Rethinking The Fed: Sowing The Seeds Of Financial Destruction

Tyler Durden's picture

Authored by Mike Shedlock via,

Time and time again, the Fed sows seeds of the next financial crisis in actions it takes to mitigate the previous financial crisis that it caused.

Have we reached that point yet?

The Guardian reports Central Banks Raise Alarm Over New Crash After Steep Rise in Lending.

Soaring stock markets, which have become detached from underlying values, were another sign that unjustified exuberance had replaced last year’s overly pessimistic reaction to political events such as the US election and the UK’s Brexit vote, BIS cautioned in its annual report published on Sunday.


Claudio Borio, the chief economist at the BIS, welcomed a turnaround in global growth over the past year that had “strengthened considerably and [was] forecast to return to long-term averages soon”.


He said: “Economic slack in the major economies has diminished further; in some, unemployment rates have fallen back to levels consistent with full employment. And inflation has moved closer to central bank objectives.”


But he warned that financial markets and policymakers were too quick to forget the risks that brought about the 2008 financial crash. The disconnect between the exuberance of stock market investors and bond investors who lend funds to nation states was also a destabilising factor.


“There is tension between stock markets, which have soared, and sovereign bond yields [the interest rate on the debt], which have not risen much as economic prospects have brightened. And, unfortunately, the unwelcome long-term developments we termed “the risky trinity” in last year’s report are still with us: unusually low productivity growth, unusually high debt, and unusually narrow room for policy manoeuvre,” Borio said.


“Leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the great financial crash.”

Are We Safe From the Next Financial Crisis?

Commenting on the Guardian article, CTMfile asks Are we safe from the next financial crisis?

On the whole, the BIS annual report is a lot less alarmist than the Guardian article makes out. But there are others in the press and financial industry that are voicing concerns about problems up ahead in the global financial system.


Richard Bove of Rafferty Capital disagrees with Janet Yellen and writes that the next financial downturn could be far more devastating that the previous one and says that “The financial system is now at massive risk” because financial regulations now prevent the government from bailing out a struggling bank, meaning that the bank may have no choice but to fail. Bove argues that the very regulations put in place after 2008 could in fact be the destabilising factor that leads to the next big downturn.

Bove Ass Backward

Bove is correct about a potential crisis, but he has things ass backward.

We are in this mess because the Fed and governments have repeatedly bailed out banks on the moral hazard grounds known as “too big to fail”.

Dilemma of Transparency

The BIS Annual Report is lengthy but it’s worth a scan. Here are a few snips regarding the Fed’s communication tactics and balance sheet normalization.

The combination of gradualism and transparency raises a dilemma. It can certainly dampen volatility in the short run. But, if pushed too far, it may raise the risk of a larger adjustment and unwinding in the longer run.


This dilemma is especially visible in the context of balance sheet policies – how central banks decide to normalize the size and composition of their balance sheets.


The 2013 taper tantrum and the associated communication difficulties are still very much on policymakers’ minds.


Other, novel challenges have more of a political economy nature. Large central bank government bond purchases when rates are unusually low will entail losses precisely when the policy succeeds; that is, when the economy and inflation recover. The corresponding losses can lead to unwarranted public criticism and even threaten the central bank’s autonomy.


Similarly, large-scale central bank government bond purchases, financed mainly with excess reserves, amount to a sizeable quasi-debt management operation: they equate effectively to replacing long-term debt with very short-term claims, indexed to the overnight rate.


The normalization of monetary policy in the major economies also has implications well beyond their borders. Developments in the past decade have shown that monetary policy spillovers can pose complicated challenges for central banks and disrupt adjustments in the global economy.

More Tightening than Priced In?

Via email, Albert Edwards at Societe Generale also commented on the BIS article asking “20 years since the Asian Crisis, has anything really changed?

On the 20th anniversary of the start of the Asian crisis, it is certainly clear to me that the mess we are now in is a linear progression of the monetary madness that followed the 1997 Asian bust. Each and every subsequent economic and financial hiatus has been a direct result of excessively loose monetary policy to clear up the previous mess. The current perilous state of the global financial system is evident to anyone who scrapes at the cheap veneer of normality. I was cheered last week when the BIS called out the current conjuncture. They were one of the few institutions in the mid-2000s to accurately predict the impending financial crisis – and they fear another crisis is close.


Unlike central banks who merely give a casual shrug of the shoulders when asked about the impact of their ZIRP and QE policies on debt and asset bubbles, the BIS is really very concerned that policy makers are making exactly the same mistakes they did in the run-up to the 2008 financial crisis. In what can be regarded as the clearest warning possible, if not a direct rebuke to current central bank timidity and gradualism, the BIS Chief Economist, Claudio Borio said “The end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance. A strategy of gradualism is no panacea, as it may encourage further risk-taking.


He went on, “Leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the great financial crash.


[Mish Comment: Those quotes are not in the annual report bot others are also citing Claudio Borio.]


I, like many others, have been scratching my head as to what really has changed in its thinking from this time last year. Certainly not the data!


[Mish Comment: Count me among those who have stated Fed hikes are unwarranted by Fed measures since the Fed ignores asset bubbles.]


John Mauldin writes in an appropriately titled piece Mad Hawk Disease Strikes Federal Reserve, “I believe a faction on the FOMC wants to cement its own preferred policies in place and make it difficult or impossible for a new majority to change course in 2018 or thereafter. Yellen, Fischer, and Dudley all seem to be of that mind, and they are now taking a hawkish approach to monetary policy. That’s why they don’t want to do the otherwise sensible thing, which is to wait for more evidence that inflation is a problem before tightening further.”


[Mish Comment: The sensible thing is to not blow bubbles in the first place. Maulin also insinuates more inflation is a good thing. It isn’t.]


An alternative theory is even more desperate for investors. My learned counterpart Michael Harnett at Bank America Merrill Lynch believes that the Fed has become increasingly concerned about the inequality QE has produced. It had been willing until recently to run the economy hot in the expectation that this would produce wage inflation for Joe Sixpack. That hope has been disappointed and “the Fed has two ways to cure inequality…you can make the poor richer…or you can make the rich poorer…”. And recent events make Michael think the Fed has now abandoned the former and opted for the latter.


If Michael and/or John Mauldin are right, there are going to be some very surprised investors out there.

Mish Theory

Does the Fed, in aggregate, believe it blew a bubble? Of course not, even if a couple Fed members believe that may be the current direction.

Is this a transfer of wealth conspiracy theory of some sort, with the Fed actively seeking a transfer of wealth from the poor to the rich.

Many believe that theory, but it is directly opposite Michael Harnett’s inequality theory.

A simpler explanation, my theory, and the theory that best meets Occam’s Razor is the Fed has no idea what it is doing.

All the talk of inflation expectations, consumer confidence, regional diffusion indexes, and other useless theories and measures provides strong supporting evidence.

The Fed is oblivious to bubbles other than they may possibly form sometime in the future. It’s too late to worry about that now. The bubbles are here, massive, and obvious.

The Fed has a 100% track record or never predicting a recession as well as a 100% track record of not seeing massive bubbles.

Mauldin ignores the asset bubble and Harnett believes the Fed is purposely trying to pop the bubble. Both cannot be right and in practice, I believe neither is right.

The curious result is that it doesn’t matter whether Mauldin is right, Harnett is right, or I am right.


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VinceFostersGhost's picture




The Creature from Jekyll Island........has got to go!


Endgame Napoleon's picture

There is never any acknowledgement of the low quality job creation, the temp, part-time, 1099-contract pickings at low wage levels. Nor is there any talk about the huge number of people on welfare, with the mountain of people making just as little who cannot get free housing, food and Child Taxfare Welfare in April to boost their wages up to livable levels. There is no talk of rent absorbing half (or more) of the low, unreliable wages. It is All FakeNews, All The Time. That is one huge reason why DJT won and why the street protests keep swelling with people who are not placidly accepting the misery index and the incongruity as easily as they were in the past.

geekz_rule's picture



Friedrich Von Hayek, Austrian economist, proposed a 4 plank plan to establish economic "freedom". Of course, that "freedom" was really only for the inbred elitists, the "rentier" class, the "new" feudal lords. These ideas support and justify the creation of absolute monopoly of the entire world's resources. Monopoly always was the real intention, the people's only real enemy. 


"Competition is a sin" J. Rockefeller.


Hayek's plan: peddled as Libertarian, supporting "Liberty", but based on the inaccurate notion that "government" is evil and root of all corruption. A self serving lie. Government is the people, but the Monopolist's use "government" as a simple false target, a straw man, a distraction, a curtain to hide behind. In practice, government today, and for generations,  is merely a puppet used as the force projector controlled by the money masters, pay to play, bought and sold to the highest bidders of the deep state.


Hayek's 4 Planks:


1) Deregulate global financial markets - DONE


2) Deregulate global trade - DONE  


3) Bankrupt all sovereigns and nations with fiat (empty, unbacked, meaningless) paper "debt" (thereby neuter a nation's capability to enforce laws - eliminate the people's ability to defend against being consumed by these 1%) - DONE


then lastly, the kill shot:


4) Privatize Everything. create permanent rent payers of even the most basic necessities of life (Air, water, food, shelter). - Almost COMPLETE


Implemented globally by force, using their "super sovereign" (above the laws of nations) global banking control entities, WTO, WB, IMF, BIS, etc. and of course, actually militaries.


We are 99.99% there. 

we are already debt slaves to a global 1%, they have monopolized everything. 


this condition will not, nor can not, be changed with BS "elections" run by the very 1% we seek to depose. 


#BankstersAreGangsters #PlantationLife 

Endgame Napoleon's picture

The problem is no "competition" in politics. We have the Globalist Uniparty. Their solution is free markets that are really just a way for companies to flee to countries where near-slave labor is plentiful, and there are few laws to reduce their ability to milk that slavery, with the top 20% of dual, high-earner couples keeping all the jobs worth anything in the West in fewer households due to assortative mating. They then bet on the global, near-slave trade, using their excess money to play the global stock market.

The way they keep the rancor down is by Socialism For Some, i.e. by paying the rent, food and other major bills of millions of single parents and immigrants, adding Child Taxfare Credits that, at the high end ($6,269), equal 3 to 4 months of take-home pay for many citizens who are not eligible for these handouts, but whose pay is just as low.

Both parties support this, bragging on themselves for adding a 20-hour-per-week work requirement for welfare that does nothing but ensure employers a low-wage workforce with an incentive to make less. The less welfare recipients make, the more they qualify for a string of welfare benefits. This further nails the coffin of the citizens who do not get Socialism For Some. They need jobs that actually cover the cost of rent and groceries.

The more people you throw into the economy who do not need decent wages, the less jobs pay. The same force is at play when moms whose husbands make plenty of money and SS recipients willingly work for low wages: it drives wages down and reduces the number of full-time jobs.

The Establishment Uniparty does nothing but add to the partial socialism, playing God as to which group is deserving. They do it via the means-tested welfare system and the tax code, which is really just another form of welfare or Socialism For Some.

The only element of the system either party ever challenges is the one we all pay into on every dime of income up to $127,000, with the self-employed paying twice as high a percentage: Social Security.

The Establishment Uniparty uses the means-tested, Socialism For Some programs, like EBT, housing assistance and $6,269 Child Tax Credits, as riot control, not realizing that those with high womb productivity are the least likely to be out there.

Over the years, with all of the offshoring of jobs to countries with low-cost labor, the SS system has been robbed of contributors, and now, automation is about to disrupt their brutal, unfair-to-the-max system of Socialism For Some.

Yet, the Establishment Uniparty still uses the same approach, rewarding citizens and noncitizens in increasing amounts per birth. In addition to free or reduced-cost housing and EBT food, they still give them monthly and tax-time cash to create more humans to compete with robots for jobs, making them work 20 hours per week, as if jobs were plentiful.

Meanwhile, people who cannot use their wombs as a cash register are packed into multi-family dwellings, living at higher and higher temperatures on the miserly index.

The Establishment Uniparty still shouts its feminist rhetoric, making sure that every upscale mom takes one of the few high-wage jobs with benefits, adding it to her hubby's high-wage job with benefits, and reducing the number of citizen with health insurance, as the government continues to sponsor this "employer-provided" insurance via $260 billion in tax exclusions.

The working mom is celebrated, as she (and dad in cases where this is applicable) take what can only be described as a wanton number of babyvacations, whether the moms are working the low-wage, welfare/taxfare-augmented positions at the bottom or the six-figure jobs at the top.

All of this excused absenteeism for working parents is made possible by computers that do more and more of the work, but yet, the Establishment Uniparty calls for more paid time off for "busy-working" parents, as if that were the problem in our economy instead of the exact opposite of the problem.

Our economy continues to churn out 94% part-time / temp gigs, mostly at low rates of pay that will not even cover the cost of housing while the jobs last, much less financing living expenses in-between churn gigs.

The Establishment Uniparty continues to promote the concept of low-income, single moms, working 20 hours per week in compliance with welfare "reform" stipulations, in exchange for rent, food and other bills paid compliments of Uncle Sam and the US Treasury Department. A massive number of immigrants with single-earner, multi-family living arrangements and American-born children also cash in on this Socialism For Some system.

And the streets continue to spill over with all of the parts of our massive population that do not fall within the bounds of their unfair, rigged schemes.

rrrr's picture

"Competition is a sin" J. Rockefeller.

He should know. He did enough of it.

Bopper09's picture

It doesn't matter what they do.  What matters is that foreign entities control our currency, while we pay them a percentage of every dollar for doing it.  Silver backed government issued notes, anyone?

Stormtrooper's picture

Will I be able to turn in my old silver certificate bills for real silver?

realmoney2015's picture

Yes, the banking cartel said it years ago, give me control of a nation's money and I care not who makes it's laws, since 1913 every dollar has been created out of debt and the dollar has lost almost 90% of its value, a dime once bought a loaf of bread, today's dime wouldn't buy you a slice, but a silver dime will still buy you a loaf of bread. Silver and gold is real money. Inflation is theft. Debt is slavery. End the fed, return to real money. Then we'll be able to remove the shakles of slavery to the bank cartel

jharry's picture


overmedicatedundersexed's picture

if you kill the fed how many JU's do you harm..??

lloyd and janet and ben and alan..oh the humanity..

congress's  check book would take a beating and .gov would shut out the lights.

NYC condos and DC estates selling for pennies on the FRN

Stlouiemike's picture

Time Arbitrage = Use it Before you lose it ..  in all things ;) 

wholy1's picture

The PRIVATELY-held [NOT]Federal[NO]Reserve - perhaps the biggest incarnation to date of the int'l financial [D]elites/PTB (Psychopaths That Bugger) age-old ponzi of REAL asset/wealth consolidation/xfer by issuing FIAT "debt-credits" on the AUTHORizing sigs of "borrowers".  With the amt of the Principle ONLY being "funded" in to circulation, the UNfunded "coupon/interest" and banker fee amts eventually cause " liquidity crisis' " allowing said "consolidation/xfer" to occur.

rejected's picture

Why does anyone believe the Fed is actually tightening without an offsetting QE? They can do whatever they want off books. Who would know?

Why can't we just get back to Silver Certificates? Why are people so afraid of money with value?  When they buy a house or a car people always talk about their value, but money, they just shrug it off. Even with the minor issue of Greenbacks in the uncivil war a person born in 1820 had the same purchasing power in 1900. They could save money, pay for retirement and whatever without someone screwing them with interest rates.

And this crap that there is not enough metal is pure bullshit. It's the pricing,,, not the quantity. It's real easy... a couple million of us take vacation and surround DC demanding they do this. Americans are gonna have to seriously start voicing their demands. Elections do no good. The last election shows you may get 'your guy' in office but also proves existing structure will just neuter him. No,,, voting is useless until government can be controlled. Writing your con-gress critter is completely useless. Revolt is too messy and only very last resort. Demonstrations by overwhelming numbers could work. Just knock the wannabee troublemakers out. National strikes would work. Sure, you might lose your job but you could capture your country. There's always another yob,,, countries are hard to come by. 

Damn!!!  Just woke up. What a great dream I was having!

Reaper's picture

The Fed scam is the same scam, wherein when you complain it's too cold, they put a small heater on the thermometer and claim the indicator went way up.

Deep Snorkeler's picture

It seems that housing is the foundation

of our FIRE economy.  The crazy home price asset bubble

is the single most important indicator of overall economic activity

and prosperity.  When this bubble pops, as it must,

we all go for a deep dive inside Monstro the Whale.

south40_dreams's picture

Disassembling the American economy for delivery to foreign owners is the only "business activity" left. We're royally screwed

RocketScience's picture

This article is probably correct, but it ignores that the Fed is a polical animal. They are intentionally interfering in the 2018 midterm elections by tanking Trump's economy.

RocketScience's picture

This article is probably correct, but it ignores that the Fed is a polical animal. They are intentionally interfering in the 2018 midterm elections by tanking Trump's economy.