Is The Fed Responsible For The Great Financial Crisis?

Tyler Durden's picture

"Recessions are a natural economic feature and their regular occurrence is healthy and indeed essential," is how Deutsche's Jim Reid introduces his investigation into post-Fed un-natural business cycles. Without them there is a serious danger of bubbles and the misallocation of resources as the further market participants detach themselves from the last downturn the more they tend to under-estimate risk. We,


Jim Reid, Deutsche Bank: The history of business cycles in the US

The chart below shows the duration of each economic expansion (i.e. between all US recessions) since the NBER started collating statistics from 1854. This highlights the fact that prior to the GFC the three preceding expansions were in the top five on record. We can also show that this cycle is now almost exactly average length through history.


If we re-order these cycles by duration we can show more clearly how this current US expansion compares to those through history.


We passed the median cycle length at the start of 2012 and we will be past the historical average point by the end of this month (September 2012). This expansion is now the 12th longest out of 34 since 1854.


There are those that suggest that the Fed's inception back in 1913 has allowed for longer business cycles and for those interested we have colour coded those cycles (above) that occurred after this point, and also those post WWII when overall economy debt seemed to start a YoY increase that continues to this day. Countering the argument for longer post-1913 cycles would be the view that without the Fed helping to elongate several recent cycles, the GFC we've just been through might not have been anywhere near this deep and we are therefore now left in a unique situation at what is at the likely end of a multi-decade leverage binge consisting of several artificially long cycles. We are also now arguably in a liquidity trap where the Fed are less potent that they have been before in their near 100 year history.


The three 'super-cycles' between 1982 and 2007 were the exception rather than the norm, one where Central Banks and Governments had almost total flexibility over policy. The conditions that allowed for these long cycles perhaps started a decade earlier with the already much talked about collapse of the Gold Standard.


Unfortunately the 25-30 year build up of excess that this facilitated led to the GFC being the worst crisis since the 1930s and we have now likely moved to an era where policymakers no longer have the flexibility that defined the previous 25-30 years. Most Developed World (DW) Governments are up against their fiscal limits and are actually being forced into economically damaging austerity. We also have interest rates across the Western World that remain close to zero with little room to be lowered further. While we do have money printing, we are close enough to a liquidity trap that flooding the market with printed money doesn't have the same immediate impact on the economy as a cut in interest rates did in the long leveraging stage of the super-cycle.


So not only are we battling with the huge structural problems that the post-credit crisis world brings, we are fighting it without much policy flexibility and are indeed being forced into a reversal of stimulus at arguably exactly the wrong time.


So it all adds up to a return to more normal length business cycles in our opinion. Indeed one could make an argument for shorter cycles than normal given the lack of policy flexibility relative to most of history.


We, like Jim, would argue that the reason the Great Financial Crisis was so deep was due to the authorities continued refusal to let the business cycle take its natural course.

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Flakmeister's picture

Yes, to a point...

However, it ain't the Feds fault that geology said no mas....

Ahmeexnal's picture



Sep 5, 2012 - 01:51


TOKYO (Reuters) - Japan has agreed to buy disputed East China Sea islets, claimed by both Tokyo and Beijing, from their private Japanese owners, Japanese media said on Wednesday, a move likely to fuel tensions between Asia's two largest economies.

The uninhabited islands, known as Senkaku in Japan and Diaoyu in China, have long been a source of friction. Japan and China have competing territorial claims to the islets and surrounding fishing areas and potentially rich gas deposits.

The Japanese government will buy the islets for 2.05 billion yen (16.48 million pounds) and the owners will sign a contract soon, the Japanese dailies Asahi and Yomiuri said.

The planned purchase of the islands, controlled by Japan and claimed by Taiwan as well, will be approved in a cabinet meeting as early as mid-September, the newspapers said.

Jstanley011's picture

War between China and Japan, now that would be a swan of a different color. Not black, red...

AldousHuxley's picture

Fed controls both booms and busts......

what they are supposed to be doing is make markets stable in order for businesses to plan properly, so you don't have bubbles and depressions....


Fed is bipolar these days



Fizzywig's picture

Huxley, I always look forward to your comments.  I don't care who votes you down.

Al Gorerhythm's picture

It's the two resident Fed trolls.

teahouse's picture

is there any confirmation? is not Hillary Clinton in Beijing now?


TheObsoleteMan's picture

This isn't the 1930s. Japan had better tread carefully, VERY carefully. There is a price to pay for sitting back on your arse and letting your former adversary foot the bill for your national defense {I know all about the Treaty}, especially one that can barely hold on to it's own these days.

icanhasbailout's picture

Japan is the peer of the UK and France in military spending.

TheObsoleteMan's picture

Japan has no navy, only a coastal defense fleet which can not remotely defend it's interest outside of the main islands {and against China, even that isn't enough}.

chump666's picture

Next major war will be naval, probably South China Sea.

Most likely soon.  And yes I blame central banks for driving up the war juice - oil

ACP's picture

Is the sky blue? The Fed has been responsible for EVERY financial crisis in the US since it was created. Not only that, it MAGNIFIED the amplitude of the sine curve before, during and after every crisis.

gwiss's picture

Hmmm..... I think it's the Triffin dilemma.  When you have the reserve currency, you need to keep the money supply flowing to satisfy international demand, but this is inherently inflationary.  Thus your national monetary and global monetary priorities are fundamentally incompatible with each other.   Thus, reserve currencies always have long periods of expansion during which times seem booming in the country which owns them, followed by eventual international repudiation of the currency.  That's why our expansions have been longer post WWII, and even longer after we finally admitted that we were expanding the dollar supply and wouldn't stop, and cut off gold redemption for countries like France who didn't like getting robbed while holding the currency we were inflating.  Our "great moderation" is partially explained by this international expansion of dollars which showed up as a persistent current account deficit.  Is this the Fed's fault?  Sort of, but not really -- they weren't the ones who forged the treaties making US dollars the sole reserve currency.


ACP's picture

While I agree that fiscal policy has flooded the world with dollars, I disagree with the greater argument because the Fed is responsible for controlling monetary policy, which should have mitigated this situation, but over the years and much more recently, has exacerbated the situation.

In addition, the empirical evidence here and elsewhere strongly suggest the rate of inflation in the US began its meteoric rise shortly after the creation of the Federal Reserve, and well before Bretton Woods.

Of course, as I have suggested before, there are at LEAST two currencies in every country: A nation's sovereign currency, and gold/silver. While it still puzzles me why human beings are so "stuck on gold," 6,000 years of history have proven that when all else fails, that is the world's reserve currency.

gwiss's picture

I'm not a fan of the Fed.  It's a jacked up system controlled by elite for the benefit of elite.  But, there has often been tension between the Fed and the Federal government.  The Fed waffles between fulfilling its mandate, which is never popular with politicians but is popular with bankers who have a long term gaze, because for banks monetization is a short term strategy that long term kills the goose who lays golden eggs.  Banks make money for nothing with the Fed system.  Yes, there is a short term burst in their profits if they support monetization, but long term this kills the system and the thinking bankers know this.

The people who don't know this and don't care are politicians, whose future gaze is forever stuck at 4 years or less, which is their reelection window.  If the people want printing, then the politician who doesn't support it doesn't last more than 4 years, so guess what they support?  Thus we see periods of tension, such as when Truman fired Fed chairmen and eventually coopted the system, and periods when the Fed regains independence, such as Volker, who proceeded with an immensely unpopular plan because he understood the long term necessity if the system was to be preserved.


The Fed has been in a long phase of being politically controlled with Greenspan followed by Bernanke, which is why their policy has been what it has been and why their concerns have competely oozed past protecting their monopoly.  They are trying to help protect the current political system, and are sacrificing the current monetary system in order to do so.

Politics is why the dollar was chosen as reserve currency, and politics determines when we go fight wars we can't afford, such as Korea and Vietnam and Iraq and Afghanistan, and politics determines when we decide to strap on crushingly heavy burdens economic burdens such as transfer and social safety net schemes, and these are the things that we are inflating our currency in order to afford.


What do you see as the Fed's game plan if you think they are driving?  How does it benefit the Fed to destroy the system?

Dr. Engali's picture

And the reason why the whole system will crash and burn
Is because they won't let the purging run it's course.

holdbuysell's picture

Because they can't...Lehman showed that the derivatives mess is so interconnected and massive that if there's even a whiff of deflation, everything collapses.

Greece with a couple dimes worth of CDS in a relative sense gave ISDA a heartache when it came to determining a default.

It goes back to what Tyler described many times: gross = net

Dr. Engali's picture

That's one story..if you are a believer of official stories. Of which I am not, and I will cite 911 as my example. I will propose another theory. The "Lehman moment" was needed to scare the sheep into compliance for the greatest wealth transfer ever. Once the sheep were plenty scared TPTB could write any check they wanted to, and they still capitalize on it today. Except now they use it on a sovereign level. They like to tell us: "Even though Greece is small there is still counter party risk!"We don't want another Lehman moment". Just like they used 911 to turn the U.S into a police state they used the planned take down of Lehman to transfer trillions of wealth from us to them. So I call bullshit on "the Lehman moment".

LMAOLORI's picture



The politicians are ultimately to blame IMO they put the Fed in place and have left it in place it's a convenient scape goat so they can continue to deficit spend.  There is plenty to blame the Fed for though like IOER payments to it's member banks for one and keeping interest rates low creating the housing bubble for another (though that too was at least in part political).  I agree with you about Lehman and the financial system being so interconnected. Though it wasn't a whiff of deflation that set it off it was a whiff of easy money by other players who smelled blood in the water. 

buzzsaw99's picture

the banks end up owning it all bitchez. that is the only natural feature.

Cognitive Dissonance's picture

"We, like Jim, would argue that the reason the Great Financial Crisis was so deep was due to the authorities continued refusal to let the business cycle take its natural course."

If you never remove the economic butt plug things are gonna get a bit stopped up.

Just sayin'

Eventually nature takes its course and the butt plugee gets very very sick and dies.

Dr. Engali's picture

CD you are one sick individual, and now I have an image in my head that wouldn't otherwise be there. :->

Specifically a bloated green corpse exploding feces all over the place.

Cognitive Dissonance's picture

"CD you are one sick individual, and now I have an image in my head that wouldn't otherwise be there. :->"

4 out of 5 Cogites agree with you.

Worse......Mrs Cog just informed me that after that comment there will be no nookie tonight.

Colonel Klink's picture

Well at least you still have your buttplug to keep you warm.


Hahahahaha.  Sorry CD.

Cognitive Dissonance's picture

I don't know WHAT you're talking about. :)

RobinHood73's picture

Proper price discovery has been so badly damaged by the FED's actions and  the ubiquitous "Bernanke put" that the Fed has had to go "all in". No politics here.  It is moronic and will be read about in great detail by Chinese elementary students in about 5 years time.

chump666's picture

The Fed should be encased in concrete and lead.

Bury the toxic f*ckers.

Thank you.

Michael's picture

The Federal Reserve Corporation is the root of all evil.

SAT 800's picture

This is false; and it is a serious mis-understanding. The Fed is an enabler for the Federal Government; which is 100% responsible. Democracies don't work because the people find that they can induce the law makers to vote them monies from the public purse; or in the case of the Military-Industrial complex, which we were warned against by Eisenhower, simply demand that public monies be directed to them. Once limits are removed from the quantity of Federal Monies, (removal of the international redeemability of the dollar), disaster is merely a matter of waiting.

Michael's picture

Are you saying the people who created the Fed are still alive, or the people alive today could have stopped the formation of the FED 100 years ago?

The answer to both questions is No, and once the demon was born it became unstoppable. The Federal Reserve corporation is pure EVIL!



Papasmurf's picture

It was absolutely stoppable.

vertexa's picture

The man in charge of our financial system, Federal Reserve Chairman Ben Bernanke, is not going to save our economy.  He didn’t see the last financial crisis coming, and even after things started falling apart he continued to insist that housing prices would not go down and that we would not have a recession.

Well, it turned out that we had the worst housing crash and the worst recession since the Great Depression of the 1930s.

But still millions of Americans are trusting him to save us this time around.

It isn’t going to happen.

The truth is that the design of the Federal Reserve system itself is fundamentally flawed.

The biggest reason why the U.S. government is 16 trillion dollars in debt is because the system is designed to create gigantic amounts of government debt.

Some Of The Really Bad Things That Could Happen If You Do Not Prepare For The Coming Economic Collapse

MiltonFriedmansNightmare's picture

Who was it that said of the Federal Reserve System, it's not Federal, there are no Reserves, and it isn't a system.  Pure evil to the nth power.

Papasmurf's picture

For Ben, this is just a big science fair project. 

SAT 800's picture

The Federal government is responsible for the crisis. Firstly in the person of Nixon, and his adviser, Friedman, who removed the gold regulator and weight, that prevented unlimited federal spending; and secondarily in the person of the congress critturs who introduced and voted on legislature over many years that made the madness possible. the Fed can be viewed as anoying and disfunctional, but utterly incapable of causing the crisis without the wholehearted efforts of the Federal Government to spend themselves into oblivion.

apberusdisvet's picture

The real reason is that the FED and its partners in crime have corrupted everything in its path through the power of money printing  to such a magnitude that the ownership of politicians, judges, The DOJ and even those in the Military Industrial Complex is now a foregone conclusion.  Gone is true capitalism, the Rule of Law, and sadly, the US Bill of Rights.

MiltonFriedmansNightmare's picture

The alliance of the monetary and political "scientists" have corroborated to create a mutant version of Frankenstein's monster, a monster on steroids, that will eventually destroy the entire borrow a thought from TCFJI.

dick cheneys ghost's picture

Our monetary system is the disease

TheObsoleteMan's picture

No, our monetary system is only a symptom of our disease {moral decay}.

singsing's picture

Debt which can never be paid is made whole and money is debased.  Seniors are forgotten, the productive class is abandoned and our children are forever to be enslaved.  All to save monstrous financial bets and the paper wealth of lunatics.

This is the lagacy of central banks around the globe and the cowardly politicians who believe threats of mutually assured destruction.  Fools, the lot of them.   

TheObsoleteMan's picture

No, it is not the Fed's fault, it is OUR FAULT. The Fed is just a predatory animal, doing what predatory animals do, much like the way a lion hunts African plains game. It was our duty to either prevent it, or kill it once established. So far, we have failed on both accounts.

Caviar Emptor's picture

Refusal to cut rotting limbs has allowed the rot to spread to the trunk. 

The corporate welfare state is an autocratic regime that permanently endows a parasitic aristocracy which saps the productive economy of vitality. 

The last 3 super-cycles of record breaking monetary expansion (through expansion of the debt), Fed activism and micromangement coupled with incestuous politics have only succeeded in making an epic, giant mal-investment. Taxpayers from current and future generations were conned into paying for the offshoring and downsizing of the American economy. Now the only thing left is for Americans to serve each other burgers and do each others' laundry

Michelle's picture

Let's blame the Fed because it just FEELS SOOOO GOOOOD!!!

(Making an objective and logical argument to state otherwise in this current crazed environment seems ironically insane.)





ekm's picture

It was Nixon, not the Fed that got USA out of the gold exchange system. The Fed was ordered to monetize and the Fed obeyed.

It was the Congress that passed the Community Reinvestment Act in 1977. The Fed was ordered to monetize and the Fed obeyed.

It was Reagan who re-appointed Paul Volcker after he accepted to follow through with Reagan's order to kill inflation. The Fed was ordered to de-monetize and the Fed followed through. If Volcker did not accept, simple, Reagan would have chosen somebody who would accept.

The Fed is just a tool for politicians. They always act upon acts of congress or WH. Fed independence is inexistent, but the job of Fed chairman and Fed member carries extremely high academic status. That's the whole value of it. That's why Volcker who was chosen by Carter, wanted to re-appointed: ACADEMIC STATUS.


The Fed has only to options: Monetize and de-monetize. Anybody can do this job, the simplest job in the world. Monetize and demonetize, Monetize and demonetize, Monetize and demonetize, Monetize and demonetize, Monetize and demonetize, Monetize and demonetize, Monetize and demonetize, foreeeeeeeeeeeeever.


What's so difficult about it? Just follow orders and collect fees for speeches. Easy crap. Monetize or demonetize.



Hasn't anybody noticed that all Fed Chairman have been academics without any real life business experience? The reason: Easy to scare. Academics always shit in their pants. Thus, even praising Volcker is nonsense. He just followed orders. He switched overnight from Carter Democrat to Reagan Republican.

icanhasbailout's picture

A national bank is The One Ring to the Congressional Gollum, which in turn is enslaved by its adoration and devotion, joining the ranks of the faithless subjects of the Bank of Sauron and run on sentences everywhere.

YesWeKahn's picture

No, china was responsable for all the crisis USA ever had, the FED always saved USA afterwards.

LongSoupLine's picture

Is the Fed responsible?


Does the Pope shit in the woods?  Are bears Catholic?

q99x2's picture

They are guilty as fuck dude.