rhizome

Coming Soon: Banking Crisis of Historic Proportions

What about the recent actions of the Fed? Specifically, the Fed is going to purchase more treasuries in an effort to keep the long end of the yield curve down according to their recent statement. As Bernanke continues that action he is increasing the risk for foreign central banks who normally operate in that market. What happens when the foreign central banks take a look at the Fed's growing balance sheet and decide not to buy our debt? Rates will go to the moon and Benanke will end up holding the bag.

Ben Bernanke's Dismal Prediction Record

Bernanke and Geithner are clearly doing all they can to keep this system from grinding to a halt in a wave of deflation. Unfortunately, their plan will not work because they are forgetting the demand side of the equation. The collective loss for American households stands at approximately $11 trillion (according to the Fed). Nothing the Fed or Treasury do is going to be able to fill that hole in the economy. We are being sold this idea that by lowering interest rates in various ways it will make people want to borrow money again? Nobody in this country has any faith in Bernanke's ability to predict where they economy is going. He missed every major move so far so why should anybody believe him when he says we will be out of this mess by next year? People are thinking unemployment is going to 20% and they are living their lives as if it has already happened. It will be interesting to see the CPI number for March. If it comes out below expectations (or worse down significantly), the markets are going to panic because people will become painfully aware that neither the Fed nor the Treasury have any control over the velocity of money and that underpins every plan in their book.

Robert Shiller's Real Track Record

The reason predictors of crashes are more sought after has to do with the distribution of returns in a particular market. Any long bull market has a positively skewed distribution of returns. In economics it is referred to as a long-memory processes or something resembling Brownian motion. The long-memory process tends to persist in one direction for a relatively long period of time until a brutal reversion takes place. Everyone wants to be the person ringing the bell a little ahead of the brutality. Nevertheless, it is much harder to get the timing of a crash just right because the market tends to surprise everyone and go further than anyone expected.