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.


Mar 16, 2013 10:31AM

Typical so called guru, does he also remember pimping msft for years?

Feb 11, 2013 9:23AM
When someone writes an article like this, I know he is an idiot. Bill is an idiot who makes his living bashing the Fed and displaying his ignorance in all things financial and economic.

He is like these idiots who concoct conspiracy theories to replace their huge intellectual short falls. I always ignore these fools. There are smart people who understand the market and can give sage advice, but you won't normally encounter them here. These people of wisdom have to be discovered during one's effort to gain wisdom.

However, we do have one gem here, and that is Anthony who is doing a good job of reviewing the context within the current market operates. 

Har har har!
Jan 28, 2013 7:09PM


The Fed needs to get a subscription to Barrons.

Jan 28, 2013 3:27PM
It is humorous to see the Fed adopt the Sgt. Schultz defense....  I see nothing, I hear nothing, I know nothing...

Will someone please tell Ben that you cannot print your way prosperity.   And while you are in DC, please pull Obama off the golf course and tell him he cannot Borrow and Spend our way out of debt.  Nor will taxing the people spur economic growth either... 

When the printing stops, the depression will begin, and it will be far worse than it would had wenot printed all this new fake money.
Jan 28, 2013 2:56PM
All these money printing articles that I've read over the years is giving me this impression.  That this money goes into banks and A) just sits there doing nothing and waiting for good economic times to unleash the fury of inflation when the money finally starts to move or B) goes into propping up the stock market and is eventually siphoned off by the ones that don't need it into their banks accounts.  When the supply gets too low again, they money print again and rinse and repeat.  Did I get that just about right?
Jan 28, 2013 2:01PM
A complete wipeout of the bond market is about to be undertaken. Mining stocks will go through the roof, then wiped out, gold will go through the roof, then wiped out. After everyone's been fleeced, the world will have changed to a feudal society, one in which the poor die in droves, crime is rampant, and few can afford health care. Expect much of the world to devolve into chaos. Certain classes of people might not entirely rue a large die off of humans.

Unless, that is, we jail all the bankers that have precipitated these unprecedented financial calamities and recreate the financial system to be directly owned by citizens whom will own an identical percentile share and print money debt-free. Fractional reserve lending will become a thing of the past, as will sovereign debt and income taxes. The profits of any loan made by any entity in the country shared with the entirety of the citizen shareholders.
Jan 28, 2013 1:43PM
Greenspan started the stupidity going on at the FED and Bernanke just extended it. Those two are more to blame than any other people for the financial mess this country is in.  You have to remember the FED is owned by the large banking families so controlling money is in the hands of the bankers anyway. Bernanke should get fired and the whole house at the FED needs to be cleaned out. We need a central bank but one that is independent from being controlled by the banks.
Jan 28, 2013 6:14AM
In the end Fleckenstein will be 100% correct.  However, this Fed induced Ponzi scheme could last for several more years.
Jan 28, 2013 12:07AM

     I thought I knew why the housing bubble burst, why the financial system went into the ditch, why people got laid off and can't get a comparable job and the Fed raises the minimum wage, why college tuition is so expensive and college graduates are in hock until they retire, why seniors are getting blamed for the Social Security shortfall and companies are lining up their excuses to avoid offering affordable Medical insurance.

     I thought I knew all of these things and more. I was wrong. I am completely mystified.

     When I read comments from the left and the right, from liberals and conservatives, from libertarians and independents, and these comments all start sounding the same, then I know something is DRASTICALLY wrong with this country.     We are all slowly coming to the same conclusions, and are frustrated with our politicians. We scream at them and they simply look right through us, as though we are invisible. They say words to us they hope will quiet us. When their words fail to quiet us, they ignore what we say. They are not beholding to us, if they ever were. The lobbyists own our Congresspeople. Money has corroded any moral code that still clings to their pysches.

     We need to VOTE AGAINST ALL INCUMBENTS. Get them out of office. Get a majority of turnover in Congress, with every new election. Vote them out again, and again, until they start getting the do OUR will, not corporate will. Keep turning over the seats in Congress to prevent these people from retiring in office, on our nickel. Keep getting freshmen senators and representatives into office, yes, and vote them out again come next election. Prevent them from becoming corrupted by the system and the temptation of  TOO MUCH money to turn down. (If I really had MY way, I would make Congressional lobbying a class 1 Felony). Cooler heads will tell me to be reasonable, that voting out incumbents will do no good. I'm through with "reasonable".  Nothing that has happened up to now has done ANY good at all. LET US DO THIS, FROM THIS DAY FORWARD.   

Jan 27, 2013 11:18PM
Banking regulation is a farce. The Fed should've nationalized BAC, C, WFC and several others and never allowed GS or JPM to become retail banks and receive Fed bailout funds.  Banking regulation should include the maximum size that a bank can become and not allow banks to operate brokerages. Oh, well it's too late now and we're all paying the price of bank's hubris and greed.
Jan 27, 2013 10:21PM
Wall Street should be closed, they fix every price one everything we buy and sell with no blood nod sweat invested, all leeches
Jan 26, 2013 10:03PM
To quote above "At some point, the bond market is going to revolt over this".  But is the bond market now so diluted by all of the additional central bank money that it is not capable responding?
Jan 26, 2013 9:57PM
Bill Fleckenstein is right as usual.
Jan 26, 2013 9:24PM
"Headlined "," the Jan. 18 article by Binyamin Appelbaum ..."

Well, wasted my time on another article here. It's like you people think 'Oh, this is a massive housing bubble that's about to collapse and cause the worst economic collapse in 80 years. Let me just tinker with this random interest rate and all will be fine and dandy!'

No. Morons.
Jan 26, 2013 6:52PM
Didn't make many waves when they did it a few weeks ago, but Germany took all of their physical gold they had stored here OUT of this country and had it sent to Germany. Why do you think they did that?
Jan 26, 2013 6:45PM

this will all end very badly..what mr flekenstein however cannot tell you is when it will end

the fed says that it will continue to buy longer term securities until the unemployement rate

reaches 6.5%..that could take a decade or it could happen by 2015 but in any event as long

as they print money and keep interest rates down the equity markets will go up..and like everything

else when the herd decides to jump in the pool its time to jump out..let me tell you a little story

at the top of the housing bubble i woke up one night at 2am and said to my wife.we are selling

our home and then renting in the area...she asked me why and i said very simply that "everyone

cannot be a multimillionaire based on the value of their homes" the proceeds were put in 5%

cd's for between 4-7 broker thought i was nuts and that I should be in the stock market

the rest is history...but my larger point is this..the little guy is just coming back to the market after

misssing out on the double since the bottom...that money will take another year to be invested but

fund managers will have to buy just about everything....forget what they tell you about asset allocation....those of you who have substantial liquid assets do not put more than 20% of your

investments in the market and then not all in equitites short term bond funds as well...then

wait..if the market crashes you will be able to pick up high dividend stocks at a bargain..if interest rates rise as they eventually have to you will once again get 4-5% safe insured CD rates...if

you have 2-3 million that will be between 80-150 a year plus ss if you are under

your means ..go out to dinner, play golf, and take vacations...but do not count on the market

to make you the 8% of the old days because it aint going to happen in your life time

Jan 26, 2013 6:21PM

What most people don't realize is that rates a lot of times rates track 2 to 3% above inflation. The Fed is holding it artificially low paying under 2% for our money now, which is stupid low. Figure BO will easily hit 20 Trillion in debt shortly. Now get out your calculators and plug in normal rates, say 4.5-ish like Clinton had. What you will find is that when that happens we will be paying over a TRILLION a year in JUST INTEREST EXPENSE. We will be taking in probably 2.5 to 2.8 Trillion.


Now put yourself in bondholder shoes, what rate would you want for a country spending all its cash on interest and entitlements.


The only thing it will take to kick off this event is inflation. Once it hits the FED can't keep printing. Are you willing to bet all this massive money printing and massive borrowing won't cause it? In the short term it won't, but at some point ......


I have been 100% invested for 20 years and am usually not overly pessimistic. Until now. Am i the only one that sees this as a very real possibility? It seems obvious as the nose on my face to me, am i wrong?





Jan 26, 2013 4:33PM
The country is falling deeper into debt and the currency is continually being debased to create a huge bubble in the stock market. The actions of the Fed. in manipulating markets cloaked behind the veil of a stimulus agenda is a complete failure, however they continue to move ahead with the same failed policies with no end in sight. We are going on five years with little or no growth. At this point, compared to all the previous recessions, the GDP should be at 5-6%, and now we are conditioned to accept less than 2% as a good number. Crappy jobs and depressed wages going forward. We must have 3-4% GDP just to absorb the people entering the workforce and to start moving the labor participation rate up, currently 1 tenth of 1% above it's all time low set in July.
Jan 26, 2013 4:07PM
You must crush an economy in order to control the people, This takes time.
Patience people, it will all be over by 2016.
The new era of slavery will be the American people no matter their skin color.
Jan 26, 2013 3:47PM
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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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