Could The Fed Lose Control Of The Frankenstein Economy It Has Created?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

What if there are tail risks present in the Fed's Frankenstein Economy of the same sort that Greenspan et al. failed to identify in 2008?

A longtime correspondent emailed me last week about the apparent contradiction between a Federal Reserve that has had the power for five years to counteract any decline and my call for a market decline in 2014: why would the Fed allow a market it has pushed higher for five years to ever fall?

It's an excellent question, as it summarizes the key question: is there any limit on "don't fight the Fed?" Can the Fed push assets higher essentially forever? And if so, why did it fail to do so in 2008?

Former Federal Reserve chairman Alan Greenspan's recent bleatings in Foreign Affairs,Why I Didn't See the Crisis Coming, offered one primary reason: the Fed's models failed to accurately account for "tail risk," (otherwise known as things that supposedly happen only rarely but when they do happen, they're a doozy), because guess what--they happen more often than statistical models predict.

I would add that tail risk is a fancy name for unintended consequences of central planning. Thus Greenspan had more in common with failed Soviet planners than he would ever admit.

Greenspan also confessed that the Fed overcame the meltdown by creating and lending unlimited sums of money--yes, unlimited. Various accountings after the fact identified $16 trillion in direct Fed backstops and loans to global banks, but implied or indirect subsidies, backstops and lines of credit added tens of trillions of dollars to the total bailout of the privately held banking cartel.

This money spigot has remained open for five years, and a tiny reduction ($10 billion a month) is all the Fed dares to do lest the global markets melt down again.

So are there no "tail risks" or unintended consequences to leaving the money spigot fully open for five years running? Those who believe the Fed's record of five years of rising asset prices proves its ability to drive prices higher for another five years. In other words, having created a Frankenstein economy that depends on unlimited credit pumping, the Fed can control its monster with uncanny finesse.

The Fed's extraordinary success in suppressing risk, tail and every other variety, has given punters and strategists alike a supreme confidence in the Fed's ability to suppress risk for another five years, and another five years after that. (The similarity to Soviet-era five-year plans is ironic coincidence.)

What if there are tail risks present in the Fed's Frankenstein Economy of the same sort that Greenspan et al. failed to identify (or grossly under-estimated) in 2008?

If the limitless hubris of the Frankenstein story doesn't resonate for you, consider the unseen risks of monoculture agriculture as an apt analogy. In this view, the financial markets are a Fed-farmed monoculture that is sustained solely by massive quantities of financial fertilizers and carefully engineered "crops." The Fed claims its engineered monoculture is as resilient as a market-based ecosystem, but this is simply not true: monocultures are exquisitely vulnerable to tail risks that are impervious to the policies intended to kill all threats.

Indeed, in the monoculture analogy, central planning engineering perfects the power of threats to bypass the system's defenses.

Despite the supremacy of Fed hubris and punter confidence in the Fed's Frankenstein Economy, the likelihood of some tail risk emerging out of nowhere is rising. Indeed, the very confidence in central planners, i.e. that the Fed is now the ultimate power in the Universe, is a prerequisite for collapse.

Debt = Serfdom (April 2, 2013)

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Rubbish's picture

Tyler it's already the 2nd and no obese chicks?


What gives, rising Gold can only make us happy so long.

Headbanger's picture

But the Fed IS Frankenstein!

GetZeeGold's picture



The real question is would they lose control of it.....on purpose?

Iocosus's picture

They purchased 5 billion rounds to fight inflation, or rather, the effects thereof. Wonder what the huge potassium iodid purchase signifies? For those with "thyroid problems"?


BLOTTO's picture

Interesting...the Galatic Empire and the Fed are both ruled by the same 'people' - Annunaki :-)


"The Empire will always strike back!"

Stackers's picture

The collapse will start in china and spread from there

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


"Could The Fed Lose Control Of The Fankenstein Economy It Has Created?"

The answer is yes, but not only the Fed, but the rest of Washington, however the last thing they will do is blame themselves!


kliguy38's picture

Washington??? You act like they really have a say? hehehehe......... the owners of the Fed call all the shots

Stuck on Zero's picture

The way the system works is that the top 0.01% will never have any tail risk.  All the tail risk is born by us poor folk.


SeattleBruce's picture

"The way the system works is that the top 0.01% will never have any tail risk."

And they think of themselves as 'brilliant' investors, etc...nothing but a bunch of crooks...i will give them this - it's a pretty clever criminal enterprise as most 'Murikans, and other citizens of the world don't know they're being robbed blind.  But does that fall more to the cleverness of the criminals, or the stupidity of the victims?  I will say, it's pretty convenient when the person you're robbing doesn't know they're being robbed and continues to do 'business' with you, as if you're providing a benefit.  Is this proof of the Stockholm Syndrome?

Antifaschistische's picture

The Fed will always retain the control over inventing money via the debt mechanism....any one see that power being threatened?

As long as these insiders can invent debt/money, then they may lose power over some of the secondary economic statistics....but they will never lose power over the ability to enrich themselves at the expense of the masses.

That's the bottom line...and it is why the Fed must be destroyed.

czardas's picture

So so true.  Why anyone would think the FED, after getting praise for the predicament we find ourselves, could lost control is ludicrous. If the name of the game is perception, they have already won.   The vast majority think of the economy now in terms of what the State does - not private transactions.  The "economy" has devolved into niftier ways of sloshing debt from one account to another.  Yes, there will be a reckoning but not as long as the Fed controls the conversation.   I no longer look for a huge catastrophe but a continuation of the slow but steady decline in our status as a true economic power.  Perhaps cultural vigor can only last so long - this all may be rear guard action of something that is inevitable. 

Dingleberry's picture

I'm still trying to figure out why I never heard of or learned about the fed in all of my years in  public school and college. In fact, everything I was taught turned out to pretty much be wrong (about consequences of deficits, interest rates, free markets, accounting, law, etc). 

It took the invention of the web for me to see things clearly.

There is no excuse for ignorance today. Sadly, most actively choose to remain so.

NickVegas's picture

I'm finding out most everything I learned in learned in school has either turned out to be wrong, or somehow didn't make it into the syllabus. In my simple opinion, it is the conditioning of the test that indoctrinates.

SeattleBruce's picture

"I no longer look for a huge catastrophe but a continuation of the slow but steady decline"

The implosion/explosion of the financial 'markets' could still happen (if the FED accidentally or on purpose loses control), but that steady decline you talk about is definitely happening all around the world thanks to these manipulators.  We just need to do our own PR and put that blame squarely on their backs.

Oldrepublic's picture

Yes,indeed, the fed is an evil monster

BuddyEffed's picture

Maybe in a contracting economy, there could be higher risk of more Fukushimas where spent fuel pools might gassify, raising the level of take up in humans and all species.  Wasn't that compound a blocker that prevents take up in people in the more sensitive thyroid body part?  If too many spent fuel pools end up in the environment, some of the technical materials I've seen suggests that longer living species might become challenged just to  reach reproduction ages.  Wouldn't it be a shame if this place ended up mostly inhabited by fast breeding species because of their ability to produce at least some viable offspring in the short term, regardless of genetic drift due to mutation and increased mortality due to uptake and concentration of the harmful topes in the food chain?

Landrew's picture

Yes to be  literal, the Fed is Dr. Frankenstein and the economy is Frankenstein's monster. 

Bangin7GramRocks's picture

The answer is no! They can invent money and manipulate any data necessary to maintain the status quo. The people who know the dirty details are all making billions so they have no reason to talk.
There is no market.

SeattleBruce's picture

"The people who know the dirty details are all making billions so they have no reason to talk."

Well, we all know the dirty details around here - and there aren't many of us making billions, I'm sure.  I think the FED is concerned about the continuing PR battle they need to wage these days (after 100 years, it's about time, don't ya think?)  That's the front line of our war against them, imho, and one we need to actively engage in with every possible person, and be ready to make our arguments against them.  The Rs have had a bubbling anti-FED campaign through Ron Paul and certain parts of the Tea Party, and then the Ds through their Occupy groups a couple years back.  All the anti-FED energy needs to be unified across those two parties (perhaps into an I party, or at least an independent movement that agitates to end the FED's tyranny.

Temporalist's picture

Gold up on the day starting from the overnight and yet Yahoo finance has 3 lead stories on the front page reporting:

"More bad news ahead for those trying to play gold this way"

Newmont Mining was the worst performing stock in the S&P 500 for 2013. Things may be even darker in 2014, say two strategists.


"Gold jumps in thin volumes, but outlook remains dim"


Why gold bugs should brace for an 'awful' 2014 "

GetZeeGold's picture



I'd rather read Pravda before I read Yahoo.

Oldrepublic's picture

old Soviet Russia saying: “”In Pravda there is no news, in Izvestia there is no truth.

Temporalist's picture

My point is that gold is sooooo meaningless, such a bad idea as an investment, only that minority of "crazy gold bugs" could care...yet it's the lead story of the first business day of a new year and it's all negative.  I guess leading with a positive story about ANYTHING else would have been weird.


bentaxle's picture

As an investment? Well, things went pretty well for it between 2000 and August 2011. 

How about gold's intrinsic "purpose," in relation to counterparty risk? In those terms fiat really, really sucks! And who controls fiat, some generally decent, honourable, fair-minded individuals that have the best interests of the human race at heart? Or a bunch of sociopathic crooks out to screw you but look out for themselves? If the latter then gold itself won't be enough, but having none is unlikely to have been a wise investment decison in the not too distant future. 

Calculus99's picture

But this is what the Gold bulls need, almost EVERYONE (apart from the Longs/people who believe the Gold story) believing that Gold is not only a busted flush, but a) expected to go lower and b) has ZERO chance of rising.

Never forget  Goebbels, keep repeating the same message over and over again, then by osmosis everyone gets it. Well, almost everyone because I don't get it!

PS. On a  similar matter. I probably switch to CNBS a few times a month, a  routine channel search. Last week I saw a message they were carrying, a cut/paste job with about 6-7 central bankers all saying 'things are getting better'. I(f that's no outright propaganda I don't know what is. I almost put my foot through the telly. And the morons at CNBS wonder why  viewership is at an all-time low.


Spungo's picture

Contrary indicator. That means we are near the bottom.

max2205's picture

Markets high enough that they can drop it and cause a rush to treasuries to keep rates in check

Landrew's picture

Short rates are still zero, long rates are close to zero. People will move to cash/short  maturity  rather than long U.S.T.

Pladizow's picture

This assumes it had control to begin with.

BLOTTO's picture
'Could The Fed Lose Control Of The Frankenstein Economy It Has Created?'


A. Yes, because evil is dysfunctional and that will be its eventual downfall.

nickels's picture

The "economy" is an engine that makes money for the players. The piston goes up- the piston goes down. It doesn't just keep going up. The players make money on both sides of the market. When the timing is right, the spark will fire, the market will go down and the players will make more money in what the sheeple will see as a "market crash".

NoDebt's picture

Yeah, but in that process there's normally some power created and sent down the drivetrain to the rear wheels.  That seems to be the part that's lacking right now.  Piston's still going up and down but the wheels aren't putting much power to the pavement.

Free-rev an engine in neutral with your foot to the floor long enough and you know what happens.... bang!

Sudden Debt's picture

are we talking about the same morons who actually build a death start but managed to include a engineering mistake where on fighter could drop a bomb in a unprotected air vent that caused the entire thing to explode?

I mean... just a piece of  simple chicken fence would have stopped that bomb... and they didn't think about that?



Got gold?    Best tailhedge around. Ben bernanke said it's a tailhedge.

Hedgetard55's picture

Yes, the same morons that thought an air vent would work in outer space!

The Wisp's picture

Air Vent ? in a Vacuum...

   Good Thin the Government didn't build the Fed the Government can't do anything right.

Chicken wire stop a Bomb ? i thought they dropped thru roofs before they exploded.  :)

fooshorter's picture

<--- Mr. Yellan is a Sith Apprentice

<--- Mr. Yellan is an ewok



zaphod42's picture

Mr. Yellan is a woman!  Therefore not "Mr."  Just FYI.

Can a woman be a Sith?  I know no reason.  However, she seems much more cuddly than that.

My vote:  ewok!


fooshorter's picture

Mr. Yellan is a woman!


You sure 'bout that? Search your feelings. 

drendebe10's picture

Maybe a tranny? Pretty fukn ugly woman if really a woe-man. Ugh.

GeezerGeek's picture

Some people say the same about Hillary Clinton. I'm still in the undecided camp.


  I'm not saying it's true but there is a large community of people who contend that the WOOKIE is a tranny. Real name Michael Lavaughn Robinson. Lots of pics out there showing Moochelle's package. Look  for the one where he/she has on black pants.... what is that in your pants Moochie?

TeamDepends's picture

Could they?  The question is have they?

gwar5's picture

Is it losing control if the Fed does it on purpose?

dick cheneys ghost's picture

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered........''

Thomas Tyler Jefferson

besnook's picture

in other words, reality eventually wins over a system based upon illusion(or is it delusion?).

buzzsaw99's picture

There are only two things that would induce the fed to cause a market crash. One is double digit ust rates. The other is $200 oil. The first can't happen because the market is rigged so that leaves door #2 which is jammed due to market manipulation and military intervention.

kurzdump's picture

Unemployment is out of control - the FED lost control long ago.