The Hippocratic Oath is an
oath taken by physicians swearing to practice medicine ethically, honestly
and above all, to do no harm to the patient. Unelected central bankers do not
take such an oath. They do however swear allegiance to the Constitution.
On February 6, 2006, Ben
Bernanke took an oath to the Constitution at his swearing-in ceremony as
Chairman of the Board of Governors of the Federal Reserve System. The
significance of this is that as a federal officer, despite being the front
man for a privately owned, quasi government bank, he can be prosecuted for
any violations of the Constitution that he swore to uphold.
Bernanke is likely never to be
charged with a crime against the constitution, but he is certainly guilty of
malpractice. As a result of his untested and uncharted monetary policies, he
has created broad based Moral Hazard and Unintended Consequences that have
inflicted immeasurable and potentially fatal harm to the America he swore
allegiance to.
Deceptions, Distortions & Delusions
By the Deceptive means of
Misinformation and Manipulation of economic data the Federal Reserve has set
the stage for broad based moral hazard. Through Distortions caused by
Malpractice and Malfeasance, a raft of Unintended Consequences have now
changed the economic and financial fabric of America likely forever. The
Federal Reserve policies of Quantitative Easing and Negative real interest
rates, across the entire yield curve, have been allowed to go on so long that
Mispricing and Malinvestment has reached the level that markets are
effectively Delusional. Markets have become Dysfunctional concerning the
pricing of risk and risk adjusted valuations. Fund Managers can no longer use
even the Fed's own Valuation Model which is openly acknowledged to be broken.
Monetary Malpractice
·
Low interest rates
and massive transfers of capital from Fed to banks has allowed banks to
become hedge funds, making most of their money through proprietary trading
and the creation of ever-more exotic instruments (moral hazard). This has
lead to a merger of the banks, government and military/industrial complex
into one entity (unintended consequence) that is not focused on expanding its
power rather than serving its original constituents.
·
Low interest rates
and easy money have lead to massive concentrations of wealth as bankers and
corporate CEOs take ever-greater risks, keeping the profits and handing the
losses off to taxpayers (moral hazard). Wealth disparities have exploded
(unintended consequences), creating in effect an aristocracy - and a
disaffected majority. Political instability has risen (unintended
consequence), leading the government to build a police state apparatus. The
coming confrontation will look like Greece, with the addition of advanced
technology on all sides (very unintended consequence).
"An environment where
financial crises are seen to be a regular part of the landscape is one where people
might actually take more precautions. People would maintain a margin of
safety in all their decisions, investment and otherwise, regulations would be
well thought out and diligently enforced, and the unscrupulous and the incompetent
would quickly fail and disappear from the scene. Modern day attempts to
abolish failure only serve to ensure it, as moral hazard - the
likelihood that people's behavior changes in response to artificial supports
or guarantees - surges. Attempts to prevent or wish away future crises only
make them more likely. Only by allowing, even welcoming, episodic failure
do we have a chance of reducing the likelihood and magnitude of future
financial crises."
~ On The
Morality Of The Fed 12/21/12 The Baupost Group
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Moral Hazard
In economic theory, a moral
hazard is a situation where a party will have a tendency to take risks
because the costs that could incur will not be felt by the party taking the
risk
·
A moral hazard may
occur where the actions of one party may change to the detriment of another
after a transaction has taken place.
Example: persons with
insurance against automobile theft may be less cautious about locking their
car, because the negative consequences of vehicle theft are now (partially)
the responsibility of the insurance company.
·
A party makes a
decision about how much risk to take, while another party bears the costs if
things go badly, and the party isolated from risk behaves differently from
how it would if it were fully exposed to the risk.
Example: the Euro debt
crisis, in which the troika of relief funds (aka the ECB, the IMF, and the
EC) for heavily indebted nations like Greece are waiting as long as possible
to act. The risks of a money run, and the consequential market crash in
Europe is by far not as detrimental to these institutions as to the indebted
nations themselves.
·
An individual or
institution does not take the full consequences and responsibilities of its
actions, and therefore has a tendency to act less carefully than it otherwise
would, leaving another party to hold some responsibility for the consequences
of those actions.
·
One party in a
transaction has more information than another.
In particular, moral hazard
may occur if a party that is insulated from risk has more information about
its actions and intentions than the party paying for the negative
consequences of the risk. More broadly, moral hazard occurs when the party
with more information about its actions or intentions has a tendency or
incentive to behave inappropriately from the perspective of the party with
less information.
·
One party, called
an agent, acts on behalf of another party, called the principal.
The agent usually has more
information about his
or her actions or intentions than the principal does, because the principal
usually cannot completely monitor the agent. The agent may have an
incentive to act inappropriately (from the viewpoint of the principal) if
the interests of the agent and the principal are not aligned.
"A party will have a
tendency to take risks because the costs that could incur will not be felt by
the party taking the risk"
- Bad bankers
run good bankers (i.e. those reluctant to lend to bad credits)
out of the business.
Result: banks become hedge funds, predatory,
corrupt.
·
Big banks use their
too-big-to-fail status to borrow much cheaply than well-run smaller banks,
and then proceed to push the latter out of mortgages and other lucrative
business lines.
- Big banks
then accelerate their growth.
Result: financial oligarchy in which the
banks/government/military industrial complex merge into one organization.
Bernanke, Jamie Diamond and Obama are division heads in this empire.
Final Result: Police state in which the Bill of
Rights is ignored and technology is used to suppress dissent while inflation
siphons wealth from the 99% to the 1%.
- Real estate
appraisers forced to meet the number.
Result: Buyers end up underwater on day one.
·
Governments begin
to lie about economic stats to obscure the impact of bad policy.
- Businesses
take excessive risks because borrowing is so easy and government stats
paint a too-rosy picture.
Result: Massive Mal-investment
·
Banks create
unlimited amounts of derivatives and asset backed securities because
financing is so easy and they know that, should the market fail, governments
will have no choice but to bail them out.
·
Individuals borrow
excessively because credit is extremely easy to get. The market signals that
they're highly credit-worthy and that the future is brighter than it actually
is.
·
Investors move
further out on the risk spectrum because:
1.
There's no yield
available in low-risk paper,
2.
Government stats
paint a too-rosy picture, and
- The
conventional wisdom is that the government can't let high-risk
investment fail.
Result: Extremely fragile national balance
sheet,
Result: Overexposure to stocks and junk bonds,
Result: Retirees with capital at risk that
might never be recovered.
Unintended Consequences
Unintended consequences(sometimes unanticipated
consequences or unforeseen consequences) are outcomes that are not
the ones intended by a purposeful action.
Unintended consequences can be
roughly grouped into three types:
1.
A positive,
unexpected benefit (usually referred to as luck, serendipity or a windfall).
2.
A negative,
unexpected detriment occurring in addition to the desired effect of the
policy (e.g., while irrigationschemes
provide people with water for agriculture, they can increase waterborne
diseases that have devastating health effects).
3.
A perverse effect
contrary to what was originally intended (when an intended solution makes a
problem worse), such as when a policy has a perverse incentive
that causes actions opposite to what was intended.
"Unintended
consequences are outcomes that are not the ones intended by a purposeful
action"
Unintended Consequences
> Dysfunctional Markets
> Instability
Dysfunctional Markets
Dysfunctional Marketsare
considered operating when normal and expected 'causes and effects' no longer
occur.
Dysfunctional Markets exhibit characteristics such as
Malpractice, Malfeasance, Mispricing & Malinvestment.
Monetary Malpractice
Europe
Malpractice: Instead of allowing excessive
peripheral country debt to be wiped out, ECB is guaranteeing it.
Result: Investors buying bonds they wouldn't
otherwise buy, and Spain and Greece continuing to build up debt
USA
Malpractice: Low interest rates lead to a vast
oversupply of houses. But instead of letting prices fall to market clearing
levels, the Fed lowered rates even further and is now buying mortgage bonds
as part of QE3.
Result: Mortgage rates are at near-record lows
and home building is rising again, even though we still have too many houses
(malinvestment), flipping is back (moral hazard), first-time home buyers are
being priced out of starter homes (unintended consequence) and mortgage debt
is beginning to rise again (moral hazard). Important to understand is that
homes are not productive assets. They eat capital and the more big houses we
have the less productive we are as a society (unintended consequence).
Malpractice: Low interest rates are pushing pension
funds and individuals into riskier assets.
Result:
1.
They were forced to
buy equities and junk bonds to achieve decent yields.
2.
Now the yields on
those two classes have been lowered to the point where they don't work, so
pension funds are moving back into collateralized loan obligations (CLOs),
securities created from pools of corporate loans.
3.
JP Morgan forecasts
three times as many CLOs will be created this year as in 2011.
Malpractice: The Fed's willingness to monetize debt
prevents the US from living within its means.
Result: Without a printing press we would have
to prioritize and limit spending. But with a printing press we don't. The US
can run a global military empire and a cradle to grave welfare state, and
simply print the money it needs (moral hazard).
An ongoing, accelerating debt
buildup (unintended consequence) that:
1.
Makes it harder to
live within our means because we first have to pay interest on this rising
debt, and
2.
Increases the odds
of a catastrophic meltdown as rising debt renders the system more unstable
(unintended consequence).
Conclusion
"We must question
the morality of Fed programs that trick people (as if they were Pavlov's
dogs) into behaviors that are adverse to their own long-term best interest.What kind of government entity cajoles
savers to spend, when years of under-saving and over-spending have left the
consumer in terrible shape? What kind of entity tricks its citizens into
paying higher and higher prices to buy stocks? What kind of entity drives the
return on retiree's savings to zero for seven years (2008-2015 and counting)
in order to rescue poorly managed banks? Not the kind that should play
this large a role in the economy."
~ On The
Morality Of The Fed 12/21/12 The Baupost Group
