He called our piece “complete silliness” and then attempted to deconstruct our logic with this silliness:
- Does the Fed know the difference between an asset bubble and my mom’s tuna casserole?
- Does the Fed know the difference between an asset bubble and a moon of Jupiter?
- Does the Fed care about asset bubbles even if it could detect them?
As chuckle-worthy as that was, and as tempting as it is to believe that the Fed is run by dummies — we simply can’t allow ourselves to settle for such a simplistic explanation.
Mish says they can’t see bubbles
Mish’s position is that the Fed does what the Fed does because the Fed is “dumb” and incapable of seeing bubbles. They are, one must infer from Mish, mentally incapable of perceiving that which so many of the rest of us perceive. Bernanke didn’t publicly predict the crash, ergo Bernanke must be too stupid to see crashes coming. Or something like that.
Likewise, Mish says Yellen too is “clueless” and doesn’t understand bubbles.
“I propose Yellen is clueless. If she had any sense, she would have acted in advance to prevent an asset bubble or at least stall the one Bernanke had started.”
Yeah well. We’re not buying it.
Short-termist, yes. Blind, no.
The Fed is a distinctly political entity despite protestations to the contrary and repeated claims of “independence”. They are also (as we all know) strongly influenced by Wall Street. Those two despicable influences create obvious internal conflicts and raise an unholy mandate for painfully cautious policy language and highly-processed public statements.
When we see the results of the Fed’s policy diverge from it’s supposed mandate, it would be too easy to assume that they are “stupid”. A more astute observation would be to note that the priorities of their mandate may not be what we think they are. And that the Fed has a wide series of non-public agenda items which supersede their public mandate. Should that be the case? No. But it is.
In fact — we know this to be true and the evidence abounds.
Bubbles are intentional creations
Despite what we all know about the destructive nature of bubbles, one cannot escape the flipside reality: That bubbles stave off the effects of the previous collapse. That the bubble-creation game cannot be played in perpetuity is obvious. But that does not change the intentional nature of their creation in these past cycles.
To put it bluntly: Where Mish sees stupidity, we see intent.
The Fed is in the business of preserving the unfettered hand of the banking system. Through policies which masquerade under the banner of “stability” The Fed ensures (they hope) that no matter how destructive or irresponsible the banking system may be, the underlying structures which enable it will endure. Comparatively little concern is given to what the long-term impact of the required policy responses may be.
And we know exactly what those policies look like, because we are continuously subject to their destructive power.
The only time the Fed engages in anything remotely resembling “regulation” is when the system threatens to destroy itself.
But this time really is different. The underlying structures themselves might not endure. The problem with short-termism is the long-term. And we’re there.
The ponzi “singularity”
Just yesterday, as we noted in our piece on Bernie Madoff we said the following:
“The problem of not dismantling a ponzi scheme ultimately becomes as impossible as the problem of dismantling it. Given enough time, neither option is an option at all: To taper is to implode it, but to allow it to reach critical-mass is also to implode it. Both paths converge at the same point. “Extend and pretend” is simply a longer route to the same dismal result.”
The ponzi scheme of the US economy is now approaching that singularity: The point where both paths will clearly meet and terminate.
The Fed knows this.
Without a controlled collapse there will and must be an uncontrolled collapse. And they also know that this time will be exponentially more damaging because the last collapse was staved off with a degree of leverage which cannot be replicated.
The second to last thing in the world that the Fed wants to do is initiate a controlled collapse.
The last thing in the world that the Fed wants is an uncontrolled collapse.
The “central bank’s central bank” clearly suggested a policy response of intentionally bringing forward the downward leg of the cycle, and starting that journey sooner than later.
That initiating a downward trend in the markets and the economy at-large is an openly discussed (and recommended) policy response at this time is not open for discussion. It’s in print.
That’s our evidence. Where’s Mish’s again?
We’re not sure where Mish’s assessment of “complete silliness” comes from, but it certainly doesn’t come from evidence.
His explanation for the past few bubbles seems to that he can see bubbles — but Fed board members can’t. Or something. If only the world were that simple.