While we wait for this final All at Once 'revelation'. I figured I would write the eulogy for modern activist Monetary Policy. It's a sordid tale...
The Federal Reserve was created in 1913 specifically to pool banking reserves across private banks to ensure that bank runs would be contained. By pooling their overnight reserves, any one bank that was seeing large deposit outflows could borrow from the other banks until loan and deposit flow re-stabilized. Forestalling contagion.
Fast forward many decades, and within the past 15 years, the Fed has financed three massive asset bubbles in a row to the extreme detriment of the economy.
Gold standard disciples will say all of this would have been prevented had the U.S. never abandoned the gold standard in the first place. Rightly so. Unfettered monetary expansion is impossible under a gold standard. However, for those who still believe in 'activist' macroeconomic policy as a means to mitigate recessions, this essay will focus on the asinine mistakes and assumptions of the past few decades...
Under the current Globalized model, the corporate sector imports Third World deflation which the Fed monetizes and turns into *free* capital for speculation. Basically turning jobs and sweatshop labour into *free* money, if we all ignore the long-term consequences...
It gets worse.
Greenspan made his claim to fame in 1987 when he bailed out the crashed stock market and created what Wall Street referred to as the "Greenspan Put". Basically a floor under the market that would catch speculators in case they wiped out. It was the beginning of moral hazard for the Fed.
Fast forward to 1998, and the "Maestro" as he was then called on Wall Street, bailed out Long Term Capital Management, the Nobel Prize Winner-managed hedge fund that almost collapsed the global financial system using 1000x leverage. PhD geniuses had figured out how to make unlimited amounts of free money by conveniently assuming all risks are uncorrelated. Then along came the Asian Financial Crisis which culminated in the Russian debt default. LTCM was wiped out overnight, with ripple effects across the entire global banking system.
The first bubble: DotCom
It gets worse. Due to LTCM, in that period of the late 1990s, Greenspan cut interest rates massively to stabilize Wall Street, despite the growing DotCom boom and a late stage overheating economy. In other words instead of normalizing interest rates he was lowering them. This confluence of events - the widespread adoption of the internet, the advent of internet stock trading, the DotCom bubble, the tight labour market/overheating economy, were now all amplified by cheap money, leading to the blow off Nasdaq top into March 2000, followed by the inevitable extreme collapse.
The second bubble: subprime/housing
It gets worse. The collapse of the internet bubble coincided with 9/11, and those two events combined prompted the Fed to lower interest rates to 1%. To "help" the economy by pulling consumption forward from the future. This insanely cheap money had to go somewhere, so it went straight into real estate. And we all know what happened next. The Fed was a big proponent of "Financial innovation" and therefore fully endorsed subprime and adjustable rate mortgages. However, when homeowners started using their homes as ATM machines, the Fed raised interest rates 17 times in a row in quarter point increments from 1% to 5% in a year and a half. They instantly obliterated everyone who had taken an adjustable rate mortgage and/or subprime loan. Millions of families were financially wiped out.
All of that asinine chicanery led to the domino failure of various subprime lenders - Countrywide, New Century etc., Bear Stearns, Fannie/Freddy Federal mortgage guarantors, Merrill Lynch, AIG and of course Lehman. At which point the Fed/Treasury stepped in to save Wall Street from itself. Because at the height of this entire debacle, Goldman Sachs had figured out how to short subprime by inventing the 'synthetic' CDO which was a toxic time bomb derivative that allowed them to bet against the existence of their own clients who bought the 'product'. By artificially packaging the worst toxic mortgages into a 'mezzanined' debt structure, which Finance dunces assumed defrayed all risk, Goldman then took out insurance bets (sold by AIG), that the products would fail. After the inevitable systemic implosion they helped cause, Goldman then was bailed out 100 cents on the dollar by the Fed/Treasury i.e. taxpayers. It would be like Ford manufacturing fire prone Pintos circa 1975 and then taking out life insurance on the buyers.
The third bubble: the Wall Street bailout bubble
It gets worse. Clearly 1% had failed catastrophically. So Bernankenstein, dumbfuck 'student' of the Great Depression decided he had the answer to 1%, which of course was 0%. Because we all know that the solution for the misallocation of cheap capital is the misallocation of cheaper capital. Meanwhile the absolute and total obliteration of jobs post-2008 by the 8 millions, allowed the Fed to cut rates straight to zero. Unfortunately, Bernankenstein, Harvard roommate to Lloyd Blankfein, CEO of Goldman Sachs, seems to have forgotten that during the Depression, the debt was wiped out, allowing a clean slate to rebuild. Whereas in this era, the lenders were bailed out whereas borrowers were given yet more debt. There is literally no comparison between now and the Great Depression, whatsoever.
When 0% wasn't enough to revive the speculative "animal spirits", Bernankenstein and his fellow Central Banksters turned to Quantitative Easing. Which entails buying up government bonds which forces all investors further out on the risk curve. Those who own government bonds, now have to buy corporates. Those who own corporates buy junk. Those who own junk buy stocks. etc.
So now, we all sit on human history's largest ticking time bomb, wondering if 1% for 18 months could cause 2008, what does 0% for six years cause? In this cycle, the money largely flowed back into stocks, into stock buybacks, special dividends, *free* jobs automation projects, and into global hot money carry trades. All while the real economy was sold out the back door.
Six years into this ludicrous charade and we're still waiting for the economy to float back from China.
Fed funds rate and Fed balance sheet:
Just waiting for the last All At Once phase, while having zero safety net.