After singlehandedly creating the biggest asset bubble in history, where the global economy has avoided collapse (so far) thanks to some $20 trillion in Fed liquidity conduits, monetary stimulus and helicopter money (the Fed is now openly monetizing all the debt the Treasury issues in order to avoid collapse), we seems to have moved into the Onion (or is Babylon Bee) zone, because as the FT reports, senior Fed official are now calling for “tougher financial regulation to prevent the US central bank’s low interest-rate policies from giving rise to excessive risk-taking and asset bubbles in the markets.”
Yes, because it’s the regulators job to prevent what is the primary and according to many, only consequence of the Fed’s massive monetary generosity.
While there are countless metaphors one can use to simplify what is going on here, there best one is that this is identical to a serial arsonists demanding the fire brigade stop slacking and put out his fires, which are coming at an ever higher frequency.
The push, according to the FT, “reflects concerns that the Fed’s ultra-loose monetary policy for struggling families and businesses risks becoming a double-edge sword, encouraging behavior detrimental to economic recovery and creating pressure for additional bailouts” and also “highlights fears at the Fed that the financial system remains vulnerable to new shocks.” Well, duh. But as Howard Marks pointed out in his latest memo “by dramatically lifting the markets, the Fed may have caused some people to believe that it will always do so – that there’s a “Powell put” that can be counted on to keep things humming.”
Among those opining was Boston Fed president Eric Rosengren, who told the Financial Times that the Fed lacked sufficient tools to “stop firms and households” from taking on “excessive leverage” and called for a “rethink” on “financial stability” issues in the US.
“If you want to follow a monetary policy . . . that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time,” he said. “[Otherwise] you’re much more likely to get into a situation where the interest rates can be low for long but be counterproductive.”
Why thank you Eric, perhaps you should have chimed in oh… a few years ago when you and your Fed pals were injecting tens of billions of dollars daily into the market – not the economy as we explained earlier, and to do what – create the biggest asset bubble ever. The same bubble you are now warning about. So truly insightful.
Of course, in typical academic fashion, the Fed’s megabrains – most of whom have never worked one day in the private sector – decided to simply follow monetary theory (ignoring completely how it has destroyed Japan and Europe) and only after the catastrophic consequences of their actions are laid bare for all to see, do they decide that it may be time for a reassessment. Somehow we doubt that will prevent the angry, if metaphorical, mob from one day finally showing up in front of the Marriner Eccles building.
Yet while Rosengren is just a decade or so behind the curve, some of his colleagues remain as clueless as ever. Take San Fran’s Mary Daly, the first openly gay Fed president. As we reported earlier this week, she told reporters that she did not see much connection between loose monetary policy and financial risks. Which of course is false, because in the very next sentence she admitted that there is in fact an asset bubble benefiting a handful of Americans, but because the economy is now so reliant on the Fed, it simply can not afford to ease back on the pedal ever again.
“We should always watch for excess risk-taking, we should always watch for excess leverage,” she said. “But we shouldn’t regulate off the fear that could happen, and at the expense of so many millions of Americans who need the employment and the income and the access to the economy.”
We wonder, Mary, what will happen to the jobs of “so many millions of Americans” when the current bubble finally does burst resulting in an even more catastrophic destruction of the US economy. Or maybe Ms. Daly is simply hoping that by the time this happens, she will be long retired and the consequences of her idiocy will be someone else’s problem. We will see.
* * *
Although no big regulatory changes are expected in the near term, the debate over tougher financial regulation could gather pace if Democrat Joe Biden wins the White House in November, making the political environment more favorable towards action, according to the FT. The Nikkei-owned newspaper cites Michael Barr, the dean of public policy at the University of Michigan business school and a former US Treasury official under Barack Obama, said: “You want to make sure that you’re using all the tools you have on financial stability, so that you don’t put the Fed in the position of cutting off growth.”
Ironically, even as the FT writes that top Fed officials are seeking more regulation to prevent the consequences of their actions fro meterializing, the Fed’s own top “bubble watchdog”, Randy Quarles who is the vice-chair responsible for financial supervision, signalled that “he was comfortable with the central bank’s regulatory posture leading into the Covid crisis, reckoning that banks were healthy enough to survive the shock of the pandemic and support the US economy” according to the FT.
But what the FT did not mention is that Quarles also made a far more “shocking” admission, when he said that the Treasury market is now so large that the U.S. central bank may have to continue to be involved to keep it functioning properly.
Speaking at a virtual panel conversation on the future of central banking hosted by the Hoover Institute, Quarles said that “it may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, much larger than it was a decade ago and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.”
Translation: the Fed can never again step away and stop manipulating the bond market, which by extension and through the risk premium, is the market which defines every other market, including stocks, commodities, FX and so on.
The best comment, however, and by best we mean most idiotic, came from who else, but former PIMCO and Goldman banker, Neel Kashkari, who somehow became president of the Minneapolis Fed a few years ago, and who told the FT that stricter regulation was needed to stave off repeated market interventions by the central bank.
“I don’t know what the best policy solution is, but I know we can’t just keep doing what we’ve been doing,” he said. “As soon as there’s a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that’s crazy. And we need to take a hard look at that.”
While we have written a lot about Neel Kashkari, we will hand the microphone to one of our readers who email us the following succinct assessment of that quote:
This guy Kashkari is full of crap and the biggest clown of all of them. He could care less and does not believe a word of what he just said and will do nothing. He is just saying that to try and sound credible, prob wants Fed chair job too. Reality is he is the single biggest money pumper of anyone on the Fed.
But we’ll give Kashkari a few points for at least being honest and admitting the he has no idea what to do now that the Fed has put itself into a dead-end position where both the market and economy demand it continues to inject $120BN (at least) per month in perpetuity.
So for all those Fed officials “worried” about bubbles, here is DB’s Aleksandar Kocic explaining just how to reduce the risk of bubbles bursting:
In a debt driven economy, the art of central banking is a technology of decelerating breakdown. By raising and lowering the primary interest rates, a central bank pursues the task of minimizing the endemic risks of a crash by adjusting to an acceptable level the stress incurred by the interest rate. Jumpstarting the economy becomes synonymous with decreasing the risk of insolvency for the units that are in debt.
And there you have it: if you want to reduce the risk of asset bubbles, just end QE and hike rates. So which Fed staffer will be the first to float this particular idea?
Yeah, that’s what we thought.