Fed President Defends Blowing Bubbles: It's In The Best Interest Of "Irrational Investors"

Tyler Durden's picture

It would appear the Fed, after being angry at itself for creating the "complacency" evident in the markets globally has reached the pinnacle of critically circular logic in its defense of policies that are aimed at financial stability (i.e. prices flat or rising but absolutely not falling). Fed's Williams, a la Greenspan's "a-ha" moment, appears to have realized that investors are not always 'rational' and "bull markets may cause investors to get ‘carried away’ over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices."

The "carried-away"-ness then leads to crashes which the Fed must then re-inflate to ensure financial stability... but because "it remains difficult to know when markets have gone wrong," or as a rational, normal person would say, when the "rational" Fed has blown yet another bubble, Williams does what any other self-respecting career economist would do: calling for additional study into the matter.

Via The Wall Street Journal,

The Fed realizes investors do not act rationally... blowing up their models entirely...

“In a world of rational expectations, asset prices adjust and that’s it,” Mr. Williams said. ” He added, “but if one allows for limited information, the resulting bull market may cause investors to get ‘carried away’ over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices.”


Mr. Williams explained that it appears to be the case that investors, on balance, look at where a given market has been heading and assume that pattern will persist. Rapidly rising markets fuel the belief the good times are here to stay, while market blowouts generate such pessimism that investors cease to act as if prices will rise again.


“The recognition that people behave in this way can move us a long way closer to understanding how asset price booms and busts can emerge and how policy actions could influence that process,” he said.

And then there is Philly Fed's Plosser - who suggests in fact that instead of "managing" this irrationality and tamping it down, the Fed should encourage it just a little longer...

Economists would say that policymakers are trying to commit to a policy that is not time-consistent.


Put another way, former Fed Chairman William McChesney Martin used to say that monetary policy’s job “is to take away the punch bowl just when the party is getting good.”


Yet, these models tell us that at the zero lower bound, forward guidance should convey the opposite. That is, it should promise that monetary policy will not remove the punch bowl but allow the party to continue until very late in the evening to ensure that everyone has a good time.


But what will make the public believe that policymakers in the future will deviate from past practices in this way?

Even as several Fed member are expressing grave concerns about the instability and complacency already embedded in investors irrational expectations...

In comments after a speech last month, New York Fed President William Dudley observed “volatility in the markets is unusually low.” He said “that makes me a little nervous because I’ve got to believe that even though most people in the room have something close to my view of the economy, there’s always the possibility of big surprises.”


In a speech this week, Kansas City Fed leader Esther George, long a critic of the Fed aggressively easy money policy stance, again lamented actions taken by the central bank may be promoting too much risk taking, of a sort that could eventually come to woe.

But Williams says, The Fed can't see bubbles anyway...

Mr. Williams flagged that it remains difficult to know when markets have gone wrong, and he called for additional study into the matter.

So in summary... It's entirely circular...

The Fed must blow bubbles because otherwise irrational investors get "carried away" and inevitably crash the markets...

Ultimately it seems clearer and clearer that, as Williams himself opines "financial stability is just as important as pursuing price stability and growth."

But Ben Bernanke said their actions were for Main Street, not Wall Street?

Ultimately it is clear that The Fed wants supreme control to protect us all from irrational investors...

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I_Am_'s picture

What a load of crock! 

zaphod's picture

This shows their insanity. Fully agree that yes if the cost of capital permanently lowers then asset valuations would permanently rise proportionally.

But the flaw here is the cost of capital has not permanently been lowered. It is only the FED's false intervention that has lowered rates and since this is not a true market move but false manipulation, the market will revert one way or another

The only way the FED could believe this is if they truly do view themselves as gods who can alter the laws of time and space, their arrogance is astounding.

kliguy38's picture

"This shows their insanity"...hehehehehe so you you believe this is not planned and ordered by the true power.....hehehhehe.....oh my little sheep you have so much to understand.......this is planned and will be executed...whether you believe they planned it or they are "insane" providing them the "cover" for this diabolical but "old game" of thrones matters not......just believe what you wish it makes no difference

NidStyles's picture

Seriously, where in the hell are you nuts coming from?

NidStyles's picture

Anyone that thinks paper tickets are capital needs to not be in charge of anything, because it's obvious they are complete and utter failures at that thing called human intelligence.

SAT 800's picture

Wow. It's a little hard to imagine that  these people are in charge of anything. This is just plain stupid. Are these people really that un-educated? How weird.

cherry picker's picture

Sorry, we screwed up.  It is a big mess we don't know how to fix.  In the best interests of the people, we will resign and let someone else take over who knows what they are doing.

The above you will never hear from the powers that be, because thy have the power and are addicted to it and we let them have it, so who are the bigger fools?

max2205's picture

Fuck it we're going up...nothing you can do about it








........('(...´...´.... ¯~/'...') 


..........''...\.......... _.·´ 





SAT 800's picture

I had to upvote you; as this is obviously the correct statement. Don't know why I got a chance to get there first. What a day; for a day-dream--" etc.

NidStyles's picture

Is it just me, or have most of the sock puppets disappeared recently?

Goldilocks's picture

Clearly the Fed is....

"smoking their own belly button lint."

BringOnTheAsteroid's picture

Hey fuck head, you're a bit late. Remember 1929. Irrational exuberance, permanently high plateau in stocks. What do these guys get paid again?

I Write Code's picture

You said:

Ultimately it is clear that The Fed wants supreme control to protect us all from irrational investors...

You meant: The Fed wants to protect investors from themselves, IOW to set all prices.  And I think that's what they are already doing, at about a two day granularity.  How'm I doing so far, Janet babe?



Da Yooper's picture



Now who protects us from the coroked FED ?

thamnosma's picture

Mr. Williams flagged that it remains difficult to know when markets have gone wrong, and he called for additional study into the matter.

That's what we need, a few more "studies" into how to spot manipulated bubble markets.   I guess 2007-8 didn't produce sufficient data.

Quentin Daniels's picture

Well, the fed conducting a study into manipulated bubble markets should be easy - whoever is assigned to do the study just needs to stand up and ask the guy in the next cubicle what he's doing.

BringOnTheAsteroid's picture

“volatility in the markets is unusually low.”

Noooooo, you don't say. The Fed injects trillions into the markets and wonders why the public thinks the stock market will never go down.

You can't make this shit up.

disabledvet's picture


It's called "50 Ways to Nuke the Dollar."

"Just flip it off the back, Jack. Print a new plan, Stan. Call it Ode to Joy, Boy. Just listen to me!

Call it disgust, Gus...don't need to discuss much! Comes right off the tree, Steve....annnnd set yourselllllf...FREE!"

BringOnTheAsteroid's picture

Hey, shit for brains. I'll save you the money on the new study. Massive deregulation of the financial markets starting with the abolishment of Glass-Steagall led to reckless behaviour by banks resulting in a near catastrophic collapse of the financial system which has only been worsened many multiples by central bank money printing and lowrering of interest rates.

Is there anything in that short synopsis you don't understand you stupid cunt.   

How ironic that the Fed is deperately fighting deflation by lowering the price of money. Something seems awry here. Money itself is getting cheaper and cheaper and when prices drop this is defined as deflation. Is the fact that money itself is locked in a down spiral of deflation truly signal the end of the system?

disabledvet's picture

"You says these things are really too hard to truly see. But I say too its easy if you're thinking logically. Just ask yourself...if you really want no pain there must be

50 ways to nuke the dollar.
50 ways to nuke the dollar."

(Meaning "sing it again"...not "refrain from doing that.")

world_debt_slave's picture

Edward Bernays, father of public relations, taught that the masses need to be lead and fed as they aren't smart enough to figure it out themselves.

" [The] American business community was also very impressed with the propaganda effort. They had a problem at that time. The country was becoming formally more democratic. A lot more people were able to vote and that sort of thing. The country was becoming wealthier and more people could participate and a lot of new immigrants were coming in, and so on.
     So what do you do? It's going to be harder to run things as a private club. Therefore, obviously, you have to control what people think."

Propaganda by Edward Bernays 1928



dirtyfiles's picture

yep in the simple thought financial markets and we all need seasonality or as they say cyclical valleys

two steps forward one step back all we need now is healthy period of deflation so every one can catch up with new level of living

but this FED fuckers wants kill it with some experiments

good lock history prove many times what happens next

lasvegaspersona's picture

Like a dying man trying to figure out what is happening, we see folks trying to make sense out of something that makes no sense. It is just ending. It is so hard to see that fact that we keep trying to explain what is happening in a way that should make sense, but never will. When it is over those who survive can look back and wonder how anyone could have been crazy enough to believe anything that is now being offered as reason. At that point we will clearly see that we were just trying to believe we could get one more mile out of a dead mule.

nmewn's picture

All the algo's seem to think they won't be the one left standing when the music stops.

Same as it ever was, just faster music ;-)

Atomizer's picture

Show me a lemonade stand, and I’ll lend you to borrow a 60 day loan on a negative buying practice.


lasvegaspersona's picture

Remember that in a fiat system the amount of money in the system must always rise. Those derivatives that now are nominally grossly in the trillions are the way that the  increase in money is being pushed into the system. Why do you think Greenspan and Rubin had a collective cardiac event when derivative controls were mentioned? They knew if there was not somewhere for wealth to be stored other than in real things the game would be over. The paper wealth of the planet is now far in excess of what can ever be had in terms of gold, oil, land or other goods. They must keep the paper game going or we get hyperinflation overnight. Imagine just the 17 trillion in existing US debt all trying to score something real in a short period of time. It just can't happen...and there is no way it can happen unless currency become worth a lot less.

SAT 800's picture

Well, they're sure doing a good job. I covered my S&P shorts today @1939.25; for a sensational $10,650 LOSS. Oh, well. easy come easy go. I wonder when they're going to run out of steam?

Chipped ham's picture

You bet against the Fed.

madcows's picture

You should have finished that statement with either an exclamation point, a question mark, or both. 

BrigstockBoy's picture

Pete and Repeat were in a boat, Pete fell out, who was left?
Pete and Repeat were in a boat, Pete fell out, who was left?
Pete and Repeat were in a boat, Pete fell out, who was left?

What does an individual do to beat the Fed? Hedge accordingly but what else?