The Fed knows nothing: Who knew?

Why so many put so much trust in our central bank's central planners is a mystery, given how out of touch they seem to be. So don't be lured in because it seems like everything is under control.

By Bill_Fleckenstein Jan 25, 2013 3:00PM

Dollar bills floating over U.S. Capitol © CorbisA New York Times article caught my eye, since it described a subject near and dear to my heart, namely, the lack of omniscience at the Federal Reserve.


Headlined "Days before housing bust, Fed doubted need to act," the Jan. 18 article by Binyamin Appelbaum walked through how the Fed responded to the early part of the housing bust, beginning with what the Fed was thinking in August 2007. It makes it quite clear that the geniuses in charge of our monetary policy were completely unaware of the fact that the housing bubble had been the economy, among other important issues.


What we knew they didn't know then

That is naturally par for the course, since Fed "logic" always starts from a false premise, that being that bad things in the economy just "happen" and it is the Fed's job to fix them, rather than understanding that it is the Fed that keeps precipitating our problems through its money printing.


Just for grins I went back and read some of the columns on my subscription site ( from August and September 2007. I must admit it was pretty shocking, though somewhat entertaining (in a sick sort of way) to see just how oblivious so many were to something so obvious.


To revisit some of the highlights (or lowlights, as the case may be), the first half of August 2007 featured Bear Stearns (remember it?) announcing more problems with one its funds, rampant carnage in the housing construction and finance sectors, Japan's Ministry of Finance stating that "the subprime issue won't have an impact on the U.S. economy," my own statement that the Fed "does not understand how dangerous the problems are" (this was during a week in which it appeared the Fed was behaving responsibly, but as we now know, that was only because it had no idea that the housing bubble was the U.S. economy), followed by basically a blank-check bailout from Fed Chairman Ben Bernanke.


As I, and many others, said ad nauseam at the time, the financial meltdown created by the Fed's idiotic policies was bound to create problems that would stay with us for a long time. Looking back at that period through a "real time" lens (both in my own writings and The Times article) really drives home how incompetent the Fed is.


Returning to the present, we have the Fed monetizing government debt at the rate of about $1 trillion a year. Other central banks are charting a similar course, one in which they would be thrilled if they could get inflation to 2%. (In fact, they probably wouldn't be totally unhappy with it going higher.)


Given that inflation is a lagging indicator, and massaged through the absurd assumptions made by the official counters at the Bureau of Labor Statistics, one can be sure that by the time the Fed hits its target, the real cost of living will be rising by somewhere between 5% and 7%. At some point, the bond market is going to revolt over this.


Things may get better before they get worse

But for now, money printing has certainly put a bid in world stock markets. World economies are rebounding along with the market, to some degree, and for the same reason. Thus, apart from the always-present potential for another (and a bigger) flash crash, markets are in the process of doing everything they can to suck in more money.


That is a long way of saying that, as frisky as world stock markets feel now, they could get a lot friskier and dopier before the bond markets of the world force the central banks to act like adults.


However, readers should remember how dangerous individual stocks (or the stock market in general) can be. Money printing results in all sorts of deceptive "action."


Just look at Apple (AAPL). In March 2012, I wrote a cautionary column ("Is it time to bet against Apple?") while others were euphoric, and I was derided by many readers for doing so. Yet since then, the stock has lost 25% of its value.


The moral of the story? In a world warped by money printing, be careful that you don't get sucked in by the seductiveness of the stock market.


At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.


Jan 26, 2013 3:13PM
I'm from the government and I'm here to help you.
Jan 26, 2013 2:52PM
A new bubble, created entirely by the government this time
Jan 26, 2013 1:24PM

Everybody should stop work and the FED keep printing money and send to everybody at home.

So people can keep buying what they can not afford.

Living one life that does not belong to then.

Like that everything going to be fine the way the FED .............!

Jan 26, 2013 12:58PM

Kudo's to the folks who braved the markets and have cashed in. Were just old greedy seniors (per Alan Simpson) gutless wonders who have watched the last of our laddered CD's dry up and  the bulk of our retirement income dry up. Market scares us to death since the idea of losing the last of what we have saved over a lifetime vanish if we enter the game now "Wallsteet". We played by the rules during our working years accepting a smaller return each year because we took little or no risk but the FED changed the rules and we are being screwed into the ground as the FED manipulates and micro manages the economy.  So I guess we will spend down our lifetime of savings until we are broke and just end up on the dole. With CD's and bonds spread out with a 3-6% return we were able to meet our retirement needs.......I guess a few years from now we will be able to join the 47%.

Jan 26, 2013 12:47PM
Do you still believe there is physical gold at Fort Knox?...
Jan 26, 2013 12:40PM

Unless your looking at CD`s ?you have to love the fed.We`re making a to of

money in this market.Happy days are here !

Jan 26, 2013 12:36PM
scap aapl weekly options  10k on friday  life is good
Jan 26, 2013 12:15PM
Look at what Greenspan admitted in an interview a few years back (on the CNBC Housing Bubble special)  - that his "couple of 100 Ph D's" (including Bernanke) "couldn't figure out how derivative instruments actually worked" . Yet Greenspan just let it ride, and chose not to sound the alarm

The massive easy-money fueled housing bubble was quite apparent to any reasonably intelligent objective person by 2003 - yet the Fed says they didn't see it.

The Fed is now on a one way street, Bernanke will have no way to ever unwind this thing - THIS is the debt monetization many of us predicted 30 years back.
Jan 26, 2013 12:00PM

"Playing the FED is like playing golf. It's a puzzle without an answer. I've played both games for 40 years and I still haven't the slightest idea how to play." pp G. Player

Jan 26, 2013 11:57AM

It seems to me I remember Mr Bernarke came up with the idea of subprime loans and opened the flood gates for any and everyone to purchase the American Dream, a home. It was a frenzy and all the higher ups saw the money advantage, it was party time and they KNEW what was going to happen. I like alot of other people were in the euorphoric of the times, I remember so many people could not wait to get a loan, the loan officers were handing loans out like candy, don't worry about your falsified documents that we helped you fill out (frickin crooks). The real estate bust was designed from our government by them and for them. How many people got wealthy from the subprime fiasco? Some body do a study and then take the money they made and give it back to the people that were duped.

  And our President was telling the home owners that they were at fault, are you kidding me? He hasn't kept his house under control since he has ben elected, TWICE., when our leaders act irresponsible so will the people, truly they believe they are above the law and can do no wrong!!

Jan 26, 2013 11:46AM

Study the Depository Trust Company (the worlds largest corporation) if you really want to learn something about the stock market. They are the true OWNERS of stock in the USA. You are just a benificiary of that stock you "bought". Now remember a OWNER can change the benificiary of something, a benificiary can NOT change the owner. So when s**t hits the fan what do you think will happen to that stock?


Then for another "eye opener" look into who OWNS the Depository Trust Company.


Scary world we live your eyes......stop being a sheeple.

Jan 26, 2013 11:34AM
Now you see it, now you don't... abracadabra alacazam, alacabrodax scam scam scam.  Will the circus ever leave town?  Sometimes what you see is what you don't want to get.
Jan 26, 2013 11:21AM

The author seems amazed the Fed did not understand the impact of the mortgage crisis.  Now why do you think it was, as he said that, "the geniuses in charge of our monetary policy were completely unaware that the housing buble had been the economy, among other issues"?


Simple.  They are all bankers from TBTF banks.  Their perspective and their loyalties were planted in those fields and grew from these roots and the results were harvested as a tragedy to the American people. 


They believed the economy consists of the market and the TBTF banks' welfare.  They still seem to believe that.  In terms of understanding the real economy in which the people of this country live and work, they are selfish fools.

Jan 26, 2013 9:53AM

And who is supposed to protect the people and the people's money from manipulated markets? The same markets that manipulate the stock market? The same markets that take their people's bailout money and put it into hypotecated accounts? The same markets that manipulate the price of gold and silver, regardless of how much printed, and virtural, and fake money there is out there? Not the criminal, shyster politicians and TBTF and TBTJ banksters.


You know what? I don't know a thing. There I have said it. But the ringing noise, left in my ears from the crash of my phony  and manipulated pension plan is still there, telling me that nothing has changed. The game remains the same.

Jan 26, 2013 9:41AM
Why cant MSN get a commentator who has passed a course in Money and Banking?
Jan 26, 2013 9:06AM
I was one who missed the lagging indicators in early 2008.  I had to know something was up, but business seemed good and everything was doing OK.  When I finally seen the problem was July-Aug. 2008.  But it was too late for me, I had already committed to business investments that would eventually cost me lots of money in the following year.  I won't make that mistake again....I see the present stock rises and all the money pouring in it then just shake my head.  As I've written before, I distinctly remember a photo of Ben Bernanke and Henry Paulson standing in a parking lot talking in the mid fall of 2008.  They both looked as if a ghost had appeared....they knew all hell had broke loose and had no idea how to contain it.  Unfortunately our country decided to embrace socialist directions in late 2008 which will only now make the end of musical chairs a catastrophy.  The history of societies printing money should be a good teacher.....we have bad students in control. 
Jan 26, 2013 8:43AM
bernanke is one, john kerry is another, anybody endorsing the pres is another...all brain washed
Jan 26, 2013 8:39AM
are there fewer shysters in the financial world today than there were five or ten years ago ?  i doubt it because figures don't lie but liars figure...this is an axiom that applies to all walks of life including politics right on up to the highest levels...the president says he is happy to discuss ways to mitigate the growing federal budget deficit problem, but his track record belies this...what you do speaks so loudly i can't hear what you say...there are too many seemingly smart people in this world today who have allowed themselves to be brain washed...shameful, shameful
Jan 26, 2013 8:05AM
So much for that hope and change thing.  Just another day in Obamaville.
Jan 26, 2013 5:25AM
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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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