The Fed Blew It

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE).

The Federal Reserve blew it by not normalizing interest rates a long time ago. The consensus in financial circles is the exact opposite: the Fed has blown it in the past by nudging rates up too early.
Let's examine the idea that the Fed can't possibly go wrong keeping interest rates at near-zero for as long as it takes to create inflation (the Keynesian Cargo Cult's talisman) and push unemployment below 6% (mission accomplished).
One problem with this "keep interest rates low forever" strategy is that it leaves the Fed no room to lower rates in the next recession. By keeping interest rates at near-zero for six long years of "recovery," the Fed is now facing a global recession with no real policy option to lower rates.
The Fed blew it by waiting six long years to even discuss raising rates.
Let's consider the impact on the real economy of a 1% rise in the Fed funds rate. The move from 0% to 1% is not very large in terms of its impact on monthly payments for borrowers. Borrowers with poor credit are paying in excess of 15% right now on credit cards and subprime auto loans, and many student loans are in the 7%-8% range. A 1% increase isn't going to impact these borrowers much.
As for mortgages--if a buyer can't afford a 1% notch up in interest rates, he/she had no business taking the mortgage in the first place. If a borrower has to stretch to the maximum to qualify, they shouldn't be borrowing the money in the first place.
Those who plead for zero-interest rates forever are saying that the U.S. economy is so fragile that the slightest tick up in interest costs will collapse the entire "recovery." If the economy is that dependent on marginal borrowers, then the "recovery" is bogus: if "growth" is all based on extending more credit to marginal borrowers, it is an extremely fragile expansion that is doomed by the inevitability of marginal borrowers defaulting.
The Fed's "extend and pretend" has only increased the fragility of the economy and guaranteed a larger systemic crisis in the future. Zero interest rate policy (ZIRP) has only encouraged moral hazard and asset bubbles blown by soaring corporate debt and margin debt.
Another reason the consensus wants ZIRP Forever is to keep federal borrowing costs low, so the Treasury can borrow trillions of dollars at low rates of interest. If the costs of borrowing trillions more is low enough, there is no need for any politically painful debate about what the nation can afford: with nearly-free trillions, everything can be paid for with borrowed money.
What kinds of decisions are made when the federal credit card is unlimited? Poor decisions, of course--that's self-evident. No limits means no trade-offs or hard analysis of costs and benefits. This is a higher-order form of moral hazard, which means the consequences will not impact those taking the risks.
If you doubt this, give a teenager an unlimited credit card they don't have to pay and see how that works out.
A third reason the consensus wants ZIRP Forever is that higher rates will further strengthen the U.S. dollar as capital will flow to the safety and positive yield of U.S. bonds. In the consensus view, a rising U.S. dollar is anathema, as it means the U.S. loses the race to the bottom of currency devaluation.
But all those begging for a devalued currency forget that no nation ever debased itself to prosperity. Yes, there is a trade-off to a stronger currency: exports to other nations will become more expensive when priced in debased currencies. But exports are a relatively modest percentage of GDP, and the decline in exports will be offset to some degree by the gains in purchasing power, as imports will decline in price.
If history offers any lesson on strong currencies and race to the bottom devaluations of currency, it's that nations with strong currencies prosper in the long haul and those who attempt to live off cheaper exports decline over time.
The Fed also blew it by extending quantitative easing for almost six years, inflating asset bubbles that must now be deflated one way or another. Rather than let the stock and housing markets find their own levels and adjust to the realities of a post-bubble world, the Fed has done everything in its power to reflate assets bubbles, lest the bloated, corrupt banking sector suffer the losses it so richly deserves.
The consensus believes the magical-thinking fantasy that asset bubbles can remain inflated forever, if only the Fed keeps interest rates at zero forever and stands ready to buy trillions of dollars of bonds, mortgages and stocks at the first sign that the bubbles are in danger of popping. Is this realistic? is there even one example in all of human history of a credit-bubble expanding forever? Of course not, but since Wall Street and the entire financial industry is totally dependent on asset bubbles for its livelihood, realism will lose out to greed every time.
The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE). Instead, it waited until the next global recession is already starting to consider what should have been done long ago.

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Falling Down's picture

As in 5+ years ago.


We're fucked.

mvsjcl's picture

Why does CHS speak of The Fed as a legitimate organization instead of an international  cabal of criminals bent on stealing the fruits of your labor?

Pinto Currency's picture



The Fed blew it unless the goal was simply to keep people docile and clueless for a period of time.

Zirpedge's picture

The premise is all wrong here. The FED is being treated like a rational actor that is really trying to do something positive for the economy or main street USA.

Can we just sit back and admire how skillfully we are being played for once? The highest ambition of western civ is to create mindless consumers who aquire with easy credit.

Now it's time to pay our debts with appreciating dollars. This is true for low income to entire nations who took out loans from the IMF based on distorted models for economic development.

An appreciating dollar is so much more than the a few points of interest on the loan. This is going to be a meat grinder.

DeadFred's picture

Correct, the Fed had no real choice here, collapse early or collapse late (and harder) but collapse either way. This way though the Rothschilds or whoever runs this scam got out with bigger profits so the mission was accomplished. I would love to know who owns the Fed, maybe somebody should propose an audit.

Spigot's picture

The FED indeed has done and continues to do its job of avoiding a severe deflation and then inspiring a super-inflation where the US$ purchasing power drops to 20-25% of its current PP. This is what they did in the 1970's to dilute the debt bomb of the 1950's through 1970's. This will be done in order to correct the debt to GDP ratios we are seeing globally. The only alternative is for the entire world to go into bancrupcy and try to rebuild a workable financial system as people starve and kill each other.

Suck it up boys and girls. IMO this year, mid-Summer through late Fall is when we will see the FED generated 'Inflation Monster' (TM) reappear. Remember, there has to be credit events which present a valid case for starting the printing presses. This is just an excuse, but necessary for optics.

JRobby's picture

Clueless after 1971 - "Nixon Shock"

It has been out of control ever since. Barely in control prior to that.


Philo Beddoe's picture

Once there is a recovery they can raise rates. That simple. You just have to be patient. Very patient. 

cowdiddly's picture

They blew it allright. Blew the biggesst asset bubbles in history. Throwing the whole worlds population and economy under the bus.

FOR WHAT? To save 4 crooked Fed banks. good job men, grand job.

The only one laughing now is Hank Paulson, and he is laughing his ass off.

Seasmoke's picture

That lying scumbags needs his other 9 fingers snapped. 

Mr. Q's picture

Can you please stop posting Charles Hugh-Smith articles, whenever I see them i press ctrl+f4 immediately, they add ZERO value.

Chump's picture

It seems like you've already found a solution to your problem...

Mr. Q's picture

Yes, but the more I press on them the more views they have, therefore ZH wont stop posting his generalities.

Just indicate the name of the author on the frontpage.

lester1's picture

History will show QE and ZIRP from the Federal Reserve to be one of the biggest scams in human history !

QE is engineered to provide the Fed's "primary dealer" banks with free money printed out of thin air ("MBS purchases"). The Fed then mandates their "primary dealers" to buy up stocks to keep this stock market going higher and higher, with slight dips every now and then. There is still a lot of QE3 money left over for the primary dealers to keep driving up the stock market.

Don't believe me?.. Look at the correlation between the Fed's balance sheet constantly going up and DOW constantly going up over the past 6 years. Google it.

QE is basically to protect the assets of the wealthy 1% from natural deflation due to the current economic depression on main street.

venturen's picture

The only positive is this can't continue....we have fallen through the looking glass....and at some point someone is going to enable the backlash. It has happened numerous time in history....and it is going to be very ugly. What is going on is truly unamerican and unprecedented in history. Even the famed Robber Barons used their own money and companies to produce products. Now you have people printing trillions of dollars to take your product made....just printed money and stock and bond scams and massive debt to the people. When Wall Street is a ghost town....there won't be much sympathy. No one can show me a precedent for what is occurring...NONE!

lester1's picture

 I agree. Reganomics needs to die.


 The Fed has been keeping this debt driven, failed economic policy alive with money printing.

replaceme's picture

It all makes me wish i were closer to 30 than 50 - the idea of timing another market dump and retiring on the upswing does not sound appealing. Maybe at 30 it would sound like a great opportunity.

NoDebt's picture

I am RIGHT there with you, my friend.  It's the unspoken fear of MANY people right now.  

Goes something like this in my head:

Dot Com crash, no big deal.  Shit happens from time to time in the markets.  We all saw it fill with air on the way up, we knew it had to pop sometime.  Great buying opoortunity off the lows, too.  But then it happened again 7 years later, but bigger and scarier.  WTF?  A once-in-a-lifetime event TWICE in 7 years?

And then, slowly, it dawned on everyone.... uh, oh.  It's a all fake, manufactured bubbles courtesy of the Fed and government policies (like forcing banks to lend to unqualified home buyers and then polluting everyone's balance sheet with that "asset" in the form of MBSs).  Worse still, we all saw who got protected when the chips were down and it WASN'T US.  All the regulators work FOR the banks.

So now we sit here either earning zero on our assets in "safe" investments or let it ride in the stock market, knowing it's gonna get whacked again, probably sooner than later, but it's the only place you can get any returns on your money.  

"So do you feel lucky, punk?" is probably not the best retirement planning strategy.  I don't know whether to shit or wind my watch.  

replaceme's picture

Exactly.  Last time, I bit the bullet and tossed my money right back into the market and crossed my fingers.  Now I find myself pulling more and more out, watching more and more profit go by me, wondering if it will ever go down, if I'll get caught or just miss out forever. Makes me want a watch to think about winding it, not just shitting.

lester1's picture

You only profit if you sell. You CAN LOSE IT TOO !!

Philo Beddoe's picture

Here are a few squares of Charmin. You may find these to be useful at a later date. 

gcjohns1971's picture

"The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE). Instead, it waited until the next global recession is already starting to consider what should have been done long ago."

I believe Charles Hugh-Smith does not understand the dynamics of bureaucratic thinking.  It is not a mistake but an explicit plan to raise rates moderately on the eve of that the recession gets the blame rather than the Fed.   It is about avoiding responsibility. 

And it is also about an amoral strategy.  By raising rates at the verge of recession, not just a regional recession but a global one, the Fed provides a marginally more attractive place to which foreign dollars can flee, "Flight to Safety/Flight to Yield".

Not to worry. As soon as the Flight to Safety/Yield begins to slow, they will reverse the tiny rate hike, and go all-in on QE again.

To understand the Fed you must dispense with ideas that they serve the national or world economies. 

They don't.

They serve their owner banks.

Usurious's picture
Usurious (not verified) Mar 11, 2015 8:06 AM



fuck interest rates (USURY) and banksters........your credit is your own, not the banks........paying interest (USURY) to the dirty, slimy bankster for accessing your own credit is the PROBLEM

Jonesy's picture

The Fed didn't blow it,  Jews now own everything as intended except for the few Shabbos Goy front men like Warren Buffett held out there to show how even the playing field is, you know, it just takes hard work and 80 years and all that jazz.  

youngman's picture

Look at the oil and gas business the Fed going to come in and save them....NOT...they will let the prices drop to what the market is..and many companies will fail and be taken over by the stronger it should have been in the financial crisis..and the public will get the benefit of the lower prices...I guess they didnt donate enough to the politicians....

Last of the Middle Class's picture

Hard to raise intrest rates when you're printing 24/7 to cover for elites malinvestment over the last 20 years. Government takeover of healthcare will probably eventually be seen as the final straw. And of course none of the QE money ends up in the stock market. sheeeitttt

Dazar Nummers's picture

Like the scorpion "blew it" when he killed the frog.

PresidentCamacho's picture

I've never heard such a story please elaborate.


Raoul_Luke's picture

Yes, the Obama "you didn't build that" anti-capitalist agenda has depressed the economy to the point that the Fed was forced to keep ZIRP in place for the entire duration in order to stave off the depression that his policies would naturally produce (they are essentially the same policies FDR used to produce the Great Depression).  Now we are poised to fall into depression despite ZIRP and there is no other tool in their box, save for QE.  Get ready for QE4...

MR166's picture

As I see it the Fed is riding a tiger and can't dismount.  There was never any real recovery in the real economy just people leaving the job market and going on government entitlement programs.  Any jobs created were part time due to the destruction of full time employment.  The stock market highs were created by Fed manipulation and not earnings increases.  We have almost doubled the national debt in 6 years and done nothing but tread water.


If the Fed were to stop purchasing US bonds interest rates would skyrocket and the US would have no choice but to default or pay with runaway inflation.

Pumpkin's picture

LoL!  This article is written as if the Fed works for the people.

surfvin's picture

America will go down in history as the nation who almost destroyed the human race by forcing it to use garbage as money.

Dr_Snooz's picture

"the Fed has done everything in its power to reflate assets bubbles, lest the bloated, corrupt banking sector suffer the losses it so richly deserves."

This really is the crux of the problem, isn't it? You can't raise rates when that will send all the TBTF banks into bankruptcy. The big banks who own the Fed are still insolvent. They have been using ZIRP in a desperate attempt to repair their balance sheets. Too bad they can't stop gambling long enough to prevent further damage.


"The move from 0% to 1% is not very large in terms of its impact on monthly payments for borrowers."

Tell that to the 35%+ of people who aren't working in this country. When you're levered out to the hilt, like the federal government and most people, a rise of a few basis points is enough to send you into collections. Worse, any move in interest rate policy is likely to trigger a bunch of derivatives, sending that entire, opaque and dirty market into oblivion, carrying the rest of our rotten monetary system with it. The Fed knows this, and they know they are screwed.

Just because the Fed is putting a brave face on their plight doesn't make it any less dire.

Fox-Scully's picture

It was already blown when they started QE.

Greenspazm's picture

CHS appears to have too much time off from stacking shelves in Walmart.

Snoopy the Economist's picture

The fed ain't raising rates. They will talk about it for the next 12 months but won't do it. Look around the world at 10 yr rates - the US is near the highest. US rates are going lower.

US: 2.14%

Spain: 1.2%

Portugal: 1.7%


Who (other than guv) would buy the spain or portugal 10yr bond when US has a higher rate?

Before US rates increase Europe has to blow up and force their rates up.

PeeramidIdeologies's picture

It seems to be the consensus that it may be a bit foolhardy to claim the FED has failed in it's objectives. So on that presumption, and in a time of overly ambiguitous, even down right misleading statements everywhere in the media, you'll have to excuse me Charles if I ask for a little clarification on whom has blown what exactly?

doctorZH's picture

Should have been done in 2001.  The end of the Business cycle.




All are the end of the 18 year "Business Cycle" and require switching from the SPENDING SEASON to the SAVING SEASON.  The economy grows for 18 years; then rests for 18 years.  We should have begun raising rates slowly and steadily in 2001, which would have shielded us from the current debt bubble and would have begun reducing debt.  We want no debt, and a great nest-egg of saving wealth to fuel the next expansion, scheduled for 2019.  Of course, we have done the opposite; we hae protected old debt instad of destroying it; we have re-leveraged instead of de-leveraged.  We have forced investors into stocks and property instead of into interest-bearing investments, out of savings.  So we have not begun the deleveraging process at all really.


Total debt to GDP is about 130% at ground zero, growth time.  We are at 355% and still growing.  That's why war is coming, which is the symbolic destruction of debt (matter).

Hope Copy's picture

Interest rates did go up from 2002..


But they went a little to high and then in 2009 the BIG MISTAKE was made.


For the banks, the big ones that are ‘to big to fail’ and the US Congress, well they have never really recovered, especially Congress, and so it goes.


I do concur that present interest rates will devastate the  $ currency as for the floating $ currency has been one that has 'attached' the Edison-ian notion that a slowly inflating currency is a more productive currency and puts money to 'work' not in the mattress.


I consider T-bills and US (or any government) bonds, the metals (Gold, etc.) to be 'mattress money'.

JoWazzoo's picture

The sad thing is that we likely will more QE real soon now.  Maybe they will raise rates AND announce QE 4 coincident.  Nothing would surprise me anymore.


WRT the conclusion above, totally agree.  When they did Q E 3 they shouldn't have - they should have raised the FF rate to .125 %.


It sure is tuff to get unhooked from Hopium.  And the Fed has Effed up more than any I have observed in 40 years.