Submitted by David Stockman of Contra Corner blog,
Just when you thought that nothing could be worse than bubble blindness of Greenspan and Bernanke - along comes the Yellen doctrine of resilience. Its dangerous Keynesianblather, and far worse than Greenspans feigned agnosticism which held that the Fed does not have the capacity to recognize financial bubbles in the making and should therefore mop them up after they burst.The Maestronever did say exactlywhat caused the massive and destructive dot-com and housing bubbles which occurred on his watch - except that Chinese factory girls stacked 12-to-a-dorm-room apparently saved way too much RMB.
By contrast, Yellens primitive Keynesian mind knows exactly what causes financial bubbles. Shehas now militantly asserted thatbubblesare entirely an irrational impulse in the privatemarket and that the price of money and debt has absolutely nothing to do with financial stability. Thats right, if the Fed could find a way topeg the money market rate at negative 10% to further its self-defineddual mandateof just enough inflation and always more jobs - even thenany speculative excesses would presumably be attributable tostill another outbreak of the markets allegedpropensity for error, irrationality and greed.
Lets see. If the central bank arranged to cause carry-traders to get paid 8% to borrow short-termmoney (i.e.on anegative 10% deposit rate)in order to fund the carry on junk bonds, Turkish construction loans and the Russell 2000, do ya think they might get a tad rambunctious?For crying out loud, when it comes to speculation, leverage, maturity transformation and re-hypothecation of financial assets the money market interest rates is not nothing as Yellen contends. Its everything!
Thats the heart of the matter and why Keynesian central banking is the most destructive and dangerous doctrine ever invented. In effect, it mandatescentral bankers toseize control of the single most important price in all of capitalismthe price of carry or gambling stakes in the financial markets - and then assertsthat this drastic pre-emption will have no impact on the behavior of speculators, traders and investors.
That predicate is so perverse that it puts one in mind of the boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan! Keynesian central bankers like Yellen are doing exactly the same thing. Pegging the money market rate at zero for seven years amounts tokilling all of the financialmarkets inherent stability mechanisms.
That is to say, carry trades are made essentiallyrisk free because the money market rate is officiallypegged at zero. Moreover,the Fed has furtherpromised to be utterly transparent in notifying gamblers as to when the spread between their funding cost and their asset yield will change, and with ample advance notice.
Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen put the cost of protection against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.
Accordingly, momentum dealsandcarry trades are far more profitable than they would be on an honest free market because in the latter case market-priced insurance premiums would eat up far more of the winnings. Needless to say, out-sized and artificial profitability attracts massive excess capital and resources into the hedge fund and trading deskgambling arenasthe very motor forces of financial instability.
Likewise, an essential ingredient of honest two-way financial markets is speculation from the short-side. Self-evidently, ZIRP, bond market repression and the Feds stockmarket put have driventhe short interest out of the casino entirely.So now we have one-way markets that are inherently prone to powerful speculative excess.
Continued here:
The Yellen "Resilience" Doctrine Is Dangerous Keynesian Blather