Why A Former Fed Official Fears A Global Meltdown

Tyler Durden's picture

Authored by Gerald O'Driscoll, former vice president at The Dallas Fed, posteed op-ed at The Wall Street Journal,

Are we headed for another global financial crisis? The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified.

This year is likely to be one of financial crises in industries and countries around the world. Whether those turn into a global financial crisis is an open question, and the answer will likely turn on the health of the U.S. financial industry and broader economy. No crisis is global if American financial markets hold up. The best I can foresee, at this moment, is that a true global financial crisis is not likely.

Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.

Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process? They have in the past, and rumor is that they are already doing so today.

[ZH: Which is exactly what we have alleged based onm numerous independent sources.]

The problem with extend and pretend is that it allows losses to accumulate. When they finally must be realized, they are larger than they would have been, and some financial firms will collapse. This happened in the Texas banking crisis of the 1980s and the nationwide savings-and-loan crisis of the 1980s and ’90s. I am not predicting another banking crisis—but pointing to the folly of extend and pretend.

Regulators need to apply prompt corrective action to overextended lenders. New capital must be injected by investors into solvent banks, but those that are insolvent or too weak to survive must be closed.

In addition to the world-wide oil glut, which will continue in 2016, another important factor in the story is the strong U.S. dollar. The dollar is at a near-term high against an index of other currencies. This reflects, at least in part, trends in monetary policy. The U.S. Federal Reserve implemented a long-expected, modest increase in short-term interest rates in December, while other major central banks, like the European Central Bank and the Bank of Japan, are easing their monetary policies. The Fed’s action is seen as a prelude to a series of interest-rate increases. That would further strengthen the dollar.

However, oil is priced globally in dollars. When the dollar is getting stronger, oil becomes more expensive for other countries, who have to sell more of their own currencies to afford it—and this dampens their demand, putting further downward pressure on oil and other commodity prices. In addition, a stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, lowering U.S. exports.

A strong dollar also means that those who borrowed in U.S. dollars but earn income in other currencies are stressed to pay back their dollar-denominated debts. Emerging-market countries (governments and private borrowers) were heavy borrowers in dollars and are at risk of default on these debts.

In their 2009 book on financial crises, “This Time Is Different,” Carmen Reinhart and Kenneth Rogoff observed that countries are more prone to default on foreign-held debt than debt held by their own citizens. Especially at risk are energy-producing, emerging-market countries as they have been hit by a double whammy: steep drops in the price of their leading export and rising debt-servicing costs in dollars.

I am not going to predict which specific countries are likely to default because there are many variables, including the varying political situations. Default is as much a political decision as an economic necessity. But one country illustrates the ramifications for the U.S. of a default. Brazil is a large, emerging-market debtor. U.S. banks had $89 billion worth of loan exposure to Brazil as of the middle of last year. That debt was likely concentrated in a few large institutions.

The Fed’s monetary policy of extraordinarily low interest rates helped create the asset bubbles in stock and commodity prices that are now bursting. Low rates also distorted investment decisions. I have argued for the Fed’s increasing interest rates much sooner. Now the Fed has made a tentative step forward on rates. It has done so, however, with incredibly bad timing—with the dollar already getting stronger and the global economy weakening. The Fed is worried about energy-industry loans. But how can oil prices recover with a rising U.S. dollar?

In retrospect, the Fed’s rate hike last month will likely be viewed as monetary malpractice. The next hike is on hold, and there is already talk of another round of quantitative easing. None of this is likely to forestall turmoil in credit markets. Investors are wise to be worried, but it’s likely that 2016 won’t be a replay of 2008.

*  *  *

Indeed, Mr. O'Driscoll, it may well be a lot worse!

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silver surfer's picture

Why always former...

38BWD22's picture



A strong US$ might be incentive for the exporters to keep selling in, yup, US dollars...

Pinto Currency's picture



The Fed's monetary malpractice was blowing the debt bubble in the first place.

Tightening now is the coup de gras for the West.

cheka's picture

load of crap spewing from nyc:  raising rate from 0.x to 0.x is the cause.  stfu

E5's picture

Game of Musical Thrones played to Freebird.... the long version... everyone who is high, drinks bud light, and is caught standing with their lighter held high won't have a seat.  Course, i don't give a fuck, rock on and then we riot!

cheka's picture

trump is right

import tariff, or continue the downward 'free trade' spiral unleashed on us by nyc/dc's finest

philipat's picture

He IS right. The US remains the largest economy in the world and raising tariffs/reducing taxes for the middle and working classes is exactly the recipe for an economic recovery. Prices would rise BUT there would be higher wages (The way around tariffs is to again manufacture domestically) and more disposable income from lower taxes for the masses.Of course, the oligarchs don't want to hear this, which is precisely why Trump is the anti-Christ of the "elites"..

Baby Bladeface's picture
Baby Bladeface (not verified) silver surfer Jan 26, 2016 4:08 PM


Why always former..."

The drugging and takes to sleep it off more than a day.

philipat's picture

Beacuse they are all cowardly weasels who don't want to risk their jobs and nice fat pensions by speaking out whilst in office? (All done under the self-excuse of being a 'team player"). I almost hate these bastards who speak out after they retire MORE than those who never do. You can't sell your soul and keep it?

BandGap's picture

His "come to Jesus" moment so he won't be blamed for this fucking mess.

How long has he been "former"? Less than 45 years? Guilty!

TheSecondLaw's picture

Now that my salary does not depend on lying, I'll call it like it is.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Jan 26, 2016 4:02 PM

Sooner or later, there just aren't enough ---bux to counterfeit out of nothing to keep making the world spin round...


Whether I get 'junked' or not... I know one thing... I DIDN'T PRINT THE FUCKING MONEY, INVENT THE 'SYSTEM',  OR MAKE LEVERAGED BETS WITH IT!

38BWD22's picture



For now you can buy gold with your $$$...

"I didn't print the gold, I just bought it."

-- 38BWD22

Bangin7GramRocks's picture

Tell that to Japan. They are on their 3rd decade of this shit. There won't be a full meltdown anytime soon. It's just too damn easy for them to stop. They have unlimited fake money to buy stocks, bonds, treasuries or housing if they want. If it starts to unravel, the fed will buy just enough to goose the "market" back up. It's only happened like 30 fucking times already in 7 years! What makes you think it won't happen 600 more? BTFD

cheka's picture

agree..except for the btfd

wait for the btfcrash

they WILL let it crash (again).  it is major part of 'first by inflation, then by deflation....'

db51's picture

Are we headed for another global financial crisis?

WTFucking hell kind of question is this to be asking?

Oh...My Bad....asked by a FORMER FED GUY.  LMFAO....HILARIOUS

IridiumRebel's picture

I hope he gets big fees to speak now that the truth suddenly is so important.


Soul Glow's picture

What's the head count of former Fed officials worried that they fucked up?

BandGap's picture

eleventy seven, seasonally adjusted, of course.

Countrybunkererd's picture

Worried?  Hard to say, i guess count those that don't have a private island fortress or compound with airstrip in NZ and then for good measure add 1. 

wet_nurse's picture

With the drop in oil doesn't that mean less petro dollars sloshing around? If the price of oil is down 65% does that mean there are 65% less new dollars in the world market? Can someone speak to this? thanks 

ThroxxOfVron's picture

"With the drop in oil doesn't that mean less petro dollars sloshing around? If the price of oil is down 65% does that mean there are 65% less new dollars in the world market? "


Let us consider this question.  

It appears to pertain to the ratio of $US to available BBL.

Perchance would the price of oil as expressed in dollars be a function not of demand but of supply -of dollars.

An example for consideration: 

IF there is a natural ratio of, say,  100bbl = $100, then printing more dollars IF the amount of dollars is the actual intermediate/long term driver of price would result in an inflation in the AMOUNT of Oil that can be brought to market -irrespective of demand.

This would imply that as more $US are created beyond the delivery price of Oil that Oil must deflate/fall in price until the imbalance between the currency backing the price is resolved by forces of demand.



I have just opened a discussion as to whether inflation in a currency can actually cause deflation in a commodity/asset that is generally considered to back that currency.

Too many $US may be creating false market signals not by pulling forward demand; but, by forcing the extraction of oil to meet the underlying imbalance between credit/monetary emission and the generally accepted commodity/energy basis.

Effectively this means that as long as $US are being counterfeited -emitted sans actual productive economic activity- that the commodities will actually fall in price to meet and 'sequester' the phoney monetary expansion.

Pouring surplus Oil into market is not generating $US.  

The opposite: pouring surplus $US credits into market is extracting/generating Oil.

IF this is true then the price will continue to fall until unsterilized $US emissions are sterilized.

This probably has some direct correlation with $US reserves creation/sequestration and interest rates suppression.


IF true: then without an offset of some kind further $US ( or equivalents currency ) QE will actually further suppress the price of Oil.


This may be why Saudi Arabia is frightened of devaluing the Rial.

-They may perceive that it will only exacerbate their fiscal situation by suppressing the price of their own exports due to the levels of fraudulent $US emissions that it cannot control.


wet_nurse's picture

I apprciate you answering my question, but I couldn't follow. Sounds smart though. ELI5

wet_nurse's picture

I reread it, let me see if I got it. The price of oil isn't determined by suply and demand it's determined by the amount of $US chasing oil. So oil price needs to fit into the petro dollar instead of the other way?

ThroxxOfVron's picture


-Indeed exactly the opposite of conventionally taught wisdom/claimed 'consensus'.

In an industrial ( presently largly petroleum ) economy output is a direct consequence of caloric utility.

Too much money has been printed and it has gone to those that require money the least to continue consuption.

The money was funneled directly into a commodities extraction boom.

Those with access to the money tried to front-run the production utilization of the commodities in question ( OIL ) that they imagined would have been fueled by traditional expectations that inflation would result in higher prices.

They were completely wrong.

Invoking a speculative 'pulling forward of demand' was the wrong use of the emission.

The demand doesn't exist so the price of Oil fell; -and thus it will continue to fall until demand is restored to equilibrium with the availability of $US/credit which is in outrageous over-supply with respect to economic activity.

The entire traditional concept of inflation as a monetary phenomena may be utterly flawed as it has traditionally been constructed on a basis of non-production oriented commodites ( Gold ) and balancing of fiat/trade flows...

EmmittFitzhume's picture

"Regulators need to apply prompt corrective action to overextended lenders."  


Any lender working under fractional reserve rules is overextended by a fuckton!! And that's ALL LENDERS!

Baby Bladeface's picture
Baby Bladeface (not verified) EmmittFitzhume Jan 26, 2016 4:11 PM

Prompt corrective action requiring tar, chickens feathers, length of strong rope?

If kickstartered or something these items to purchase, will contribute with satisfaction...

12357111317's picture

Regulators?  WHAT regulators?

MSimon's picture

It has happened fuckteen times before.

Consuelo's picture

Headline reads:


"Why A Former Fed Official Fears A Global Meltdown"


Followed by the second sentence: 

"Investors have reasons to be fearful—but not terrified."


Followed by the ending statement:

"Investors are wise to be worried, but it’s likely that 2016 won’t be a replay of 2008."



One (or) more of these things is not like the other...

BandGap's picture

"It might not be hell, except when it is".

Countrybunkererd's picture

That word he keeps using, I don't think it means what he thinks it means.

moonmac's picture

Massive government stimulus just put millions more into the pockets of our factory owners. We charged what we wanted because of domestic job requirements, but our workers were lucky to get a 2% raise each year. There’s no reason to pay them more when tens of millions of working class Americans would kill for a factory job with paid sick days and vacation. The Fed doesn’t get any of this and that’s why wealth and income disparity is now off the charts!

Arnold's picture

Way too many inputs for the model run by ENIAC to process.

Vacuum tubes cost money you know!

But we  will be EMP survivors.


--Federal Reserve IT Group.

BandGap's picture

The Fed got all of it, and were paid to do what they did by the brown clown and his cohorts, worldwide. They got the desired outcome.

Question - if you take the phrase "Muslin" out of the current close the border immigration no-look confusion maker goings on, aren't the US and Europe the same? Are we also saturated how "undocumented workers" killing people here in the US? Thought so.

Just another piece of the puzzle.


MSimon's picture

Muslin cotton?


(there is an edit button)

Chupacabra-322's picture

Check this out:

"The federal government has joined the ranks of the bottom-of-the-barrel industries, according to a new survey from the American Customer Satisfaction Index. Americans' satisfaction level in dealing with federal agencies --everything from Treasury to Homeland Security -- has fallen for a third consecutive year, reaching an eight-year low.

The declines represent some backsliding for the U.S. government, given that satisfaction saw some improvement in 2011 and 2012, which may have been the result of spending in the wake of the recession. While the comparison with private enterprise isn't apples to apples given the nature of government services, the findings have some implications for bureaucrats.

"Satisfaction is linked to broader goals in the political system that it wants to maximize, like confidence and trust," said Forrest Morgeson, director of research at the ACSI. "It's much more difficult to govern if the entire population dislikes you."


Dislike is putting it Mildly. The American People Fucking Dispise the Criminal Fraud UNITED STATES, CORP. INC. its Fraudulent CEO & Board of Trustees. Fuck off & die!!!

chunga's picture
Oregon BLM: Document Data Dump Expose It's all about the Minerals!


Jack Burton's picture

Not much mention here of Nation States. The list of impared nations is really long, and much of their debt will be hard to see being repaid. We all know how deeply banks, hedge fundsand other institutions are into sovereign debt. Argentina is going to renegotiate their debts after a partial default. UK debt is one of the worst in the world. Ukrainian debt is also unpayable and growing, Greece can not meet it's obligations, Spain, Portugal, Ireland and others. The EU stinks of bad debts. Banks of Europe hold alot of this rubbish. The EU looks like it will slowly melt away, with mass unemployment of youth and mass migration. Fiscal crisis in the EU will be matched by social crisis.

Today, the IMF suggested a way to get migrants to Europe into work as soon as possible. That is to create a new wage system, allowing all migrants to work for below minimum wage in all EU nations. The fact that unemployment is already high, and this would drive wages down and unemployment up, does not seem to bother the elites of the IMF.Think that over for  minute, and that will suggest to you just how desperate Europe is.

The EU by next summer will be a ticking time bomb. States of the EU do not have the money to absorb millions of new job seekers, not while youth unemplyment hovers at 50% in many states,

centerline's picture

Expect to see a lot of rats jumping ship.  Bringing in cheap immigrant labor is a desperate move for sure.

Mr.Sono's picture

Investors are wise to be worried, but it’s likely that 2016 won’t be a replay of 2008.


Its not the housing 2.0, its the goverment thats way over leveraged. So yeah, its not 2008 its much much bigger then that. And the question is "is 2016 a tipping point?"

BandGap's picture

What is mind boggling is the IMF makes this absolutely fucking ridiculous statement right in front, for all to see, and not one EU leader says a fucking thing.

The same ridiculousness (like a state of the union where it says that anyone questioning the recovery is delusional) is here and now, too.

Let this all sink in. what is up is down, what is right is wrong, in is out. Let the chaos begin.

Chuckster's picture

How many more are there of these geniuses that know what they should have done when they were in office?  This is now number 3 that I know of.  The market would be  pure short if it wasn't for the FED.  They may try another QE.  If I had a relative on the board who would call me with their decision I could make a fortune in short order.

Janet Shalom Bernanke's picture

The subprime mortgage meltdown was contained too.  

I will be happy when the Fed criminals are contained in their prison cells.



It's funny to read the predictions about the future of the world economy, and you know just how fucked it is when an optimistic prediction is that we will have a crisis, but it won't turn into a full-blown financial crisis.  and this opinion is based upon nothing more than a wild-ass guess.




Salsipuedes's picture

He´s lying. You don´t fear things you´ve planned.

DonFromWyoming's picture

Agree.  Outright and by obfuscation too.

He wrote "However, oil is priced globally in dollars. When the dollar is getting stronger, oil becomes more expensive for other countries, who have to sell more of their own currencies to afford it—and this dampens their demand, putting further downward pressure on oil and other commodity prices."

Bzzt. It doesn't matter if the price of the dollar in local currency terms is up 25% when the price of oil is down 60% in dollar terms.  Countries that import oil are far better off today than they were 3 years ago.

And the last two paragraphs of the Op-Ed make no sense whatsoever.  Does he want "normal" interest rates or not?  To fix the problem, the fed needs to let the price of money float to its market value.  No QE.  No printing.  Let treasuries owned by the Fed mature without reinvesting in new bills/bonds.  Slowly ease back the money supply to the historical norm (ie. a much smaller Fed balance sheet).  But the fed will do none of that because it *must* prop up GoldmanSucks and DoucheBank.  O'Driscoll is just another shill.

ThroxxOfVron's picture

"It doesn't matter if the price of the dollar in local currency terms is up 25% when the price of oil is down 60% in dollar terms. "


Read what you wrote again.

The truth seems to be staring you in the face.

The price of Oil is collapsing because $US have been counterfeited to prop Oligarchs and Banksters for POLITICAL reasons.

The emission of $US/credit is outrunning the economic activity required to provide value to currency and the transmission of price discovery is forcing extraction that is not demanded by the economy: hence a glut and continued price suppression.

I belive that we are inexorably moving towards a true caloric monetary regime as it offers the only soution to counterfeiting and misallocation.

IF this is so: then the price of Oil will only be stable and viable when monetary policy is stable and reliable; but, NOT for the traditionally accepted reasons.

..&, IMHO: the ONLY manner in which a currency can truely be stable and consistent is if it is based soley on deliverable calories.

When the ratio of $US( IMF currency basket, etc.) is PEGGED to deliverable calories then money will be impervious to inflation without a corresponding increase in ratio of available deliverable calories.


It may also be possible to resolve the dislocation between the $US and OIL via fiscal policy.

Instead of providing un-needed funds to politically connected speculators it should be introduced into the economy via infrastructure/education/health/jobs programs.  

Priming the economy from the bottom -not the top.

Redirection of the existing stock of reserves and/or further emissions would be to fueling productive economic activities and laying the groundwork ( infrastructure/education/etc. ) for productive economic activites that expend energy/oil and result in BOTH circulation of the currency ( velocity ) and utilization of the fuel ( production/consumption ).

The $US/credit must generally be spent on generating real output that validates the price discovery of energy.

Extracting Billions of tons of Oil for which there is no demand is destroying the pricing mechanism.

I posit that the pricing mechanism of energy is not a function of available dollars but indeed one of economic utility as measurable in the actual productive output.

I further posit that energy use gives value to the source of the energy.

I further posit that sequestration of energy ( NOT efficiency in utility which is favorable ) supresses the value of energy.