Irrational Exuberance History Lesson
To understand what I would do, let’s review a history of what the Fed did.
In 1996 former Fed chairman Alan Greenspan delivered a speech on the burgeoning internet bubble in the stock market which he labeled “irrational exuberance“.
In 1999 he goosed the stock market by lowering interest rates in response to his absurd fear of Y2K global computer breakdown regarding date handling at the turn of the century.
US Banks made massive loans to worthless dotcom companies as well loans to Argentina and other countries that defaulted.
At the peak, just before the bubble bust, Fed minutes show Greenspan bought into the “productivity miracle” of technology and the internet reversing his call on irrational exuberance.
Dotcom Bust
To bail out the banks from the Doccom bust and bad South American loans, Greenspan slashed interest rates to zero and held then too low, too long at that rate.
The process spawned the housing bubble.
Housing Bubble Denial
Greenspan then Bernanke denied the brewing housing bubble.
Bernanke looked more than a bit foolish when the housing bubbled collapsed and homeowners walked away from their mortgages en masse starting the Great Recession.
When things did collapse, the Fed again bailed out the banks and zombie corporations.
Once again this reinforced moral hazard policies and more reckless behaviors.
Lessons Learned and Not Learned
The Fed never learned its lesson about the need to not blow bubbles.
But speculators learned the Fed likes to blow bubbles. And once again everyone seems to think they can get out of the way when the collapse comes.
They can’t and won’t because it is mathematically impossible. At the individual level a few people can cash out, but in aggregate, someone must hold every share of every company on the way up and down.
For every seller there is a buyer so escape in aggregate is impossible.
Let the Free Market Work
I would let the free market work. I would have let corporations go bankrupt in 2008 and 2001.
Of course, I would not have been manipulating interest rates in the first place that created the prior two bubbles.
The Fed frequently moans about income and wealth inequality, it is the largest contributor to both.
The Fed has proven to be no better than Russian central planners attempting to set the supply and price of steel.
2% Inflation Target
The Fed’s 2% inflation target is monetary insanity.
Full speed ahead with the stimulus in search of inflation that would be visible to anyone who was not wearing groupthink blinders.
I have a set of questions for Fed Chair Jerome Powell on inflation. Please read them: Hello Jerome Powell We Have Questions.
He would not recognize inflation if it jumped off the table and spit grapefruit juice in his eyes.
As discussed previously, Inflation is Poised to Soar, 3% by June is “Almost Certain”
Historical Perspective on CPI Deflations
A BIS study of deflations shows the Fed’s fear of deflation is foolish.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” concluded the study.
For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?
Japan has tried what the Fed is doing now for over a decade, with no results.
Yet, Powell hell bent on producing more than 2% inflation until the strategy “works”.
I discuss numerous ways Powell is on the Bank of Japan’s path in Is the Fed Blindly Following Failed Policies of the Bank of Japan?
My Course of Action
Micromanaging the economy is a proven failure. The global economy cannot be steered like a truck.
If I was appointed Fed chair, I would set a transition to free market interest rates including elimination of fractional reserve lending.
Going one step further, I would have a free market in currencies as well, confident the market would settle on gold as it has for thousands of years.
The result would be a 100% gold-backed dollar instead of a dollar backed by nothing.
I would then fire all the Fed members including myself.
Mish
All of it is because the fed has a massive conflict of interest. The private banking members have first priority over the people when it comes to money creation. They won’t “learn” because they already get it. Only Congress can fix it. The Fed chairs work with the incentives that are given to them. They can do a range of damage too. There’s been some interesting work arounds for the people since the pandemic but we’ll see where this banking nonsense goes. Prayer matters with all of this. Keep praying. Only god can truly fix this system through a small group of change agents.
We can dream
Well, if Mish gets elected Fed Chairman, I would want to be long gold on that day. But I’d still want to be long other tangible assets, too.
I wouldn’t want to be in cash or stocks, or bonds.
Maybe a good time to plant a really big garden.
Is there ever a bad time to by gold
So if the Fed, and all central banks for that matter, are willing to print ad infinitum, what pops the bubble?
Rising prices. Imagine there was one world currency and they kept printing more and more money and giving it away.
I have mixed feelings about a Gold backed currency. Although it is undoubtedly a sound monetary system, it is tantamount to fixing exchange rates. Governments have desired fixed exchange rates for years because they’re more stable in the short run but all attempts have failed so far. Longer term there’s no flexibility to adjust for surpluses and deficits. All eyes on the Euro to see how long it lasts.
I suspect a gold backed currency would cause more extreme cycles but I’m not sure.
BTC market cap is estimated at more than 10% of gold’s market cap. Don’t ignore the non-zero chance BTC is the new gold, in terms of people thinking it is an effective store and/or investment.
I will ignore BTC -:)
BTC v Gold
If every holder of physical Gold wanted to take it home they could.
If every BTC holder wanted to take it home? They couldn’t because they’d have to sell it to someone else so someone else would hold it, (whatever it is).
Wow.
I need my head examined. I once thought Mish had a clue.
The answer to what Mish would do if he were Fed Chairman is exactly what has been done by the last 3 Fed Chairmen. The reason being he would understand the US Dollar International Monetary and Financial System and how it operates. The fact that he doesn’t and he won’t be Fed Chairman makes it a moot point. Yet, it allows him to be a critic and blowhard. Much in the way he took the coward’s path and voted for someone other than Orange Man Bad and the Potted Plant.
I would be honest with the America people and tell them what the real purpose of the Fed is and stop all the BS about employment and inflation. I would tell all Americans who are the major shareholders in the Fed and why. Then maybe the public could decide whether or not they want a Fed and vote for people who’s platform would meet their ideas.
Be honest it’s a bit of old fashion idea.
In terms of a monetary system, few things are as honest as a the 100% gold-backed currency that Mish proposed.
I thought inflation was the problem
“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. ” Nixon shock speech
but then I suppose that was fixed a different way
Seems you define your response more by what you would not do, than what you would. So be it. Its very consistent with your general philosophy. I would diverge in one key metric, lender of last resort. Having read several key books on financial crisis including the great depression, panics of 1907 , 1893 and of course the East Indie crisis its abundantly clear we need such a function. The problem with letting companies go bankrupt during such a time is that suddenly in such a crisis everything is correlated, so if G.M. is failing suddenly no one will lend to Ford, and a problem with Bear Stearn causes everyone to stop lending to Lehman and JP Morgan. Lots of things that should have happened first to prevent such a crisis but that’s not always the nature of markets and we will have panics and meltdowns often precipitated by a Minsky moment.
As far as the the rest of the Fed’s responsibilities I think they’ve been tasked with far too much. They should simply be charged with being a lender of last resort and maintain zero inflation. It’s when they try to keep prices low, and then chase economic growth and of course be a bank regulator. It’s insane.
Although I’m only superficially versed in those prior crises such as the Great Depression, most of what I’ve read by academia refers to flawed policy responses to the bust, and totally ignores the years of ludicrously easy money that led to the instability in the first place.
link to amazon.com
Now’s your chance
Warren Buffet didn t mind lending to Bank of America amidst a full blown crisis….that’ s the way it should be in a capitalist environment we are all so fond of…
Not a bad response. I wouldn’t throw bank regulation out the window though. Indeed, I would keep bank regulation, and put any pain for a meltdown on member banks. That way they have a real incentive to regulate properly.
Well-stated Sechel, agreed on the US automaker issue. I was not in favor of so many bailouts, particularly the banks of all entities, but one exception or issue that was gag-worthy was the idea of letting the big three die out right then and there.
We’ll never know what would have happened if we swallowed the bitter medicine of allowing a depression to take hold.
Powell is the richest Fed chairman in history- he has more than $50 million dollars in his personal piggy bank. He could care less what the “little people” think.
And if he wants to steal the interest on middle class people’s hard earned money- and give it to his vulture cronies on Wall Street and to the “Too Big To Jail Banksters” that he serves- well he would just say : “Tough luck , sucker”
Powell has 50-60 million in his personal piggy bank. The richest Fed chairman in history, by far. He and his oligarch friends could care less what the “little people” think.
And if he steals the interest on everybody’s hard earned money, and gives it to his
vulture buddies on Wall Street and the Too Big Jail Banksters he serves- well he would just say “tough luck” sucker.
MISH, you’ve mentioned in the past you would eliminate duration mismatch. Borrowing money for 5 years and lending it out for 10 years leaves the lender vulnerable to runs on the bank. The lender has to keep rolling over short term debt with depositors until the borrower has repaid the 10 year loan.
By the way, I admire Napoleon.
Please elaborate/
I got 2 cents from Wells Fargo in interest last month. It is obvious to savers that interest is the price of money and obvious that Wells neither needs, or even wants my money. I assume that is because they can get all the newly printed stuff from the FED. What is scarce has more value (rare earth metals) than what is plentiful (money).
You should also add Long Term Capital Management which in 1998 was bailed out by a consortium backed by the FED. The fund when it failed almost took down the world’s financial system when Russia defaulted. The fund had two Nobel Prize laureates as principles. The scandal was not that it failed or that it even was bailed out but that the head of the fund, John Meriwether, was kept on with generous incentives to wind down the fund’s trading book and ended up making out quite nicely financially after having almost broke the world financial system. There was neither monetary nor penal sanctions. That was the number one lesson every trader and manager of highly-leveraged firms understood. If you can get big enough and have complicated positions your downside is limited. You have the Greenspan Put.
I agree with your assessment. The only thing I don’t think is possible is getting out of fractional reserve banking. Would be extremely painful. Much more so than companies going under in 2000 and 2008.
“Would be extremely painful. “
For the rich vulture capitalists, and the multi= millionaires in Congress, yes.
And they deserve it.
For everyone, including them. The entirety of all debt markets are based on it. Mortgages, credit cards, corporate credit, etc…any debt. Literally everything
There is no such thing as “non-fractional” reserve banking. Mish is proposing getting rid of banking altogether. He just doesn’t know it.
Yes? How do you create loans if you can’t lend a multiple of what you have on deposit? Without fraction reserve lending I can’t have access to my checking account while you utilize that same money for a mortgage right? What am I missing ?
The banks lend to each other in the inter bank market. So if you want to make a withdrawal your bank can borrow in the interbank market until someone else makes a deposit.
I’m not sure what we mean by getting rid of it. A bank can always borrow in the interbank market? Interest rates would rise if reserve requirements were more demanding because they’d all be scrambling for funds.
Mish that may be the solution to the problem but know body wants to be that guy. You know that guy who brought down the world economy. Think how hated you would be. So well keep playing musical chairs and see who is left when the music stops.
Ps since you are in utah now you should head down to moab before it gets hot. Can be real pretty this time of year with the red rocks/ plants are actually green and a dusting of snow here and there.
We will answer their demand for a gold standard by saying to them: ‘You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold’! ― William Jennings Bryan 1896
The economy would rise stronger through creative destruction.
Setting fed funds below the inflation rate should be illegal and a federal crime.
I worked hard and payed all my taxes on my saving.
Where does Powell get the authority to tax my saving ?
Its a mystery why the plebs haven’t revolted yet, there is such manifest theft going on right now.
Trump’s Chumps tried and failed… though they had no agenda except love for dear leader.