Financial Bubbles | timiacono.com

A World Drowning in Debt

I don’t know the source of all the data presented in the chart below, recently stumbled upon in this item at the Confounded Interest blog, but nothing about it looks to be out of order. The only major shortfall would appear to be that China is not included and, after reading stories like this one, you have to wonder how they would stack up.

Everyone knows about Japan’s public debt, but the business and bank debt in the U.K. was a bit of a surprise to me. Also, it’s nice to see that our neighbors to the north have now caught up to the U.S. (or passed us – it’s hard to tell) as indebted spendthrifts.

Still, Just the Cost of Doing Business

It’s hard to think of the many billions of dollars in fines that big banks have paid over the last few years or so as anything other than the cost of doing business. Here’s Matt Taibbi with Nermeen Shaikh and Amy Goodman of DemocracyNow to explain why.

Taibbi notes:

What’s humorous about this is that virtually all of these so-called too-big-to-fail banks have been embroiled in scandals of varying degrees of extreme seriousness since 2008. So for them to say, “Oh, it’s just a few bad apples in this one instance,” is increasingly absurd. They have been dinged for everything from bribery to money laundering, to rigging Libor, to mass fraud in subprime mortgages and now the forex markets. It’s one mass crime over—you know, after another, and there’s no consequence.

See also Banks Will Keep Doing FX Stuff That Got Them in Trouble at Bloomberg if you feel you’ve not been sufficiently disappointed by the above.

Groupthink at the Fed

Take away the regional bank presidents from this chart (said presidents being physically removed from the center of power in Washington D.C. and not being political appointments) and there are virtually no dissenting votes at any Federal Reserve policy meeting going back two decades, a point that should be cause for concern as detailed in this Bloomberg story.

Fortunately, unlike the executive branch of government, the central bank has no military to dispatch when enacting its chosen policy course, so, this is clearly a case where groupthink will have only limited (though still quite important) negative repercussions.

No, Central Bankers Are Not Learning

In his eight years at the helm of the Federal Reserve, Ben Bernanke really never had to raise interest rates – he finished off Greenspan’s “baby steps” normalization campaign in early-2006, but, in the understatement of the decade, it was all downhill from there.

Absent a premature departure from the central bank, expectations are that current Fed Chief Janet Yellen will have to raise rates at some point, but, given recent economic reports in the U.S. and stories like Debt Traders to Fed: We Dare You to Try Raising Rates This Year at Bloomberg, it is not at all clear when that might happen.

Of course, asset bubbles are gestating (see The Federal Reserve Asset Bubble Machine for more on this timely subject) as they are wont to do under overly accommodative monetary policy and, with fiscal policy aimed at boosting economic recovery permanently absent around the world, central banks are the only game in town.

Or so the thinking goes.

Now that the European Central Bank has entered the game in a big way and Japan’s monetary policy continues to be off the charts (as detailed in It’s Official: The BoJ Has Broken The Japanese Stock Market), it was interesting to stumble upon this item ($) at FT Alphaville that included the following comment by former Fed Vice Chair Donald Kohn from 2004 (i.e., about when we sold our California home and began a six-year, multi-state trek as renters):

A second concern is that policy accommodation – and the expectation that it will persist—is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices in order to stimulate demand…

I believe that at least for a while the macro imperatives are likely to outweigh any threat to financial or longer-term economic stability from accommodative policy. Any unusual distortions in asset prices that might intensify a subsequent correction are probably small…In our situation, a high burden of proof would seem to be on policies that would slow the expansion, leaving more slack and less inflation in the economy in the intermediate run to avoid hypothetical instabilities later.

The FT Alphaville story includes this comment by ECB Board Member Benoît Cœuré that “it would be wrong to treat bubbles as a welcome replacement therapy to a sustainable growth model”, but as in the case of Janet Yellen’s “warnings” about the housing bubble via Fed transcripts from a few years back, this is much too little and far too late.

No, central bankers haven’t really learned anything when it comes to asset bubbles.

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