Guest Post: Psychoanalyzing The Fed

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Psychoanalyzing The Fed

Few of the many analyses on Federal Reserve policy consider the psychology of diminishing political and financial returns of Fed promises.

Rather than regurgitate the usual economic analysis of the Fed's policies, let's hazard a psychoanalysis of the Fed. Given the primacy of psychological factors in human behavior, it is astonishing how little attention is paid to the psychology of the Fed's statements and policies.

Zero Hedge offered just such a psychological insight (with a deliciously Freudian twist) with this question: Does the Fed need to re-instill some discipline in order to regain its omnipotence? Why (For The Fed) It Is All In The Foreplay

Exactly. Subservience is a slippery slope, and if the Fed "caves in" to market demands for a massive QE campaign, then where is the Fed's vaunted autonomy? It's gone. So what happens in a few months when the market is once again in danger of rolling over? Will the Fed cave in again and issue more QE? If it doesn't, the market reaction will be violently negative, and the Fed will get blamed for the catastrophic decline.

You see the positive feedback loop of Fed subservience: the longer the Fed puts off regaining autonomy, the more disruptive their refusal to obey the market will be.

The more they appear to meekly comply to the demands of the market, the greater the pressure will be on them to continue giving the market what it now needs to continue rising: QE.

The only psychologically wise choice is to nip Fed subservience to the market in the bud before it becomes even more destabilizing.

ZH's reference to Fed omnipotence raises a critical question: what happens to the Fed's power to manage market behavior with mere words if they launch QE3 and it fails to move the market? Jawboning, promises and threats are the primary tools of "perception management," and Bernanke has masterfully manipulated perceptions with promises of future QE "should the need arise" for the past 15 months.

If he unleashes a tsunami of "free money" (QE3) and the market spikes up and promptly rolls over into a decline, then his power will be destroyed in three ways:

1. The promise/threat of more QE has been eviscerated; jawboning has lost its power and will only make the Fed chairman look silly and irrelevant.

2. QE itself will be revealed as the victim of diminishing returns: everyone will understand that QE4 will be a failure.

3. The Fed's omnipotence will be revealed as illusory.

Imagine the addictive rush of being globally relevant. Now imagine losing that power. The Fed only remains relevant, domestically and globally, as long as QE and its other "unconventional" (and now utterly conventional) policies exert a powerful magic on the market and economy. If these policies are perceived as failures, the Fed's relevance vanishes--along with the addictive rush experienced by its leaders.

The Fed has foolishly backed itself into a corner. In essence, what Chairman Bernanke and the other easy-money "doves" on the Board have said is this: "We have the power to move the market and economy. We will use this immense power when we feel the need to."

Now the stock market is calling their bluff: "Oh, so you have this great power, huh? Well, you better use it right now, or I'm going to throw a fit and collapse!"

By constantly talking up the success and power of his policies, Bernanke has backed the Fed into a corner: either it proves its power is as potent as it has constantly promised, or the power of the promises will fade.

Bernanke has also backed the Fed into a corner by essentially promising that the Fed can bail out the market and the economy while gridlocked Washington burns trillions. What Bernanke has said: "Our policies have worked, and will continue to work magic."

What he should have said: "We have done all we can. The Fed cannot solve fiscal problems or structural problems in the economy. That is up to the President and Congress, the elected leaders of the nation."

Having foolishly made grandiose claims of supernatural powers, Bernanke now has to deliver on those grandiose claims or be stripped of power.

Some have suggested that Bernanke is frustrated by Washington's gridlock and inaction on the "fiscal cliff," but he himself has played the enabler of Washington's denial and addiction to borrowed trillions.

If Bernanke shoots his QE wad here with the stock market at multi-year highs, what will he do for an encore when the market falters? Once again Bernanke has created a positive feedback loop: the more QE he pushes into the market at its highs, the more vulnerable the market is to steep declines when the QE runs out.

If he promises a steady drip of QE cocaine, what happens when the market declines anyway? Announcing any QE at market tops leaves fewer "surprises" available at market bottoms. Bernanke will have expended his high-power ammo and be facing the rampaging Bear with a dull Swiss Army knife he picked up in Davos.

Is Bernanke a stud or a wimp? Most of us never get close to the sort of power Bernanke wields, and so we must explore the psychology of those who revel in power, regardless of their public persona of calm modesty.

People with power want to retain their power. Having backed himself into the corner in two ways, Bernanke is extremely vulnerable politically. If he launches a massive, sustained QE, he will rightly be perceived as acting solely to get President Obama re-elected. (Wouldn't the Democrats accuse him of that were the sitting president Republican? Of course they would, loudly and vehemently.)

If he launches QE and the market declines because QE has already been priced in, he will be perceived as a failed Fed chair and will eventually be asked to step down, i.e. fired. That's not the legacy he desires, but he has backed himself into a corner: having over-promised, he can only under-deliver.

Does Ben Bernanke want to be perceived as a wimp who caves into the market's every demand? Once again, he has backed himself into a corner by touting the stock market's rise as evidence that his policies have succeeded. Having tied his policies to the market, he now faces the possibility that a market decline will be rightly viewed as a failure of his policies and leadership.

Having taken credit for the market's spectacular rise, he will now be held responsible for its decline. Bernanke has made all the classic errors of the grandiose ego: over-claiming credit and over-promising on the effectiveness of his "magic."

Admitting the Fed is not all-powerful would have diminished his perceived power, but it would have increased his real power because he would be viewed as a truth-teller. But in claiming a magic and power he does not have, he has set up the classic pitfall of promising what cannot be delivered.

Diminishing returns and unrealistic expectations make a volatile pairing. Having raised expectations to the stratosphere even as the real-world returns on his policies have been diminishing, Bernanke now faces an explosive gap between what he has promised and what can actually be delivered.

There is one last irony in Bernanke's constant promotion of his powers to unleash QE. Having talked up the market for years with his promises/threats of QE, the market has priced in ever higher doses of QE, in effect bidding expectations of QE's effectiveness to the sky.

Bernanke has lost the power to surprise the market. Having raised expectations to the sky, he must deliver something beyond the stratosphere to surprise the market. But he doesn't have anything capable of matching the absurd expectations he's inflated, never mind exceed them.

The only surprise left is a negative one. Chairman Bernanke and his fellow doves will soon realize the consequences of over-promising and under-delivering. It works better the other way around, but now it's too late.

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HelluvaEngineer's picture

Right.  Please short now.  Drive the market up even higher as you cover.

LMAOLORI's picture



Bernanke's a Fabian Socialist but I digress same thing I guess as an ass clown.  Santelli already exposed the ass clowns psychology.   You are right Charles Hugh Smith it's too late.

Santelli Exposes The Political Fed Behind The Curtain As Romney Makes Bernanke A Target

Rising Market Means Obama Wins


optimator's picture

They'll sell the market before the election, make a bunch of bucks, and put Natan Yahoo's buddy Mitt in office.  Good planning so far.

Assetman's picture

Engineer... your comment actually got a nice chuckle out of me.... thanks!

fonzannoon's picture

Enough with the psychoanalysis. It's over. Showed his hand today. It's inflate or bust.

HelluvaEngineer's picture

Correct.  Get what you and your family need.  Now.

crusty curmudgeon's picture

To all those who keep saying, "I ought to buy gold/silver" but haven't got around to it (and I know there are LOTS of you out there), I suggest you consider HEs advice.  Oh, I know, you're waiting for the price to drop one last time, or for you to pay off your car, or for your wife's sister's brother to show you his collection of silver dollars....blah, blah, blah. 

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. —P.J. O'Rourke

IndicaTive's picture

Guilty...sort of. I'm in the "haven't bought enough" crowd. I can only afford a couple hundred bucks at a time.

crusty curmudgeon's picture

You are definitely not guilty of being in the group I was aiming at.  I never feel I've bought enough.  You remind me of a quote...

“The fundamental cause of trouble in the world today is that the stupid are cocksure while the intelligent are full of doubt.”  Bertrand Russell

IndicaTive's picture

Thanks Crusty, and excellent quote.

mbarido's picture


Where are all those doubtful worldly people?

20-20 Hindsight's picture

I confess that I'm one of those worry warts, Crusty.  I fear that I may have missed the gravy train.  Gold has skyrocketed in the past ten years and reached unpredecented heights.  For a neophyte such as myself, this is scary, as it is counter-intuitive to the maxim "Buy low, sell high."  

Why is gold different in this case?  Is there not a high risk that gold could come crashing down, as it did in 1980, when an ounce of gold reached $850 at its apex, only to spiral down and stay low for the next twenty years.  If I'm not mistaten, gold was only selling at about $270 approx. ten year ago.  

If we apply the same potential negative scenario, this could mean that the current value of gold at approx. $1770 today could potentially hit a wall and tumble down quickly, like it did in 1980.  I just have difficulty trusting all those rich "one percenters", who might decide to pull the rug from under our feet overnight and leave small investors such as myself left holding the bag... again.  I'd be interested in getting your views (or anyone else's for that matter)...  

crusty curmudgeon's picture

First, pay no attention to where gold was.  You can't figure out where gold will be based on where it was.  That's true with gold and it's true with stocks.  To all you technical chart analysts:  you're frauds, whether you realize it or not.  You can make all kinds of fancy names (head and shoulders, giant dildo, I don't care...) and you can draw all kinds of silly lines and convergence/divergence patterns, but in the end, my friggin' astrologist, who can't seem to pick lottery ticket numbers to save her life but I'm sure is otherwise extremely brilliant and prescient, can pick stocks better.  I wish I had a nickel for every poor soul who was convinced gold was in a bubble because it was $650...or $800...or $1000...  I am not joking--I've had conversations with people at these price points...all of whom wanted to buy gold but decided it had gone up too much.  IT DOESN'T MATTER WHERE IT'S BEEN!  Stop crying over spilled milk--it detracts from one's ability to think rationally.

What does matter is whether gold is in a bubble.  What do bubbles look like, historically?  What evidence is there of gold being in a bubble?  You have to decide these things for yourself.

Second, what premises do you believe in?  Why do you think gold might be a good value right now?  Why would it drop?  If it drops, how far is it likely to drop and for how long?  If non-market interferences are suppressing or supporting the price of gold, are they temporary or permanent?

Finally, why do you want to invest in gold?  How long will you hold it? 

As I said a few days ago (after a spike in the price of silver), there are three truths today:  (1) it is a good day to buy silver & gold.  (2) it would've been better to buy yesterday.  (3) it's a great day to buy silver and gold.

If you decide gold is a good investment, do not worry if the price goes down--look at it as a buying opportunity.  When you see the price crash, resist being bummed and instead get excited and take action--buy!!  Don't say, "this would be a good time to buy."  Buy!!

Oh, and I strongly recommend the "Alpha Strategy" (

Sorry for the long post.  Cheers!

“Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.” — Douglas Adams


20-20 Hindsight's picture

Thanks, Crusty, your logic is impeccable.  One thing is certain right now: my investments have been doing crap for the past five years, so I'm looking at a potential golden opportunity right now.  Time to take a leap of faith, I think...

20-20 Hindsight's picture

Thanks, Crusty, your logic is impeccable.  One thing is certain right now: my investments have been doing crap for the past five years, so I'm looking at a potential golden opportunity right now.  Time to take a leap of faith, I think...

crusty curmudgeon's picture

Thanks for the kind words.  I re-read my post and it sounds a bit preachy.  Sorry.

Good luck!

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. . . .  This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”  Alan Greenspan

grid-b-gone's picture

This will still take a couple years to play out, given that other major world fiat currencies are in even worse shape.

Today's Fed move sends the unfortunate signal, "Yes, I am a one-trick pony."

This guy makes a good case for PMs, but is obviously talking his book after betting big on silver seven years ago. The later segments get repetitive, but segment nine, a history of when things have gotten bad, is telling.

Like the S&P that historically bottoms at P/E = 4, it is a reasonable argument that precious metals will revisit their historical relative value during a reset.

Sadly, Bernanke could avoid much economic pain by moderating deleveraging instead of trying to avoid it. Today's move is evidence that will not happen.

Bernanke's pseudo-Keynesian mantra is, "Two steps forward, one step forward."

Hype Alert's picture

I guess now that we are on open ended QE it will be up to Draghi to jerk the markets around.

grid-b-gone's picture

I think it's even simpler than that. His current boss has indicated he'll keep him on. The contender favors a somewhat stronger dollar  to maintain it as the world's reserve currency. He's also signalled a possible Fed head change.

Bernanke is in the strange position of being able to use OPM to help ensure he keeps his job. 

Until today, the Fed would always defer significant changes until after an election. We used to get the blandest Fed statements during the months leading up to an election. Now we get a significant policy announcement. 

The Fed just went the way of the Supreme Court today - not really caring if its bias is apparent.

Snakeeyes's picture

It is easy. Bernanke is the Cookie Monster and loves to dispense sugar cookies to investors in stocks. No nutritional value to the economy, but this is an election year.

mewenz's picture

feel lucky you have lived in the period where economics truly became a science.  All it took was the removal of market based pricing and of the silly notion that time has value.

In it's place we have finally learned, that prices are best set by a well educated man with a beard and a former investment banker

odatruf's picture

mewenz - you are missing the subtle nuance. Time does indeed have value; too bad for those who are used to the old normal that its value is negative.


Robot Traders Mom's picture

I don't think you can "psychoanalyze" a psychopath...

Colonel Klink's picture

Very close RTM, the correct term is sociopath.

lolmao500's picture

Or you know, he could shot himself.

NotApplicable's picture

I'm sure all of those puppet strings would get in his way.

Timmay's picture

There is no need to "surprise" the markets any more, he just bought them. "There are no markets anymore, only interventions".

LongSoupLine's picture

Here's the simple analysis...

Absolute power.
Mandate to serve big banks.
Congressional backing.

The only solution is his forceful removal by those not in power.

roadsnbridges's picture

I'm going all in at VXX at 2.  Fuk it.

Ineverslice's picture

W h a t e v e r .

Milton Waddams's picture

If you accept that QE is essentially a program to push asset prices higher and if one takes Bernanke at his word that the Fed will only cease QE when the labor market improves; it seems the interests of the rentier class are best served by holding back hiring as much as possible.

AvenoSativo's picture

If Bernanke shoots his QE wad here with the stock market at multi-year highs, what will he do for an encore when the market falters?


There is a phenomenon called "post orgasmic depression (POD)". Don't know, though, when the after-glow ends and the POD starts.

odatruf's picture

We are all POD people, now.

optimator's picture

Use his other passport to get away!

Everybodys All American's picture

There is only one answer. End the Fed.

falak pema's picture

there is only one question : who will bell that cat?

roadsnbridges's picture

Go HL!  Holy Moley!

hannah's picture

first off, the fed is the market and second ,if the fed stops qe then the whole stinking pile collapses to what choice does the fed have...none. what is the point of this story...? the fed cant regain control of something it never had control of.....

HaroldWang's picture

I disagree. They're in this with MBS purchases. There are plenty of other tools/bullets for them to use if/when needed. Not that I agree with it but they can do many other things.

hannah's picture

name a tool other than printing....that is all they can do. period.

DaveyJones's picture

psychoanalyzing the Fed requires a mental health professional with significant experience in the criminal justice system 

max2205's picture

I just love the reason he gave for keeping our grandparents from getting any interest....this guy needs prison time

Colonel Klink's picture

It's extremely difficult to psychoanalyze sociopaths!

Since many are PM holders, they say not to look a gift horse in the mouth, however it's difficult not to when you wonder why he breath smells like shit.

Traianus Augustus's picture

The Fed has proven that it never has to give a negative surprise.  The gift to all central bankers is to continue to let them provide fiat currency regardless of the depreciating value.  They continue to hold all the cards and will never voluntarily give up that power.  No further analysis needed.

nick howdy's picture

I wonder what those bank$ters will invest in with all that fresh fiat.....

Thank God food and energy isn't counted as inflationary or else we'd all be in trouble..

I cant wait to pay for my first $9.00 gallon of gas..




dark pools of soros's picture

by law they can only change the price once in 24 hours.... so i bet they will be the cheapest by end of Benny's coming out party today