Central bankers out of their depth

With the market hitting record highs even as the US runs up huge deficits, officials around the world are embracing the very Fed policies hurtling us toward financial ruin.

By Bill_Fleckenstein May 10, 2013 5:45PM

Federal Reserve Building © Hisham Ibrahim/CorbisPaul Singer, the founder and CEO of the extraordinarily successful Elliott Management, recently wrote an essay ("The Fed, Lost in the Wilderness") that was the most succinct and accurate discussion I have seen of where we are, how we got here and where we are headed.


Regular readers will not be surprised (given that I wrote the book "Greenspan's Bubbles: the Age of Ignorance at the Federal Reserve") that the first point I appreciate about the essay is that Singer lays the blame where it belongs -- something a surprisingly small number of people are able (or willing) to do.


"The Fed is primarily responsible for (the current) state of affairs, and it is out of its depth," Singer writes. "Former Chairman (Alan) Greenspan created -- and reveled in -- a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard."


By embracing, rather than discouraging, his "maestro" mystique, Greenspan helped foster the sense that not only was he able to keep the economy "just right," but also that he could quickly correct any problems that might arise.


Jerk of all trades, maestro of none 

As Singer puts it, Greenspan "cultivated an ever-increasing (but unjustified) faith in the Fed's apparent ability to fine-tune the American (and, by extension, the world's) economy. Ironically, this development was occurring at the very time financial innovations and leverage were making the system more brittle and less safe."


In short, the Greenspan era represents the greatest failure of Fed policy this country has ever experienced. Not only did Greenspan fail to grasp the consequences of his leadership, but his "solutions" also laid the groundwork for the bigger problems of the housing/credit crisis. If not for his incompetence, none of the problems he created would have befallen us.


If Greenspan's tenure is marked by hubris, current Fed Chairman Ben Bernanke's tenure is (in Singer's view), "one of lower and lower discipline (and) less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin. . . . Speculators win, savers are destroyed and the ties that bind either fray or rip."


The other invisible hand: Risk 

Singer correctly points out that while the Federal Reserve's money printing seems to be all gain and no pain, it comes at a price (greater  risk) that present-day investors have been conditioned to ignore.

Inflation, dislocations in stock and bond prices, and instability of financial institutions are all problems more likely to mount as a result of Fed policy. Yet, since stock markets continue to rise (on weak fundamentals) and there is no widespread concern about inflation (yet), many investors seem content to believe that our problems are being resolved.


Reality, according to Singer, is quite different: "We believe that the global central bankers, led by the Fed as 'thought leader,' have no idea how much pain the world's economy may endure when they begin the still-undetermined and never-before-attempted process of ending this gigantic experimental policy."


And keep in mind, central bank recklessness is a global phenomenon, not a local one. In addition to rampant money printing by the Fed, the Bank of Japan, the Swiss National Bank, the Bank of England, the European Central Bank (in word, if not deed) and, just last week, the central banks of Australia and South Korea have all joined the party.


Also this past week, ECB President Mario Draghi made some bold claims when he stated during a speech in Rome that: "For the southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But it will likely consider such a step."


Assuming that Draghi follows through with the action he is implying, we will have unanimous and massive fiscal and monetary stimulus from every single G-7 country and, by extension, others as well.


Green with envy 

The amount of stimulus being applied is unfathomable. Thus far, the United States is perceived as being in the best position (i.e., the sweetest of the sweet spots), with Japan quickly catching up. It would seem that world governments are in the process of concluding that their stimulative policies are solving all problems and have no negative consequences (thus we are going to see more of them).


How long the deflationists can hold out with their bond bets remains to be seen, but only the bond market can stop these policies -- a point I have made many times. (I should also be clear that it does not look like the policies will be halted anytime soon.)


With the Dow Jones Industrial Average ($INDU) and Standard & Poor's 500 Index ($INX) hitting all-time highs even as we run trillion-dollar deficits, we are the financial and economic envy of the G-7 world, even with our massive problems. So you can be sure the Europeans are going to emulate us.


Summing up the current environment, Singer writes:


"Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE (quantitative easing) without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible."


It is impossible to say when all this will unravel, but one thing I am certain of is that those who think it won't be painful are in for yet another rude surprise.

At the time of publication, Bill Fleckenstein owned gold.
May 10, 2013 6:44PM
Brings to mind a Hemingway quote from 'The Sun also Rises'...

Question: "How did you go bankrupt?"

Answer: "Two ways. Gradually, then suddenly."

These high-flying central bankers don't seem to realize that  "free-falling" can feel remarkably like actually "flying". All the way until (suddenly) it doesn't.

May 11, 2013 12:06AM
This "PRIVATELY" Owned Bank, has RIPPED off the American people for 100 years.  It's time to shut it down. 
May 10, 2013 10:14PM
Ben Bernanke and the Federal Reserve, by printing money, buying U.S. Treasuries and keeping interest rates low on the national debt is enabling the U.S. Government's addiction to debt, just as a person giving money to a cocaine addict.

In the same way, Ben Bernanke and the Federal Reserve are enabling the Too Big To Fail (or Jail) banks to make sub-prime mortgages destined for failure (after the reflated housing bubble collapses), which will again have to be bailed out with taxpayer money.

And then these executives at the Too Big To Fail (or Jail) banks become the largest corporate welfare recipients and multi-millionaires for skillfully manipulating the U.S. Government into bailing them out, after they have earned huge bonuses for making bad loans which eventually default.

May 10, 2013 6:45PM
Workers who faithfully contribute into their 401k plan and just leave it alone are doing much better than people that think they can time the market.  Maybe one day the stock market will make sense and follow earnings and growth potential,  but for now the market is rigged and I have my 401K money in a stable fund.  Sometimes it isn't wise to fight the FED.  At least I know that any flash crash is not going to hurt me as my co-workers, on the other hand they are feeling richer everyday.  Who's right and who's wrong?  Really doesn't matter as long as you can sleep at night.  Pay your bills on time and have no credit card debt and drive a car that is paid off.  
May 10, 2013 8:17PM
Be undaunted Bill, and continue to author articles like this. After reading Andrew Dickson White's: Fiat Money Inflation in France, I did some careful research into the mainstream French. We know that the excessive printing of assignats eventually diluted the economy until just the stockjobbers earned, and the rest became stagnant or compromised. Wealth had nothing to do with labor. These aspects equal much of what is happening now. When you say that other nations' Central Banks are joining in, it is as important to note that all those already printing no longer have self-sustaining economies. Take Japan- the latest printing of Yen debased it so low that they can sell cars here in America far less than our car companies. The problem is, cars are not exactly selling- here. They are being financed at such terms that the subprime debacle paled in comparison. We are-- offing cars to log the units. These tricks can only keep going around until they come back around and that next round of printing wipes something out. There is no retail movement. Retailers claim to be okay but anyone going to the Mall knows they are not. I bought clothing for $1 at Sears. Clearance is an old issue, but a dollar item foretells something far more dire. Singer also pointed out that 'savers are being penalized'. More than that... everyone who would work to create economy that works- isn't, and the Kool Aid crowd is indeed partying like it's 1999. Maybe because it really is. Each nation stated operates a near identical economy-type, all compromised by this crazy Central Bank plot. None of the other nations have their acts together. That's one messy Perfect Storm we are sailing into. Wouldn't want to be wealthy right now. No place to go after the show. Not on Earth.
May 11, 2013 12:30AM

Hey Jake,


Read your economic history.


There is NOT ONE instance in the history of paper currency that is not backed by anything that a government has not inflated out of existence. NOT ONE.


The FED is doing the same thing every other government has done throughout history.


There WILL be horrendous hyperinflation and this time it will be in all the advanced countries of the world.


A lot of people think that there will be blood in the streets, once this hyperinflation sets in.


I don't think any person [outside of bankers and their government cronies] wants this to happen, but a lot of people thinks it's going to happen.


By the way if YOU believe the what the government is saying, I pity you.

May 10, 2013 11:38PM
To Just say put money in a 401K and leave it alone isn't sound advice. It's bad advice because first of all, not all 401Ks are created equal. Now if your company is matching dollar for dollar, that almost free money compared to just investing your own money outside the company's plan into stocks. Some people can time markets and some people can't, that's really besides the point. What is the point, nothing and I mean literally nothing can be consider stable when Global Feds are out of Control. This is not much different than the Mortgage Investments Scams during the Bush Years. I expect the fallout to be far worse. Why, the Global Feds are literally already at Zero Percent and just how much Fake Money can you Print before there is an Epic Fail.

Folks want you to think that for the first time in World History, stocks are safer than bonds. Well they aren't, you can still lose 100 percent of your stock investment. Treasuries, if you lose 100 percent in those, the World must have ended so it really won't matter about anything at that point. The biggest thing is making sure you have a Stable place to live. Jobs come and go so of course, everyone tries to put money aside for rainy days when you do have one.

Fact is some workers don't make enough additional cash to even contribute to any investment plan, 401K or anything else. Make your own choices but if your company matches dollar for dollar, that's hard to beat. However there is no such thing as stable when the Global Feds are running Wild. Why do you think they are running wild? Because it's a stinking mess that's only getting worse.

May 10, 2013 8:39PM
To much credit is given to malfeasance, this work of the Federal Reserve is by design. It benefits the wealthy w/ free money they invest in land precious metals. Then every dollar printed in debt that we the taxpayers pay. This will and soon collapse the system w/make believe money(nothing of value) and the real wealth, land and precious metals will be held and controlled by the wealthy. 
May 11, 2013 8:08AM
Actually a well-written and insightful article published on MSN!!! Wow.  Congrats, Bill..
May 11, 2013 9:33AM

"the still-undetermined and never-before-attempted process of ending this gigantic experimental policy."


One thing you can count on is that any great unwind won’t be orderly and controlled. No Central Bank wants to be the one responsible for starting it. They will all jawbone it, but none will actually do it voluntarily. So, the honors and the blame for it all will go to the one that snaps first; like a wound up spring being released.


How convenient that the collapse and ensuing calamity will all be blamed on Cyprus, The Maldives, or some other tangential player instead of the ones who started it all in the first place.


Oh, I almost forgot, "No one will have seen it coming." That's Wall Street's 21st centrury addition to that other tired old disclaimer, "Past performance is no guarantee of future outcomes." 

May 11, 2013 1:53AM
   Your right dave,  For the most part people should only put the amount in a 401 that is matched by their employer. Remaining retire assets should be put in a IRA, preferably a Roth if you can stand the the tax rate up front, were you have control of your own money. You can buy protection against inflation, against a falling $ when that occurs and insure your profits when the market has made a big run but your not sure its time to jump ship yet with the use of puts or bear etfs. You can't do this with a 401. Pull yourselfs away from the tv, games, bar or whatever your hobbies are and learn how to manage your own money. They should be teaching all this finance stuff yearly in school starting by at least. middle school, just like they math, all of it, the rule of 72, stocks, bonds, commodities, insurance, 401s, pensions, IRAs and more. But then the gov.  doesn't seem to care about teaching financial independence, but rather gov. dependence. Don't call it retirement teaching when addressing the young. They don't care when young. Call it learning to be financially independent. With the right training and effort many people could be financially independant at a fairly early age enabling them to withstand layoffs and other crisis.  
May 11, 2013 11:51AM

Is anyone ever going to see inflation for what it is, destroying savings of everyone that saves a little. This has been going on forever, all over the world.  I could see this in 1946, others must have seen the same thing.  Little people cannot work at a job and study money at the same time.  We have to make a day to day living.   I though Germany might hold out, but it looks like they are about to cave in, with the rest of the world.   100 to 1 inflation makes saving worthless. No one will mention inflation.

Thanks for saying something about the problem.   



May 11, 2013 11:00AM
Come on guys you know everything is control by the Fed's and World banking. Their smarter then you think, for  example Cyprus a very small country was a test run for the bankers. They told them they (bankers) will bail them out or they (bankers) will siege all their Bonds,Bank account, checking account etc.. unless you accept our worthless currencies paper money for a exchange for all their Gold and Silver (precious metals) or your country will have crash and burn. The country accept the deal and the bankers gave them the worthless paper money and took their precious  metals and dump most of it on World market. Causing the Gold and Silver prices to crash because it was allot at one time. Then the Dollar is now getting stronger as the metals crashes. See, their other bigger countries that will need help like Cyprus did but they owe more precious metals means more effect on the world. The bankers will bail them out like they did with Cyprus,keep half put the rest on the world market to bring down the metals and again the dollar will climb higher. At one point when the Bankers have most of the precious metals and dollar strong and stock market climb at around 17000 give or take, now the bankers will crash the dollar and the precious metals will skyrocket high enough so the dollar doesn't effect the bankers. The precious metals will make the different up with the falling dollar. Bankers win and everyone else will be broke.
May 11, 2013 11:01AM
What Bernnie did was to buy the Moon with my sons, grand sons credit card. He just kicked the can down the road as politicians have done for decades.
May 11, 2013 12:34PM

You know things are really bad, and that something is up, when the religious "end-of-the-world arguments are identical with the seculiar "collapse" arguments.


What I find particularly intriguing is the "when". The religious theorists are smart. They say that only God knows when the end will come. The seculiarists haven't a clue. The system has been running on evil for so long that they can't find anything but the devils passing for God.


The devils are perfectly happy to be obliging. Everyday is the end of days. Buy that house now while interest rates are low, low, low (again).  Buy stocks while you still can (again). There has never been a better time to contribute to your 401k (yeah, I really like that one). If you try to protect yourself with gold and silver, the totally and completley manipulated markets trash commodities.


The end?


The end will probably will start when all those retired folks, who counted upon 3-6 percent interest on their savings, are bled down to nothing by trying to live on almost zero interest rates. That could be years. The end will come when the Baby Boomers join them.


The end will probably come when the end of fiat currency comes to the U.S. dollar. All faith and trust must be lost before that happens, and there are so many zombified Americans walking around, saying how everything is so wonderful, that it could be a decade, or another market crash, before they even try to wake up.


The end? Could come when the USD loses its status as the Reserve Currency, then it is "Welcome to the Banana Republic." This really could happen anytime. If Japan defaults, the world will make the U.S. pay. If Europe collapses (meaning if just one of the PIIGS goes), the world will make the U.S. pay. It could come if the BRICS come together to form their own Reserve Currency. This could happen anytime. Even in 2013. And the new Reserve Currency will be backed by something, like gold.


The end could come when people realize that there is a difference between paper gold and physical gold. I can't believe how stupid people are to even own paper gold. The end could come when banks say they do not have the gold to pay off all these ETFs floating around. Germany has already discovered this when they tried to claim their physical gold from the Bank of New York. The bank doesn't have their gold, anymore. Who has Germany's gold? Who knows.


But people are so stupid the facts don't even register. When ABM Ambro said they would no longer be allowing their gold customers to redeem their paper gold with physical gold you would have thought people would have gotten the hint.


Meanwhile, hang onto your gold and silver. As soon as the end comes the value of commodities will go through the roof.

May 10, 2013 8:28PM

lol i have already seen we might have a depression with the feds stupidity and the world following us.  I am putting as much money as i can in a safety deposit box.  I am starting to stock pile food and i am buying two guns a shotgun and an automatic pistol.  I for one don't trust our government anymore.  the democrats and republicans are lying to us on a daily basis.


I dont know why these stupid evangelists cant figure this out and get some politicians in office that can save us because believe it  or not in a depression a lot of them gonna be losers also.

May 11, 2013 11:42AM
The argument in this article holds true with deficit spending, which is the real culprit. This article may be about QE, but it's really an article about deficit spending. QE is a by- product of large public debts/under performing economies. Deficit spending by our government, public debt, drains cash resources from the private sector so to service the public debt & interest. Quantitative easing puts that cash back into the economic system. 

If you want to attack anything, attack deficit spending by the government that is blessed by the public at the voting both. It's easy to point a finger at the fed. not so easy to cut back our voracious spending habits.  

I don't think anyone that understands what is happening, believes QE is going to fix the problems. It's a band aid and most are keeping their fingers crossed that the economy would start holding it's own before inflation forces QE to retrench. Deficit spending & QE are both both band aids and go hand in hand to balance money suppy in our economy.  If any one is looking for a good policy, it's to start reducing our public debt, and QE along with it. And, it's going to take awhile. We can't just axe government programs over night which would have brutal consequences on people, but we can begin to slowly reverse the trend and correct the imbalance in revenues & spending.

I keep reproducing this quote attributed to Thomas Jefferson: Big government will spend too much and tax too little. The implication being the big government has it's real problems, not that it's constituents should be taxed out of productivity.  Or stated differently, there is no free lunch,.

Lastly, Here's a link to an article showing the ratio of money supply (M2) worldwide by country. If you take a look at what have been the more productive countries  (those with consistent GDP growth in recent time... say China and Germany for examples), you'll see that as of 2012 their money supply is substantially higher than ours: data.worldbank.org/indicator/FM.LBL.MQMY.GD.ZS . The implication not being that a shortage of money is what the root cause, but that we are not pioneers in money supply expansion. It is not this grand experiment in uncharted waters on a worldwide basis. Countries have been surviving, and well, with larger money supplies. If anything, it's a gauge the Fed probably is looking at when considering how far it can go as long as inflation remains low,.
May 11, 2013 12:47PM
Alan Abelson said when greenspan was leaving the qualifications of the Fed chair is SERIAL BUBBLE BLOWER.
May 11, 2013 4:25PM
Buying things on Credit, on this scale, is Printing Money. Then paying yourself via that bogus buy on Credit has to be the most criminal act in any modern day economy. If the economy cannot survive if rates double the current Fed rate, then it was never meant to survive, the Fed only delayed what must happen, what will happen. Big Banks have assets that literally have no value. The Fed is acting as a buyer of last resort, giving something value, that has none. That's printing Money.

Funny thing, the Real Economy isn't supposed to be played as some ponzi game via graduate level courses. In fact, they are they ones that created the CRAP we keep bailing Big Banks out for. Problem is, there is far more bogus crap on Big Banks balance sheets then what Uncle Ben and the Global Feds can buy on Credit. Now, empowered by the backward Global Feds, the Big Banks are creating more crap, and the corrupt Feds are willing to buy more.

So sure, the Feds are printing Money, it's just a far more complex way of doing it. It's not quite like a fiscal Dollar, but once all the bogus accounting is done, the effect is the same, more Money in the System then what you would see in a normal free market.
May 13, 2013 6:41AM
"There is nothing that the Fed is doing that is inherently dangerous for the economy. Without its policy, UE would be much higher, and we don't have any serious problems with inflation. It is true that savers aren't making out, but they do have alternatives which of course do involve more risk. That's about the only downside right now."
Your condescending posts are always dribble but I thought I'd pull this one out and use it... the theory behind this suggests unemployment from a slowing economy. This time, mass-terminating 40 million Americans where 84% of them were family breadwinners- CREATED the recession. There are 90 million long-term unemployed now- that's about 50% of the once-able workforce, pal. We absolutely do have inflation, where have you been? Savers are stagnant- that's a problem. ZERO small businesses are gaining ground and 100% of big businesses are just administrative platforms now. In short, we do not have the form to recover. It's like getting a Fat Cat off his a55 and making him jog. The odds of a massive seizure and heart attack from years of bourgeois living are greater than the odds of him getting anywhere at all. Close the banks, end the Federal Reserve and get RID of Wall Street... these have stronger benefits that force Fat Cats out of manipulation and get all of the nation back into opportunities and innovations where recovery begins.   
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