Former Goldmanite and current Minneapolis Fed president, Neel Kashkari, conducted another #AskNeel session on Twitter where the dovish FOMC voter (he was the only one to dissent to the Fed's rate hike decision earlier this year) received numerous questions. Among them was the following one from Zero Hedge:
#AskNeel— zerohedge (@zerohedge) November 29, 2017
You have admitted the Fed has a "third mandate" and are worried about financial instability. What do you look at to gauge "instability" and what is the biggest S&P drop the Fed will accept before intervening
Our job is not to protect investors. Tech bubble bursting didn't cause crisis - only mild recession. We don't see leverage building across the economy the way it did in housing run-up. If stocks correct - fine. Need to worry about what would trigger a real crisis. #AskNeel https://t.co/Wl7Pv1BX18— Neel Kashkari (@neelkashkari) November 29, 2017
The answer echoed a similar response from back in March, when he claimed that he doesn't "care about stock market fall itself. Care abt potential financial instability. Stock market drop unlikely to trigger crisis."
Needless to say, Kashkari's answer was token, superficial and condescending: while he is right that the tech bubble bursting didn't cause a crisis, the Fed's dramatic easing in response to the bursting of the tech bubble bursting lay the foundations for the housing and credit bubble; in other words, the Fed responded to one bubble by creating an even bigger bubble, and the bursting of that bubble in 2007/2008 did cause a crisis: the biggest financial crisis since the Great Depression to be precise. And, in turn, the bursting of the current global financial bubble - in which the Fed has been joined by all other central banks to inject $20 trillion in global liquidity, or a third of global GDP - and is the biggest in history, will have a far more disastrous outcome than the last one.
Kashkari also said that "we don't see leverage building across the economy the way it did in housing run-up", which of course is a surprisingly naive way of looking at leverage, especially following last night's explanation from Fasakanara that when one takes into account ehe world's vol-sellers, it's all just one giant, $22 trillion position shorting volatility with record gama and all-time high leverage, both explicit and synthetic. Which also makes his next statement that the Fed needs "to worry about what would trigger a real crisis" especially bizarre: we now live in a world in which the market itself, thanks to QE and NIRP, has become systemic risk (see ""It’s All One Single, Giant $22 Trillion Position": How Market Risk Became Systemic Risk").
The fact that, as Kashkari confirms, the Fed is completely oblivious to its footprint and impact in the market should be terrifying to anyone. Well, anyone but not traders because despite what Kashkari also claimed, namely that "If stocks correct - fine", one thing we can be certain of is that the moment stocks have a 5-10% swoon, the Fed will be right back assuring traders that it will ease back on its tightening, if not launch QE4 (right, James Bullard?)
Neel..I have respect for u but I know what I saw in August 2015..market dropped 7-8% and fed speak became “the case for tightening is less compelling”...— jim iuorio (@jimiuorio) November 29, 2017
But wait, it gets better, because in the very next question, immediately after stating that the Fed's job is not to protect investors, in response to a question whether the Fed creates moral hazard by keeping rates extra low, Kashkari answers that "If we raised interest rates to drive down the stock market, how does that help workers/wages/employment?" Or investors, for that matter. But the point is that the Fed quite clearly is intent on keeping stocks high.
The punchline: his very next statement: "If Greenspan had acted on his irrational exuberance call the economic costs may have been high."
We pay close attention to leverage across asset classes and economy. If we raised interest rates to drive down the stock market, how does that help workers/wages/employment? If Greenspan had acted on his irrational exuberance call the economic costs may have been high. #AskNeel https://t.co/hfDycYCXkg— Neel Kashkari (@neelkashkari) November 29, 2017
Here's a thought: if Greenspan had acted on his "irrational exuberance" call, there would have been pain, yes, but there would never be a tech bubble, and there would never be a global financial crisis, Lehman, AIG or trillions and trillions in central bank liquidity keeping the global financial system propped up now. In fact, Kashkari's statement once again demonstrates just how utterly clueless the "macroprudential regulators" at the Fed truly are.
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There were some other tangential, but notable insights from the Minneapolis Fed president. One was his accurate observation that the Fed's constantly wrong dot plots have destroyed the Fed's credibility:
I'm not a fan of the dot plot. Forward guidance is a wonderful tool. Forward misguidance may do harm and undermine our credibility. I would rather only give guidance when we are pretty sure about the path forward
In response to whether the Fed's ZIRP was responsible for "zombie companies" in the shale patch and the record glut of oil inventory, the former Goldmanite was non-commital:
I think low interest rates brought down costs for people and businesses to invest - across sectors. That is what they were designed to do. But commodity markets always have cycles of under and overinvestment.
When asked how US investors are supposed to compete with foreign buyers of US stocks, including such buyers as the Swiss National Bank which is price-indescriminate as it creates money out of thin air, Kashkari's response:
It is a global market for investors. I don't think US economic growth would be stronger if we forbade foreign investment. If we can get job and wage growth up, that will help regular Americans make ends meet and save for their futures.
That Kashkari explicitly ignored the stated implication, namely that foreign central banks buying US stocks has led to a giant asset bubble, was one more warning either how clueless or how devious and premeditated this entire asset reflation experiment truly is.
Kashkari was also asked if the Fed would "ever consider forgiving the Treasury debt on its books?" to which the answer- sadly for the Magic Money Treers who have no grasp of elementary finance - was "No. That would violate our independence and likely cause high inflation as people lost confidence in the Fed's independence."
Among the other interesting exchanges was a question if the Fed plans on using blockchain in the future, where the response was that "researches around the Fed System are looking at it (and other fintech developments). Too soon to know how and if it will be used by the Fed."
Kashkari also touched on inflation price targeting: when asked "What level of inflation would be a reason to 'tap the brakes'?" He responded that, as price targeting would suggest, "2% core PCE on a 12-month basis would be a good place to start. We've been 1.3% for 5+ years so we should be comfortable at 2.7% for 5+ years. That's what we are saying when we call it a target and not a ceiling." In other words, Kashkari supports doubling the rate of core inflation for the next 5 years.
Finally when asked "at what point does the flattening of the Treasury curve become a concern for the Fed?" Kashkari responded that "it's a concern now. We r raising rates, driving the front end up, meanwhile inflation expectations r low keeping the long end anchored. The more we commit to driving rates higher (regardless of data), the more we risk pressuring inflation expectations to the downside." He has good reason to be concerned: the flatter - and eventually inverted - the curve gets, the more the market is telling the Fed what should be obvious to everyone, if not Kashkari: that the Fed has lost control, as Citi warned last week.