'..There was general acceptance that market speculation was posing an increasingly dangerous systemic risk. Yet faltering global growth and a weak pricing backdrop were viewed as the more pressing issues.
The longer it was left unchecked the more apprehensive central bankers were to pricking the Bubble. Moreover, virtually everyone was oblivious to the degree of fragility associated with protracted financial excess, fragility that was greatly exacerbated by a final speculative blow-off.'<blockquote>'A Federal Reserve that was created in 1913 to regulate Credit fatefully accommodated a historic Credit boom that became increasingly unwieldy in the latter years of the ‘20s. Over time, speculation and asset Bubbles were recognized as increasingly problematic. Yet there was a critical compounding problem: the ongoing downward pressure on commodities and consumer prices. Global financial and economic backdrops had become increasingly unstable and confusing. Competing interests, analytical frameworks and ideologies ensured policymaker impotence at the Federal Reserve. In the end, a historic Bubble was allowed to run unchecked.
Benjamin Strong, president of the New York Fed and the leading figure at the Fed, administered his famous stock market “coup de whiskey” in 1927. The results were spectacular. The Dow Jones Industrial Average more than doubled in 18 months. Yet Fed stimulus had little impact other than to significantly exacerbate the divergence between inflating asset prices and weakening fundamental prospects. Looking back, a rather obvious lesson went unlearned: No shots of whiskey, especially into a speculative backdrop. Market operators are today fully intoxicated by the latest Trillion dollar body shot.
Policymakers today struggle with a serious dilemma uncomfortably reminiscent of what manifested during the late-twenties: How to administer monetary policy in a backdrop with some downward pressure on some prices (as opposed to the general price level in the late-20s) yet intensifying speculative excess propelling a securities market Bubble. Similar to today, policymakers were confounded by a complex interplay of Credit, speculative and economic dynamics. There was general acceptance that market speculation was posing an increasingly dangerous systemic risk. Yet faltering global growth and a weak pricing backdrop were viewed as the more pressing issues.
The longer it was left unchecked the more apprehensive central bankers were to pricking the Bubble. Moreover, virtually everyone was oblivious to the degree of fragility associated with protracted financial excess, fragility that was greatly exacerbated by a final speculative blow-off.
..
Today’s conventional economic thinking (“inflationism”) believes that so-called “insufficient demand” can be rectified by monetary policy. Yet the additional late-cycle “money” printing gravitates predominantly to inflating securities markets. At the corporate level, various forms of financial engineering are employed with the objective of supporting higher stock prices. On the one hand, little of the liquidity makes its way to the type of sound investment necessary to support sustainable wealth creation. On the other hand, that much of the population fails to benefit from monetary inflation becomes an important facet of late-cycle economic stagnation.
A globalized boom, as has been the case over the past couple decades, adds another important dynamic. Loose “money” and Credit globally ensure ongoing investment boom distortions in the more manufacturing-based economies (China and Asia, in particular). This helps explain – today, as it did in the late-twenties - some of the downward price pressure on manufacturing goods in the face of abundant system Credit and marketplace liquidity. To be sure, prolonged Credit and speculative booms progressively raise of the risk of devastating busts. And a policy course focused on “money” printing and reflation to combat perceived deflation risks only more precarious Bubbles and economic maladjustment.
The Fed plans to use “forward guidance” to hold down long-term interest rates as it winds down QE. Perhaps such talk will exert some impact on Treasury bond prices. I doubt when they were formulating this strategy the Fed anticipated a stock market melt-up scenario. An increasingly unstable equities market Bubble will require ongoing real liquidity buying power beyond assurances of low rates. That’s the nature of speculative Bubbles.'
- Doug Noland,
Pertinent Bubble Insights from the Roaring Twenties, November 29, 2013</blockquote>
Context<blockquote>
(Global) - '..how monetary policymakers somehow remained oblivious to the havoc they were instrumental in fomenting.'(Banking Reform) - 'Ten Real Problems, Fractional Reserve Lending..'Affectivity, Action, Electricity - ‘Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?’