The Bubble in Central Banking

The Greenspan Fed was often held out as the peak in Central bank popularity. At the apex of the credit super-cycle, its easy to be well liked. Today, Central Banks around the globe are creating unimagined amounts of monetary pornography to deal with the post apocalyptic landscape. CB popularity has gone into a tailspin.

US Presidential candidates unite on Fed bashing and the Chairman's removal upon election. Anti-Fed rants from the bully pulpit are met with rousing audience applause. Easy money that puts the froth on personal wealth is cheered. The ugliness needed to mop up the disaster is vilified.

Our analysis of recent ECB actions and Fed statements is that CBs are exhibiting an extreme distrust of  markets. Thus, policy is directed at averting the natural order of prices, choosing winners and nominal-izing results. Amazingly, the universal Litmus test for judging this activist approach is the "market's reaction."  The flaw is obvious. If markets cannot be trusted to discover price equilibrium, then how can a contrived (some would say manipulated) result  be viewed as relevant feedback ? "Priced for perfection" is not a term of endearment.

The ECB finds itself in the worst position. Only market devastation brought officials to the table for serious discussion. Central Bank activity - near term successful - has only served to prolong a meaningful solution. The Fed has gone on a publicity tour but, like Lindsey Lohan, more time in the spotlight cannot repair the damage of over exposure. Shut up, go away and we'll remember you for The Parent Trap.

I don't know how or when the Bubble in Global Central banking ends. That's the trouble with bubbles. But do yourself a favor and look at the balance sheets of the FED, ECB, BOJ, BOE ,SNB and PBOC. (Jim Bianco can help you out, or the info is readily available). This does not end well.

One thought on “The Bubble in Central Banking

  1. Ivan

    I don’t see how this “ends” until everything is finally marked to market. I see at least two big obstacles to this. (1) There are too many places (Europe comes to mind, but still some places in the US) where greater powers than accounting policy refuse to let books reflect the realities of the market. (2) ‘Reality’ and ‘market’ still don’t belong in the same sentence. I’m not bashing the CBs for this second element; they’re only reacting to the mess created by their prior irrational exuberance (insert Alanis Morissette lyric here). However, it seems like the transparency roadshow is not really helping the Fed’s cause or that of other market participants. We now have a window that looks into a foggy room. Great.

    I don’t envy Mario or Ben’s job (and I think the latter has been performing with grace under pressure). However, I do believe independence of the monetary authority comes with additional responsibility. When potentially chaotic outcomes are visible in the feasible set for economic conditions, it is time to stop pleading political neutrality and take a position on fiscal policy. Balance sheet recessions don’t have a PR department, and elected officials can’t comprehend them, when they’re busy worried about what the rating agencies might think.

    I’m just glad you didn’t reference Freaky Friday.


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