars and unlimited killing.

Fake money enables and empowers evil.  

Praise the lord, print the money and pass the ammunition.

Winston Churchill's picture

But as we are finding out ,outspending an Afghan goatherder by 10000000:1

does not buy victory.

Isn't the love of money the root of all evil.

The love of it ,not the  money itself.

SmittyinLA's picture

Mal investment? 


Are you questioning my A1 rated City of Bell CA municipal bonds?

q99x2's picture

I heard the FEDs were going to pass a law to legalize propoganda but then never heard any more about it. I guess it passed.

jal's picture


" ... What kind of entity drives  ... "

You have no business asking such a question if you are not doing your part in "doing God's Work"

/sc off

Cole Younger's picture

What people consider malpractice and unethical is only based on what they belive is wrong. The reality is there is no rules, laws, etc. that govern what a central bank can do. The constitution is a meaningless document and once you figure this out, you will come off your high horse and live in reality. Read Lysander Spooner.

Spooner’s concern with natural law and justice manifested itself in his lifelong arguments against slavery; government monopolization of money, credit, and the post office; government licensure of lawyers and restrictions on juries; taxation; seizure and confiscation of private property; and government interference with the natural laws of intellectual property.

Cycle's picture

What do you call it when there is a nominal "free" market with the Fed's "centrally-planned cost of capital" and where the new debt-as-money is first handed to members of the Inner Party?

Money 4 Nothing's picture

Oh..You mean just like the Newtown shooting? Deceptionis their stock in trade, pun intended.

ebworthen's picture

Markets that do not hold the choices and rights of the individual as paramount are doomed to failure.

You would think the FED would glance at the history of centralized agriculture in the U.S.S.R. and China to get a clue.

Unless of course their goal is to misallocate capital and encourage privatized gains and socialized losses, in which case Ben Bernanke and the FED itself should be tried for high treason.

Clesthenes's picture

You wrote,

What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retiree's savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks?

The answer should not be difficult – once you learn to judge according to results: it is an “entity” that aims at a general plunder of the earth… not just Western societies – the whole planet.

A major fact that most, maybe all, observers have missed is that the current financial crisis was consciously precipitated by the Federal Reserve.

I arrived at this conclusion after studying FR balance sheets for many months; the Federal Reserve, in other words, hides evidence of its culpability in plain sight.

It began during the first week of December 2007 when the FR sold exactly $5 trillion of US Treasury securities.  This operation had the effect of draining the banking system of $3 billion of reserves.  It was a test to learn how the market reacted.

The following week another $5 billion, exactly, was sold/drained.

There was a third dump the next week, this one, slightly over $15 billion.

In each case, amounts involved were unprecedented over the previous FIFTY years of Fed reporting.

Would the financial crisis have developed as it did without these actions by the Fed?  Who knows?

One thing is certain, we have evidence of the Fed’s complicity in triggering the crash; the best evidence possible, data published by the Federal Reserve.

And it raises a question we all should ask, ‘How do we make “them” accountable for what “they” have done?’  If we look further, we see that there is hardly a government agency that was not complicit in causing, or aiding, abetting or profiting from the crisis.  More, complicity extends beyond agencies of the US government; nearly thirty central banks joined in the raid; this, again, is established by evidence published by the Federal Reserve.

Should we wait for these world-class criminals to investigate, prosecute, judge and punish themselves?

What a silly question.

Here is a short account of how a few men, so very few, brought down judges and tax collectors, bishops and kings who thought they had a divine right to impose taxes on other men without the latter’s consent; the same men who, 150 years later, would guide American Founders.

SmoothCoolSmoke's picture

No offense Mr. Long.....BUT I'M TIRED OF PEOPLE (I assume, making money by) CONTINUALLY TELLING US WHAT IS WRONG.  You, Mr. Grant, Mr. Krasting, etc, etc.


How about some actionable thoughts, ideas, advice..... ON HOW TO FIX IT!

blunderdog's picture

Given that government apparently isn't going to make any meaningful changes to fiscal policy, we already know how this plays out. 

Eventually the financial sector implodes, and the only "fix" is to float a new currency.  Everyone with paper promises for dollars gets fucked over.  Probably lots of warfare, too. 

JR's picture

“They would give us a Planned Economy, scientific in every detail, and out of it would flow the More Abundant Life, with everyone rich and happy, and the very birds in the trees singing hallelujah.”

That was H.L. Mencken’s description of the central planners in 1936. And, just as Mencken, Gordon T. Long in this indispensable article describes our current monetary malpractitioner, Ben Bernanke, as running exactly true to type.

Our financials wizards, says Mencken, first begin by giving the appearance of Omnipotence Itself.

But, says Mencken, it soon turned out after three years of Dr. Roosevelt that they were “the sorriest mob of mountebanks every gathered together” at one place.

“On one point only did they appear to agree, and that was on the point that any man who worked hard at some useful task, husbanded his money prudently, and tried to provide some security for his old age and some heritage for his children was a low and unmitigated scoundrel, with no rights in law or equity. This fellow was the central villain of the obscene farce that they began to mum, and to his ruin they were soon bringing the full force of the national government.”

That, wrote Mencken, is the true nature of the Roosevelt Planned Economy – “their sole business in life is getting rid of other people’s money, and their only care is finding ways to do it.

“Here was the Rooseveltian Planned Economy in perfect flower… heralded by Harry L. Hopkins and his aides – ‘Let’s take a real crack at this. Let’s give everyone a job.’ The title, the Civil Works Administration…

“The scheme was concocted on the spur of the moment, it was put into execution without any attempt to determine its probable effects and consequences – and it blew up within six months…conceived by quacks and executed by fools…. And when it flopped, what was the next move of the Brain Trust? The next move was to demand $4,800,000,000 to try it all over again, with the same Hopkins once more in charge.”

Summing up these “ciphers” and their New Deal Messiah and the engagement of their manipulative fantastic power, Mencken wrote: “Of such sort are the ‘trained experts’ who were to have brought in the More Abundant Life…incapable of anything colorably describable as sober judgment.”

Déjà vu?

As Mencken finalized it: “To hand over to such incandescent vacuums the immensely difficult and complicated problems which now confront the country is as insane as it would be to hand over a laparotomy to a traffic cop.”

OldPhart's picture

I'm not an economist, but I think there is an error in thinking "unintentional consequences" are 'unintentional'.

Disenchanted's picture

Doctors = Hippocratic Oath

Banksters = Hypocrite Oafs

Joebloinvestor's picture

Ben should have been charged and arrested for theft of government funds when he made those secret loans to the EU.


nastaking's picture

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