The Fed's Pain-Relieving Policies "Have Made The System More Vulnerable To A Crash"

Tyler Durden's picture

Authored by Rand Paul and Mark Spitznagel, originally posted op-ed at The Wall Street Journal,

The recent tumult in U.S. equity markets has prompted many analysts to urge the Fed to postpone any increase in interest rates. This advice assumes that rock-bottom interest rates are balm for a weak economy, with the only possible side effect being price inflation. Yet it is the Fed’s artificially low interest rates that set up the economy for the 2008 crisis, not to mention previous crises.

The “doves” are right to point out that higher interest rates will lead to a repricing of many securities, aka a crash. But years of near-zero interest rates have made this inevitable. Continuing on the current course will only allow structural distortions caused by these interest rates to fester and an inevitable reckoning that will be much worse than seven years ago.

The master fallacy underlying so much economic commentary is to imagine that a handful of experts in Washington should be setting the price of borrowing money. Instead, the Fed should set markets free.

In their theory of business cycles, the Austrian economists Ludwig von Mises and Friedrich Hayek explained several decades ago that artificially cheap credit misleads entrepreneurs and investors into doing the wrong things—which in the current financial context includes making unsustainable, levered investments in risky assets, including companies loading up on debt to buy back and boost the price of their stock. Low interest rates may create an illusion of robust markets, but eventually rates spike, assets are suddenly revealed to be too highly priced, and debt unpayable. Many firms have to cut back production or shut down, unemployment rises and the boom goes bust.

The Austrian diagnosis leads to an unorthodox prescription: Rather than provide “stimulus” to boost demand during a slump, the Federal Reserve and Congress should stand aside. Recessions are a painful but necessary corrective process as resources—including labor—are guided toward more sustainable niches, in light of the errors made during the giddy boom period.

In 2000 the stock market, bloated by earlier Fed rate cuts, started falling when the tech bubble burst. Markets bottomed out in 2002, as the Fed slashed rates. Although people hailed then-chairman Alan Greenspan as “the Maestro” for providing a so-called soft landing, in hindsight he simply replaced the dot-com bubble with a housing bubble.

When the housing bubble eventually burst, the crisis was much worse than in 2000. When Lehman Brothers failed in September 2008, it seemed as if the whole financial infrastructure was in jeopardy. And Fed Chairman Ben Bernanke followed the same playbook: cut interest rates.

When near-zero-percent interest rates did not jump-start the economy, the Fed launched a series of “quantitative easing” (QE) programs, buying unprecedented amounts of Treasurys and mortgage-backed securities. The Fed has roughly quintupled its balance sheet, going from $905 billion in early September 2008 to almost $4.5 trillion today.

The U.S. stock market rose with each new wave of QE. Does this wealth represent genuine economic progress? Economic growth is still far below previous recoveries. Unfortunately, the performance of equities, as well as the unprecedented increase in public and private debt, may be another asset bubble in the making, leading to another inevitable crisis likely worse than in 2008.

At its core, the market economy is a homeostatic mechanism that self-corrects by cleansing mistakes from the system. When policy makers—in the Fed or Congress—try to spare us from all pain, they cripple that mechanism and ironically make the system vulnerable to a major crash.

Consider an analogy. When the U.S. Forest Service took a zero-tolerance approach to forest fires 100 years ago, what ultimately happened was a massive wildfire at Yellowstone National Park in 1988 that wiped out more than 30 times the acreage of any previously recorded fire. Paradoxically, by refusing to allow small fires to run their natural course, the forest managers made the entire park vulnerable to a giant inferno.

What is true of forests holds for the economy: When governments create a lie, whether it’s a fabricated ecology of no fires or a fabricated economy of no failures, the truth reveals itself even more violently than otherwise. Attempts to stop any dips in the stock market with monetary stimulus postpone the necessary adjustments to how and where resources and workers are deployed. Interest rates are a vital signal in the market; they must be allowed to do their job—that is, they must be allowed to be free.

The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth.

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Chuck Knoblauch's picture

It's the exodus of manufacturing that killed America.

The FED didn't do that.

You did it.

Zirpedge's picture

HA HA HA Get Rand saying the FED should raise rates and stop the QE. Cm'mon FED do the right thing. His handlers got him by the goonies.

"When I'm big bad president the FED will do what I think they should do to intervene in the markets." -Rand Paul

Manthong's picture


What is Fed pain relief?

a. a bottle of Scotch

b. a couple of Vicodin

c. a doobie

d. a nail gun

e. all of the above

lehmen_sisters's picture

Wrong, moving to a fiat currency killed America....The over regulation and taxation of businesses to the point they pack their shit up and head to Mexico sure as hell didn't help tho. 

New_Meat's picture

all lawyer full-employment acts.  Funny about that.

Is the fubar coordinated at some higher level or are the various groups of interest sympatico in some base level?

Probably Bernays and Saul would have it a bit o' each.

- Ned

Carpenter1's picture


Rand's dad, Ron, giving the masonic handshake. Controlled opposition, every bit as much a part of the system as Obama is.

This is how they work, they give us our "heroes" pre-baked and ready for consumption. They're all actors playing their part.

jimfcarroll's picture

> It's the exodus of manufacturing that killed America.

Read something Chucky.

New_Meat's picture

see lawyer comment above.

bobdog54's picture

What were the causes of the exodus of manufacturing, root causes that is?

nyse's picture

Hard to give up control.

Zirpedge's picture

THat was always kind of the point wasn't it? To enrich the priveleged few at the expense of the herd. To misrepresent the intention of QE to the masses and profit form it only to wash rinse and repeat the process without the unwashed masses figuring this out. How many articles do we have to read that pretend that the big bad FED is wrong...they aren't wrong, they are very successful and sticking it right in your face.

TeethVillage88s's picture

They said QE was going to reduce Velocity.

I don't understand QT Theory about why they didn't want Velocity of Money Stock to increase since they said they wanted Inflation.

So US Velocity is at an all time low I guess.

Business Dynamism is very low, older businesses are stable, young ones close down more than open up. Monopolies are the rule, but they are transnational so their profits can be spent else where, have foreigners do the work, and deposit profits off shore.

- EBT Cards are the rule, 150 Million are on Welfare
- But they don't like small businesses and have no policy for protecting the middle class or shoring up the middle class or building small businesses, streamlining, simplifying, standardizing to make taxes, accounting, and finance easier... and to make Rules easier

- Coup, Treason, Sedition, Fraud, and mass attack on culture, education, property, wealth, and they give away our sovereignty in 6 different ways including globalization and open borders/open hoarders... while giving away our technology, jobs, middle class and privatizing our commons

But we aren't allowed to have Money Velocity or a Congress that take responsibility for the Middle Class and the future of our Jobs.


- To Bad we don't have Honest Brokers in DOJ, FBI, SEC, FINRA, FTC, GAO, CBO, FED, Treasury, OCC, FSOC, BCFP, CFTC, FDIC, FHFA, SIPC

Practical Cogitator's picture

I think the Fed is these days largely irrelevant in the monetary policy realm - except as a propaganda tool.  Certainly their original commercial bank loan transmission mechanism for executing monetary policy is dead.  The massive wholesale overnight money markets, alongside securitized financialized structured loan products, and the gartantuan derivatives markets have together morphed into private printing presses for the TBTF banksters.  

Overnight rates are near zero not because the Fed is controlling them, but rather because competition among these private printing presses is so fierce, overnight rates have been driven to zero.  The only limiting factor is 'collateral' - because nothing sells without the collateral that substitutes for the 'trust' that once existed between players in this den of thieves.  To stimulate collateral creation, they all sweep customer accounts to The City, where daisy-chained rehypothecation is perfectly legal.  

Not even bank reserves work as a monetary policy transmission mechanism any more; ever since 1994-1995, when Greenspan authorized the TBTF's to use cheap software to 'sweep' supposedly regulatory reserves.  

The only reason the Fed is there is as a Potemkin Village lookalike designed to lead the muppets into the economic gas chambers for the third time this century.  The fractional reserve banking system is once again totally out of countrol, as it was when Jesus kicked the gold-mongers and money-lenders from the Temple.

AntiFabian's picture

The speculation in those markets is not possible with the almost free money the Fed provides to its customers.

fauxhammer's picture

"When policy makers—in the Fed or Congress—try to spare us from all pain..."

Magnanimous fucks, ain't they?

lasvegaspersona's picture

This time the Fed is acting as a funeral director for the dollar not just fine tuning the economy.

It really is different this time...well different for the dollar economy, it is SOP for a country undergoing a banana republic currency collpase.

buzzsaw99's picture

free markets? do you believe in the tooth fairy and easter bunny too? what about santa claus? how naive. free and fair markets do not exist. never have, never will.

Let me be clear, there is no Fed equity market put.

William C. Dudley, NY Fed

lasvegaspersona's picture

Had a conversation with someone with whom I have had several in the past, about the economy. Thought they were up to speed but today they said they have never heard of QE.

The Fed can get away with lots because few know what they do.

New_Meat's picture

the "low information" voter meme extends beyond political spheres.

Youri Carma's picture

Well if this is what you want this is what you get

Jim Grant: Fed will hike 25 basis points - CNBC Videos – Sept 16, 2014

In fact not realy a rate hike since it's still within their own mandate 0%-0,25%.


AntiFabian's picture

Yes current target is 25 bps but NY fed has been charging 11 - 14 bps and on the rate curve that is essentially free money. Even a 50 bps increase would mean instead of a bank paying $166 to borrow one million for thirty days at 14 bps they'd have to pay a ridiculous $416. I think any banks trading desk can leverage that million easy into 5% returns or $50,000 in less than 30 days in the stock market. And suckers don't get why the market can only go up?

playdoh's picture

Most of this article by Rand Paul and Mark Spitznagel could have been lifted from a critical review of Japan in the 1990s.
Did Japan allow banks and other big corporations to fail? Did Japan remove stimulus? Did they stand aside and let markets crash?
Or did they print, change accountancy rules for company reporting, persuade politicians to approve huge infrastructure projects, etc.

Rainman's picture

...." return to genuine sustainable growth " ? ..... stop with that Ozzie and Harriet shit !

AntiFabian's picture

Raise or don't raise rates, the thing no one gets is even if they did it will be so small that mathematically it makes no difference NY Fed has been charging banks 14 bps instead of the 25 bps target so how can a cost of $166 per million borrowed have any impact whatsoever, even if they raise the target by 50 bps the NY Fed will be at most charging 28 bps so big nothing $332 to borrow one million for 30 days. Market still juiced and essentially still ZIRP. Played peeps!

MoHillbilly's picture
MoHillbilly (not verified) Sep 16, 2015 5:02 PM


I like you, I might even vote for you if I can figure out where you really are on things, but prescribing birth control after your daughter is knocked up won't work. We are going to have to birth this bastard child with all the pain , screaming and family shame that comes with it. Maybe we can learn from this and change our ways.... but I doubt it, my sister didn't

American Sucker's picture

The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth.

There is no free-market in the federal funds rate because the entire system is a cartel.  Whether high or low, the federal funds rate is, by definition, not a free market.  Moreover, there's nothing more "natural" in money being created out of thin air by the privately-issued debt of a cartel than by publically-issued debt.  But, I wouldn't imagine the Wall Street Journal would admit that the fundamental institutions of capitalism are welfare queens.  LOL

FreeMoney's picture

"fundamental institutions of crony capitalism are welfare queens."

fixed it for ya.

venturen's picture

When is the Goldman Alumni meet and greet to hand out the march orders. Dudley don't use any of the regualtions. Carney how many billion pounds can you print? Paulson...we owe you! Genslar bang up job on that commodities thing Draghi...just genius that euro-greek thing.... Corzine can't you do anything right? Got park my car. Blankfein will be here in a minute with a gold bar for each of you. Where is grandpa Rubin...he can tells us about the latin thing...though that  was just billions we now are churning trillions? Did we send the command to Yellen yet? What about those stooges Geithner and Bernanke? Should we send them a fruit basket for Christmas or less?

TeethVillage88s's picture

The Rules are the Rules, till the one in charge says now they are different.

I was looking for the data that this article is supposed to address, but not sure it hits the mark.

"Low interest rates may create an illusion of robust markets, but eventually rates spike, assets are suddenly revealed to be too highly priced, and debt unpayable. Many firms have to cut back production or shut down, unemployment rises and the boom goes bust."

- Recession gets serious, Global or not, Banks start calling in loans, right?
- Depression becomes obvious even if everyone is getting EBT Cards, called in Loans are a self fulfilling prophesy
- More Called in Loans triggers sell off of Muni Bonds, and corporate Bonds are Depression is reveals and as State and Corporate Spending decline

- 1930s all over, Congress can pass a bill to loosen up credit and interest rates or whatever, but doesn't stop the contraction of the economy

Well, that is what I imagine.

I don't have any proof or links.

Milton Waddams's picture

Happy Anniversary.

Release Date: September 17, 2014

For immediate release Policy Normalization Principles and Plans During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon. The Committee continues to judge that many of the normalization principles that it adopted in June 2011 remain applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier. The Committee also has agreed that it is appropriate at this time to provide additional information regarding its normalization plans. All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy: The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability. When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate. During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate. The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA. The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve. The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance. The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy. The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

mendigo's picture

Actually I think that rates do not have to rise - not as long as they can append more zeros.

Bear in mind that there was oncea time that a billion was a big number.