'Just two generations ago governments in Britain, the US, and elsewhere engaged in widespread price-fixing, including of fuel, wages, and consumer goods. The abject failure of those policies was a painful lesson to learn, but the most important lesson of all will soon be delivered—interest rates, like other prices in a capitalist economy, should be set by the market rather than by central planning committees.''..Following the bursting of the late 1980s credit bubble, Greenspan inaugurated the loosest monetary policy for a generation, creating the dotcom bubble. When this burst in 2000, it was responded to with even lower interest rates, reaching 1 percent from 2003–04, generating the housing bubble. When this burst in 2007/8, the response was 0 percent interest rates, turning a $150 trillion global debt bubble as it was then—already the largest In history—into a $250 trillion global debt bubble.
When central banks set interest rates it fundamentally distorts the pricing mechanisms of credit markets, just like price setting in other parts of the economy. Friedrich von Hayek won the Nobel Prize in 1974 for articulating that interest rates, like other prices, should be set by the market rather than central planning committees. We are not surprised when the government setting the price of food in Venezuela leads to food shortages, so we should not be surprised that 0 percent interest rates leads to a shortage in yield for investors, leading to a $250 trillion global debt bubble.
..
A lot of attention has been paid to stock market and housing bubbles during this period, yet the bubble is in fact an aggregate asset bubble which has had a series of different instantiations. Young people cannot buy houses, P/E (price-to-earnings) ratios are at similar levels to 1929, but almost all assets have been inflated by artificially cheap credit in a series of waves corresponding to the waves of lower interest rates.
..
Just two generations ago governments in Britain, the US, and elsewhere engaged in widespread price-fixing, including of fuel, wages, and consumer goods. The abject failure of those policies was a painful lesson to learn, but the most important lesson of all will soon be delivered—interest rates, like other prices in a capitalist economy, should be set by the market rather than by central planning committees.'
- Max Rangeley,
As the Bubble Slowly Pops, the Economic Chain Reaction Is Now in Progress, August 18, 2020
'I coined “Moneyness of Risk Assets” in 2009 upon recognizing that Bernanke was targeting rising equities and corporate Credit markets as the primary mechanism for post-Bubble system reflation. Epic Moral Hazard was unleashed..''I would point to more than three decades of serial – and escalating - market interventions and bailouts – including Greenspan’s 1987 post-crash liquidity assurances; early ‘90’s aggressive rate cuts and yield curve manipulation; 1994 GSE quasi-central bank liquidity operations; the 1995 Mexican bailout; Greenspan’s pro-markets “asymmetric” policy responses; the ’98 LTCM bailout to safeguard global derivatives markets; Bernanke’s 2002 “helicopter money” and “government printing press” speeches; the Fed’s post-tech Bubble accommodation of rapid mortgage Credit growth as the primary system reflation mechanism – and the subsequent blatant disregard for mortgage finance and housing excesses; the post-Bubble $1 TN QE program, bailouts and various extraordinary crisis measures in 2008/09; the Bernanke Fed’s coercion of savers into the debt and equities markets; Draghi’s “whatever it takes” 2012 crisis response; Bernanke’s 2013 assurance that the Fed would “push back” against any market tightening of financial conditions (i.e. market corrections); the Bernanke and Yellen Feds’ decade-long aversion to policy normalization; the Powell Fed’s abrupt market instability-induced December 2018 abandonment of policy “normalization”; the September 2019 “insurance” rate cut and QE in the face of record stock prices and generally overheated securities markets.
“Moneyness of Credit” was an analytical focus of mine during the mortgage finance Bubble period. It was a historic Moral Hazard episode, with the government-sponsored enterprises, the Treasury and Federal Reserve all contributing to the perception that federal backing insured mortgage finance would remain safe and liquid (money-like) – irrespective of the risk profile of the underlying mortgages. The view that Washington would never allow a housing (or mortgage finance) bust was fundamental to egregious risk-taking and excess (in both the Real Economy and Financial Spheres).
I coined “Moneyness of Risk Assets” in 2009 upon recognizing that Bernanke was targeting rising equities and corporate Credit markets as the primary mechanism for post-Bubble system reflation. Epic Moral Hazard was unleashed. Markets accurately assumed the Fed had taken a giant leap with respect to market intervention and support – with the greater the degree of Bubble excess the more confident the marketplace became that the Fed wouldn’t risk pulling back.
In the realm of Moral Hazard, last autumn’s “insurance” monetary stimulus was a catastrophic policy blunder. Stress was building in leveraged speculation and within global derivatives markets – air was beginning to leak from the global financial Bubble. The Fed’s aggressive measures quashed the incipient market correction and stoked only greater speculative excess. This ensured the acute market fragility that contributed to March’s near-financial meltdown.
And the financial crisis spurred an unprecedented $3 TN expansion of Fed market liquidity. M2 money supply surged an unparalleled $2.9 TN in only six months, in an ongoing episode of historic Monetary Disorder. And when it comes to Moral Hazard, one cannot overstate the significance of the Fed’s giant leap to purchasing corporate bonds and even ETFs that hold junk bonds. With rates back to zero and the Fed now directly backstopping corporate Credit, “money” has flooded into perceived safe and liquid bond ETFs (in the face of the steepest economic downturn in decades). A debt issuance bonanza ensued.
Once more for posterity: “…The infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard.”
Rather than infrequent, Fed intervention has become incessant. Market “extremis” has turned commonplace. And any assertion that Fed policies have not materially exacerbated Moral Hazard completely lacks credibility. In fact, it’s foolish.
Friday afternoon from Bloomberg (Lu Wang):
“Bears Are Going Extinct in Stock Market’s $13 Trillion Rebound.” “Skeptics are a dying breed in American Equities.” “Going by the short positions of hedge funds, resistance to rising prices is the lowest in 16 years… At the start of August, the median S&P 500 stock had outstanding short interest equating to just 1.8% of market capitalization, the lowest level since at least 2004…” “At 26 times forecast earnings, the S&P 500 was trading at the highest multiple since the dot-com era.” “Consider the internet frenzy 20 years ago. Back then, large speculators, mostly hedge funds, were net short on S&P 500 futures in all but five weeks in 1998 and 1999. Those mostly losing bets were completely squeezed out in 2000. That’s when the crash came.” '
- Doug Noland,
Moral Hazard Quagmire, August 22, 2020
Context '..[the] industry receiv[ing] the most subsidies .. is the financial sector via money for nothing from central banks..' - '..BIS dissidents..'(Banking Reform) - '..my basic definition: A Bubble is a self-reinforcing but inevitably unsustainable inflation.''Reviewing the Fed's Q1 Z.1 report, I was thinking this is how things look as a system self-destructs. Q2 will be worse.'(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'(Story) – ‘..those BIS dissidents are muttering in the wings,’ 2018
(Nobel Prize Lecture) The Pretence of Knowledge - By Friedrich August von HayekThe Pretence of Knowledge - Economics and Moral CourageThe Pretense of Knowledge ('The educated class') - By Craig Pirrong'...the limits of knowledge...''..knowledge of individual actors in the economy .. often tacit (i.e., non-verbal) .. impossible for a central planning body to even acquire this knowledge..'Hayek Was Right, Keynes Was Not An Economist - '..Keynes ducks entirely the role of bank credit in inflating the money-quantity..'Four Hundred Years of Dynamic Efficiency - By Jesus Huerta de SotoEconomic Recessions, Banking Reform, and the Future of Capitalism - By Jesús Huerta de Soto'..the mainstream failure to recognize the dynamic elements of an economy..''..ancient poems, and biblical narratives that warn us about the abuse of power by those place in positions of authority and privilege.''..subjective knowledge treats knowledge as being tacit, private, subjective, and decentralized..''..credit booms tend to undermine productivity growth..'(Haptopraxeology) - '..We have lost three centuries as a result of ignoring our scholars!'(Praxeology) - '..Menger’s experience stressed subjective factors..'((Hapto)praxeology) - '..patterns of behavior or human action, such as money, the market, law, etc..'(Praxeology) - '..the basic individualism inherited by us from Erasmus and Montaigne, from Cicero to Tacitus, Pericles and Thucydides..'(Haptopraxeology) - '..humanism in economics..'(Praxeology) - '..the behaviorist and the experimentalists versus the praxeologists and the philosophers..'(Haptopraxeology) - '..Alfvén’s predictions .. cannot be ignored..' - '..the faculties necessary to perceive it.'(Haptopraxeology) - Twenty-year Follow-up of Kangaroo Mother [and Father] Care Versus Traditional Care - Hayek: The Sensory Order (Praxeology) - '..the widest range of human emotions..'