This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble.
Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance. What in the world do they think they’re doing?
We know from our own everyday experience that people make choices. What’s more, these choices do not occur in isolation. There are a myriad of influences and constraints factoring into the countless choices people make as they go about their day.
One person drives their car to work. Another takes the train. While a third walks. These choices may be individual preferences. But they’re also subject to other factors – like proximity to work or the train station, the price of gas, the cost of parking, and much, much more.
Perhaps central planners can account for some of these influences and constraints. But not all of them. Not even half of them.
People also behave in seemingly unexpected and erratic ways. They make irrational decisions. They run on emotion and ego over logic and sound judgement. Some choose vanity over humility. Others will cut off the nose to spite the face.
How’s a bureaucrat in Washington or Sacramento supposed to account for all of these unknown and illogical contingencies?
When it comes to credit markets, the planners are especially effective at making an awful mess. Namely, when they stretch out the currency, and supply the big banks with cheap and plentiful credit, they reward undue risk. They paper over mistakes. They also compel financial markets and the overall economy to an ever more perilous state.
Hence, when the credit market breaks, and the planners’ plans don’t compute, collapse and destruction are the consequences. We’ll have more on this in just a moment – including an update on the latest Fed fabrication. But first, for purposes of improvement and edification, we offer the following cautionary tale of collapse and destruction…
Death of Tubby
The Tacoma Narrows Bridge was a suspension bridge that connected Tacoma and the Kitsap Peninsula, spanning the Tacoma Narrows strait of Washington’s Puget Sound. When it opened to traffic on July 1, 1940, the bridge included the third longest suspension span in the world. Regrettably, the bridge was doomed long before the first vehicle ever traversed across it.
The original bridge design – a conventional proposal – was scrapped in favor of something cheaper and innovative. Several years earlier two hotshot engineers, Leon Moisseiff and Frederick Lienhard, published what was thought to be the most important theoretical advancement in bridge engineering for at least a decade.
According to their novel theory of elastic distribution, the stiffness of the main cables would absorb up to one-half of the static wind pressure pushing a suspended structure laterally. Thus, the energy would then be transmitted to the anchorages and towers.
Using this theory, a set of eight-foot-deep plate girders was selected over the 25-foot-deep trusses initially proposed. These reduced girders formed a bridge deck that was flimsy and extremely wind sensitive. Moisseiff and Lienhard had underappreciated horizontal bending under static wind load.
As a result, the bridge’s center span would rise and fall several feet over short intervals under moderate wind conditions. Construction workers took to calling the bridge “Galloping Gertie.” Unfortunately, Gertie didn’t gallop for long.
On November 7, 1940, roughly four months after opening, wind induced aeroelastic flutter twisted and collapsed the Tacoma Narrows Bridge into the Puget Sound.
Leonard Coatsworth, a Tacoma News Tribune editor, was the last person to drive on the bridge:
“Around me I could hear concrete cracking. I started back to the car to get the dog, but was thrown before I could reach it. The car itself began to slide from side to side on the roadway. I decided the bridge was breaking up and my only hope was to get back to shore.
“On hands and knees most of the time, I crawled 500 yards or more to the towers… My breath was coming in gasps; my knees were raw and bleeding, my hands bruised and swollen from gripping the concrete curb… Towards the last, I risked rising to my feet and running a few yards at a time… Safely back at the toll plaza, I saw the bridge in its final collapse and saw my car plunge into the Narrows.”
Alas, Coatsworth’s cocker spaniel – Tubby – perished when Coatsworth’s car plunged into the Puget Sound. As an aside, the same stormy winds that collapsed Galloping Gertie went on to cause the Armistice Day Blizzard, four days later, that killed 145 people in the Midwest.
Only in the wake of great folly are officials willing to speak with real candor. Othmar Ammann, a leading bridge designer and member of the Federal Works Agency Commission that investigated the Tacoma Narrows Bridge collapse, wrote:
“The Tacoma Narrows bridge failure has given us invaluable information… It has shown [that] every new structure [that] projects into new fields of magnitude involves new problems for the solution of which neither theory nor practical experience furnish an adequate guide. It is then that we must rely largely on judgment and if, as a result, errors, or failures occur, we must accept them as a price for human progress.”
Indeed, the epic collapse and destruction of the Tacoma Narrows Bridge provided invaluable information. Civil and structural engineering students now learn to incorporate aerodynamics into their designs. In addition, wind-tunnel testing of designs is now mandatory.
No doubt, the design and construction of a suspension bridge is a complex engineering feat. Without the accumulated knowledge of successful and failed bridge designs, engineers would continue to rely largely on judgement. The commissioning of each new bridge would be highly suspect. Fortunately, past mistakes can be understood and mostly avoided going forward.
Final Collapse is Inexorable
Central bankers like to flatter their profession. They fancy themselves scientists and engineers. They aggregate data and display it on colorful charts and graphs. They devise theories as to how to make the graphs adjust in ways considered favorable. They overlay arrows on their charts. And sometimes, to add real scientific credibility, they even use footnotes.
The whole endeavor is absurd. The economy, remember, is a social system, not a physical system. What works well at one time may fail at another. And what fails at one time may succeed at another. What’s thought to be accumulated knowledge becomes, in effect, a liability.
When Alan Greenspan first executed the “Greenspan put” following the 1987 Black Monday crash, financial markets were well positioned for this centrally coordinated intervention. Interest rates, after peaking out in 1981, were still high. The yield on the 10-Year Treasury note was about 9 percent. There was plenty of room for borrowing costs to fall.
Yet, now, in a world with $17 trillion in negative yielding debt and asset prices – including U.S. Treasuries – bubbled up beyond comprehension, the Fed has fabricated a financial system that’s reliant on extreme central bank intervention to remain solvent.
Over the last two weeks the Fed has pumped hundreds of billions of dollars into the financial system through the overnight repo market. These repo operations are scheduled to continue every business day until October 10, with the option for them to continue longer. Our guess is that the Fed will continue until something cracks, which may be much sooner than expected…
Stormy winds are blowing across credit markets, twisting and bending them like the Tacoma Narrows Bridge. The Fed, despite its scientific fascia, is relying on judgement. Guided by gut, it’s doing all it knows how to do; create credit and inject it into financial system.
Greenspan got us into this mess...and there’s no dampening it. Final collapse is inexorable.