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The Central Problem With Central Banks: They Become The Greater Fools/Bag-Holders
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen.
The central problem with central banks is their mandate now includes propping up all asset markets globally. Back in the good old days before the Global Financial Meltdown of 2008-09, central bankers reckoned they could control the "animal spirits" released when the risk-on herd destabilized into a chaotic risk-off stampede.
As former Federal Reserve chairman Alan Greenspan noted in his 2014 Foreign Affairsarticle Why I Didn't See the Crisis Coming, the models used by central banks and private economists alike presumed the demand for risk-on assets would remain robust even in a downturn:
Almost all market participants were aware of the growing risks, but they also knew that a bubble could keep expanding for years. Financial firms thus feared that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. In July 2007, the chair and CEO of Citigroup, Charles Prince, expressed that fear in a now-famous remark: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.They were mistaken. They failed to recognize that market liquidity is largely a function of the degree of investors’ risk aversion, the most dominant animal spirit that drives financial markets. Leading up to the onset of the crisis, the decreased risk aversion among investors had produced increasingly narrow credit yield spreads and heavy trading volumes, creating the appearance of liquidity and the illusion that firms could sell almost anything.But when fear-induced market retrenchment set in, that liquidity disappeared overnight, as buyers pulled back. In fact, in many markets, at the height of the crisis of 2008, bids virtually disappeared.
Translated into plain English, what Greenspan and other conventional economists expected was a deep pool of greater fools would gladly lose money by buying assets that were plunging in value. Greenspan et al. reckoned the seemingly insatiable demand for exotic financial products implied that greater fools would continue to "buy the dips," enabling Wall Street financiers to unload the near-worthless exotic financial products to those willing to absorb rapidly increasing losses.
The problem with this model is the pool of greater fools drains almost instantly, leaving Wall Street holding the bag of collapsing-in-value risk-on assets. As the exotic financial products crashed to Earth, the highly leveraged banks were quickly rendered insolvent.
The world's central banks have attempted to keep the asset bubbles inflated by lowering interest rates and manipulating markets with secret purchases of assets, either directly or through proxies.
Whenever markets threatened to collapse, central banks stepped in and "bought the dip," reinforcing the faith that central banks will never let markets fall.
The problem for central banks is the pool of greater fools is increasingly skittish.Once the herd is no longer willing to "buy the dip," central banks will have no other choice other than to increase their buying--in effect, replacing private demand with their own purchases of assets.
That works when a few billion dollars spent "buying the dips" reinvigorates private "animal spirit" buying. But when the risk-on herd stampedes into risk-off selling, markets go bidless: there are no more greater fools left except the central banks.
Central banks have inflated the markets to such high valuations that no central bank can possibly buy enough to keep the bubble intact. Here is Doug Nolan's summary:
Total Debt Securities grew to $36.152 trillion, or 208% of U.S. GDP.Total Equities inflated to $36.457 trillion, or 209% of GDP.Having inflated almost 2,000% since 1981, Total Securities ended 2014 at $72.608 trillion, or an unprecedented 417% of GDP.
The Federal Reserve expanded its balance sheet of assets owned from $800 billion in 2008 to $4.5 trillion at the end of its quantitative easing programs in 2014. This massive expansion was enough to calm the stampede and reinforce another six years of risk-on herd buying.
But having succeeded in blowing another unprecedented global bubble in assets, central banks have backed themselves into a corner of direct asset purchases to prop up markets. In the U.S. alone, a risk-off selling spree that liquidated 10% of the $72 trillion in financial assets would require the Fed to print $7 trillion and use every dollar to buy the assets being dumped wholesale by the stampeding herd.
Can central banks double, triple and quadruple their balance sheets almost overnight to absorb the mass dumping of risk-on assets? Will there be no consequences, political and financial, to central banks becoming the greater fools who will buy even as asset values are crashing?
The conventional view is that the Fed will never need to print-and-buy more than a few hundred billion dollars to stem the tide of selling. But the conventional view has a fatal flaw that Greenspan outlined in his Foreign Affairs article: when markets go bidless, "animal spirits" may be beyond calming. Once central bank buying fails to stem the tide, markets will truly panic.
At that point, central banks will have to decide to buy trillions of dollars of rapidly depreciating assets or finally let the market find its own level. Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen.
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I've got a sac the CBs can hold
when markets go bidless, "animal spirits" may be beyond calming
Jade Helm will then be expanding to all 57 /sarc states.
Don't even bring up the Constitution, they're ready for that.
The consitution won't be what I'll be bringing up, not at all, and all of their private security won't stop a marching army...
These bankers will hang, one way or another, and that most definitely applies to the worst of the lot...
http://www.blacklistednews.com/The_Secretive_Bank_of_England___/43899/0/...
P.S. the lies & charades are up, it's time to pay up.
The Fed has always been destined to be the "bad bank". After the looting of the taxpayers is complete.
I thought the tax payer and people with bank accounts were the ultimate bag holders.
actually it is your labor, one life to live...
Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."
— SIR JOSIAH STAMP
"Markets"??
Finally found the Welfare Queens that old man Ronnie was warning me about in 1980! He is right, they are scary and must be stopped! End rich cunt welfare now!
CANADA is NOT one of the 57 'States' on your <sarc>list I hope? And I thought Chuckles Norris was going to take care of Jade Helm 15 in Texas this summer? wtf?
NOTE: Jade Helm 15 & GI Joe & the MRAPS(tm) are not licenced to work in CANADA. Harper likes Temporary Foreign Workers so that he can screw all Canadians, but GI Joe & the MRAPS(tm) cost too much money for us poor Canadians to be able to afford them, and Harper is a true anal retentive money hoarder like his parents raised him to be.
Good luck, Chuck!
As long as there are academics who concoct hair brained economic theories thay prove a free ride is possible if enough money is printed, there will be fresh ammunition to fight the next downturn. They aren't bag holders. They're innovators and everyone else is wrong.
Krugman?
SoilMyselfRotten: I've got a sac the CBs can hold
You should NOT let the CB's hold ANY of your sac.
But they promised to talk dirty to me
black markets are the future. the CBs and their control mechanisms own all the paper and digital garbage. let them keep it. what we need to do is to start thinking along the lines of owning and collecting things we can barter with and bypass the control grid.
My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... www.jobs-review.com
I think this is what will happen......the Central Banks have pumped this market to this high..and they do not want it to fall from here....stability you know...so they will be the buyer of any crash...until they own 80% or so of the market...then the people will change I think.....really panic.....
.....really panic.....
Like this?
https://www.youtube.com/watch?v=GPYLJoq_40Y
No, like this
https://www.youtube.com/watch?v=ZR6wok7g7do
I'm putting this bank under martial law.
The CBs will print and destroy the currencies of their countries. That is the basis for the chaos that will come. In that chaos we will have the forces of control fighting the forces of liberty. The problem for the Libertarians is that the communityorganizers have a 100 year head start on building and educating the populace in their ideas.
It ain't going to be easy to win.
"That works when a few billion dollars spent "buying the dips" reinvigorates private "animal spirit" buying. But when the risk-on herd stampedes into risk-off selling, markets go bidless: there are no more greater fools left except the central banks."
Yeah? And? So? That's what they're there for. Or at least that's what they taught me way back in bidniz school.
It may be worthless at that point, but it's for damned sure they'll own all of it.
They can print enough money to buy everything real - all of the mortages, all equities, all student loans, etc. If they then arrange to be first in line to claim what supposedly backs their paper, the Fed can take ownership of everything and leave everybody else holding the bag. There, of course, could be major issues like civil unrest from the masses who would feel cheated, but the owners of everything might feel they are up to that challenge. Provided that the infrastructure for trading keeps working (which might not be a good assumption in this age of state-sponsored cyberattacks) don't kid yourself by thinking the Fed can't keep the bid where they want it.
That s the plan. You do not & have never owned anything or have allodolial title to anything via The Emergency Banking Act of 1933.
You don't even own yourself Slave. You soul via your securitized bond / birth certificate is a financial instrument used to pay back said bankruptcy of 1933. You're also a resource / assets on the balance sheet.
so we are no different than animals in the woods? just visiting....enjoy your stay, ha...
In the Elite's twisted, sick, Pure Evil Criminal Minds. We're lower in the food chain than an animal. An animal has some sense of worth or assets in their eyes. It can produce, where as we Goyim consume & are a waste / expendable.
There is no government, there is only central bankers.
This 5min 49sec video sums it up perfectly.
The Banker
https://m.youtube.com/watch?v=peX4dBEF0Vg
Absolute bullshit. Greenspan knew the crisis would come one day. That's why he quit the Fed while he was still ahead, and is the toast of Wall Street.
Where was this defender of free financial markets when it mattered?
God save us from old men who used to be important and n9w tell anybody who'll listen that they'd have done everything differently if they got the chance to do it over. No, they wouldn't have.
Exactly what I said in Stockman's post yesterday. There's no way that Greenspan would tell Ron Paul he stood by his 1966 article on gold, while "not understanding" the bubbles he was blowing.
Just like Rubin, he was a tool chosen to do a job for his masters, all while appearing to do otherwise.
The only difference between him and Bernanke is the ability to lie convincingly, as Mr. Lip Quiver was certainly no Maestro.
since the average joe isn't in the markets this just keeps the wealth cycling from the fed to the fed with first touch insiders getting extremely wealthy. keeps the pensions propped so the plebs don't revolt. how long can it go on? till they are forced to change the rules to keep it alive for another day. greece 101.
“I can assure you that it is safer to keep your money in a reopened bank than under the mattress.”
– President Franklin Roosevelt in his first Fireside Chat, March 12, 1933
The interesting thing, that bond markets have just started to price in, is the possible interest rate hike later this year and its effects on markets, particularly stocks.
CBs have pumped stocks so high, higher than bob marley ever got on ganja, that when rates start to rise in the US, stocks will start to tumble, and ah now those QE programs in Europe and Japan are starting to make sense....hold up stocks from falling too much when rates do start to rise.
I'm ready for the next episode of this shitshow.
just an endless cycle of debt creation with usery and fees(first touch and ongoing touch) benifitting the powers of fiat creation and distribution via debt games. not a balanced zero sum backed system. for it to keep going on it needs input of moar debt creation. without moar it starves itself and a greater fool stands on the tide out beach...
Taxpayer is ultimate "mark" or bagholder. The banks exist to extract monies from the taxpayers, if that is not fully evident now then anyone who says otherwise has some ulterior motive. Ultimately the taxpayers shoulder all Bail- outs...or bail - ins..
"Can central banks double, triple and quadruple their balance sheets almost overnight to absorb the mass dumping of risk-on assets? "
YES. If not, prove it
"Will there be no consequences, political and financial, to central banks becoming the greater fools who will buy even as asset values are crashing?"
NO. If so, prove it.
"may find there are political and financial consequences to such extremes that cannot be foreseen"
....What consequences and when?
Another rant where the reader's question at the end is:
"Another great diatribe just like Stockman's ! Now what? "
The fed sells SPY puts through the conduit banks. If the market falls, the banks will be out with the SPY etf. And tHe fed will declare it collateral. Balance sheet expansion. Instantly.
"Central Banks: They Become The Greater Fools/Bag-Holders"
Somehow after 50 years of being gamed, I still think the general population are the greater fools.
Central Banks are a horrible idea for a number of reasons.
Reasons everyone is aware of.
They only exists because the slime at the top knows that if they actually had to make intelligent decisions they would be swiftly deposed from their ivory towers, and central banks acts as an "eraser" of sorts to correct their mistakes.
If you gamble on something and lose, you get wiped out, but if the slime at the top gambles on something and losses, they win, because their friends at the central bank will ensure their investments "pay - off" by shifting the losses onto the nations balance sheet, privatization of gains, socialization of losses.
This is the game.
The USA [and Europe too] are being plundered exclusively for the benefit of the Central Banks and their foreign shareholders.
From what I can see, the central banks are anything but fools. They care nothing about money per se because they can create and destroy it at will. It has no inherent value to them other than as mechanism for control that they have monopoly power over.
They raise or destroy nations, create wars, reward friends and punish enemies .. and control entire governments with something that they create for free and has great value to those around the world. Other than chains and whips it is the worst conceivable form of government.
ALL THE CENTRAL BANKS CARE ABOUT IS POWER. Being a bagholder is just one of the things they do to maintain power. It is meaningless to them. The day they cannot be a bagholder is the day they lose power.
Oh, and there is only one criteria for people to diligently "buy the dips". The banks have to be completely outlawed from being involved in or anywhere associated with the markets. Ethically and morally there is no possible reason for participating in crooked markets. If one does not care about ethics and morals then one can play on the side of the banks ... but otherwise one should completely stay away.
I think the central banks get tapped out on this next crisis by the IMF. As Rickard has said they are the only ones who have a clean balance sheet.
Let us see if Bondzilla is the Schmita surprise this fall.
Central Banks are left holding the bag because all their Equilibrium Economists thought that housing prices would _NEVER_ go down. Furthermore, they literally thought that financial alchemy had achieved a risk free marketplace where risk was transfered to those that were best able to handle it. They also thought that the price per barrel of oil would _NEVER_ go down too. Clearly, the 'Quants' viewed the World as _STATIC_ instead of in a state of _FLUX_!!! ERGO, the 'Quants' were told they were 'gifted' by their imbecile tertiary educators that also thought that enrollment in their respective universities would _NEVER_ go down due to their brilliant schemes to control 'financial alchemy'. Bottom line is that the Central Bankers themselves thought that they were smarter than empiricism itself. Greenspan literally thought he was God's gift to the World of Finance because he is an arrogant Jew that was brought up to believe he was one of God's 'chosen Jews' who could do no wrong.
Well MOU, it would make sense that all those arrogant jews would migrate their way to the most arrogant nation in recent history. I don't hold truck with all the jew baiters.....yes there are a lot of jews in the financial overlords, but they are not the only greedy, self important people in this mess.
American exceptionalism has been the mantra of their power.
WHOM THE GODS WOULD HUMBLE, THEY FIRST MAKE PROUD"
....its a big club, and we aren't in it......
Actually, since March 10th 2008 @ 11:00am Bear Stearns New York City time the 'big club' has been looking for a way out of their collective quagmire, and the membership of those that are in the big club has not provided any answers. What is obvious to myself, and others, is that de Rothschild Bank is primarily responsible for the lack of understanding of Quantum Behavioural Economics, and ultimately, Quantum Physics/Quantum Mechanics. Empiricists the World over understand what manifested on March 10th 2008, but the establishment Equilibrium Economists do not. Moreover, they are collectively acting in denial, and have completely disregarded Empiricism proper in their uneducated attempts to inflate more asset bubbles. We all know that the Central Banks are thinking collectively as though they live in a fantasy World where the Law of Large Numbers, and the Law of Diminishing Returns, is not applicable in their collective World view. When the 'big club' arrives at the juncture of reality that we live in, it will be too late to save our collective, let alone the 'big club'. In brief, in Information Theory/Cybernetic Theory, closed systems run down over time and cannot be maintained for any length of time compared to open looped systems. Entropy Laws apply to the 'big club', and their closed cybernetic systems, in the same way that they apply to ours.
ERGO, I am in the 'big club' whether de Rothschild Bank wants to believe it or not. Lastly, it's PAY DAY, Barron de Rothschild.
"There is pride before the fall"......the _Bible_ King James version.
NOTE: As an Anglican I am only permitted to have one 'God'.
"......Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen......"
Indeed they Will.