Select Page

Mauldin: The Fed Is Creating A Monster Bubble

Mauldin: The Fed Is Creating A Monster Bubble

Authored by John Mauldin via MauldinEconomics.com,

Ignoring problems rarely solves them. You need to deal with them – not just the effects, but the underlying causes, or else they usually get worse.

In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.

Central bankers are the ones to blame. In a sense, they are far more powerful and dangerous than the elected ones.

Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.

Fixing Their Own Mistakes

Central banks weren’t always as responsibly irresponsible.

Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.

The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis.

Paul Volcker’s recent passing (RIP) reminds us of perhaps the Fed’s finest hour, stamping out the inflation that threatened the livelihood of millions. However, Volcker had to do that only because of past mistakes.

History’s Loosest Monetary Policy

Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc.

Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system. And with the system completely aflame, we asked the arsonist to put out the fire.

Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future.

This wasn’t a “beautiful deleveraging” as you call it. It was the ugly creation of bubbles and misallocation of capital. The Fed shouldn’t have blown these bubbles in the first place.

On the Way to Crisis

The simple conceit that 12 men and women sitting around the table can decide the most important price in the world (short-term interest rates) better than the market itself is beginning to wear thin.

Keeping rates too low for too long in the current cycle brought massive capital misallocation. It resulted in the financialization of a significant part of the business world, in the US and elsewhere.

The rules now reward management, not for generating revenue, but to drive up the price of the share price, thus making their options and stock grants more valuable.

Coordinated monetary policy is the problem, not the solution. And while I have little hope for change in that regard, I have no hope that monetary policy will rescue us from the next crisis.

Let me amplify that last line: Not only is there no hope monetary policy will save us from the next crisis, it will help cause the next crisis. The process has already begun.

*  *  *

I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.


Tyler Durden

Fri, 01/03/2020 – 14:16


This post has been republished with permission from a publicly-available RSS feed found on Zero Hedge. The views expressed by the original author(s) do not necessarily reflect the opinions or views of The Libertarian Hub, its owners or administrators. Any images included in the original article belong to and are the sole responsibility of the original author/website. The Libertarian Hub makes no claims of ownership of any imported photos/images and shall not be held liable for any unintended copyright infringement. Submit a DCMA takedown request.

-> Click Here to Read the Original Article <-

About The Author

Tyler Durden

Zero Hedge's mission is to widen the scope of financial, economic and political information available to the professional investing public, to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become, to liberate oppressed knowledge, to provide analysis uninhibited by political constraint and to facilitate information's unending quest for freedom. Visit https://www.zerohedge.com

Leave a reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Welcome

Bringing together a variety of news and information from some of today’s most important libertarian thought leaders. All feeds are checked and refreshed every hour and pages auto-refresh every 15 minutes. External images are deleted after 30 days.

Time since last refresh: 0 second

Publish Your Own Article

Follow The Libertarian Hub

 

Support Our Work

Support the Libertarian Hub by tipping with Bitcoin!

Send BTC:
19PU2K7448gKxAvisR5cF6X5RquYfWu5vZ

Weekly Newsletter

Newsletter Signup

Subscribe to our newsletter to receive a weekly email report of the top five most popular articles on the Libertarian Hub!

Weekly Newsletter SignupTop 5 Stories of the Week

Subscribe to our newsletter to receive a weekly email report of the top five most popular articles on the Libertarian Hub!