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The Authority Fallacy, Or The Quarles Quandary

Jeffrey Snider profile picture
Jeffrey Snider

By Jeffrey P. Snider

In early September 2007, just a month after the eurodollar system broke and still weeks before the FOMC would finally see the need to do something, anything, private equity firm Carlyle Group added six new "senior investment professionals" intending on making investments in global banking and insurance. The timing was, well, suspect.

Among those added to the firm was Randal Quarles, a former Treasury official in the Bush administration who had become Undersecretary for Domestic Finance. In that position, Quarles had delivered a speech in New York in May 2006 addressing the irregularities becoming undeniable throughout markets. It was, to say the least, an auspicious time to be talking his book.

It was, in reading it this much later, a far more realistic assessment than most that had been offered particularly by anyone in any official capacity. He addressed the potential issues with the GSEs starting with their role in the then housing bubble mania, admitting quite frankly, "The concentration of risk inherent in these portfolios along with the GSEs' thin capital structure are an important policy concern and a high priority for the Treasury." Priority in name only, apparently.

In addition, the Undersecretary identified low risk and volatility largely for what they could potentially represent underlying everything, meaning asset bubble conditions. Following on that, his speech referred directly to mortgage payments and again bubbles, before finally speaking about foreign holdings of UST securities.

Still, despite all that, Undersecretary Quarles remained quite optimistic. In conclusion, he said:

I would like to close by just noting that the potential tail risks I've talked about today are just that-possibilities but not likely outcomes. Fundamentally, the economy is strong, the financial sector is healthy, and our future looks bright. We will surely face challenges in the future, but we can take comfort in the knowledge

This article was written by

Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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Comments (4)

The Nattering Naybob profile picture
"These are the people who have been brought in to run the Federal Reserve 10 years after the monetary system broke and the global economy with it. The sort of empty suits who knew little or nothing about what was going on when it was going on (which is astounding given his job at Treasury, Undersecretary for Domestic Finance, but explains a whole lot about what happened and continues to), and by all outward appearances have learned nothing from everything in between then and now. Is it really too much to ask that whomever takes one of these jobs is actually competent within the area they are assigned? You can and do fail upward."

Amazing incompetence indeed. José Ortega y Gasset who died in 1955, about 14 years before The Peter Principle was published, suggested:

"All public employees should be demoted to their immediately lower level, as they have been promoted until turning incompetent".
change is the only constant profile picture
"Until he or someone like him acknowledges symmetry, and then realizes what that means, there's nothing useful to be taken from his assessments"

It is times like this, the most ancient of sages in the western world can be referred to as an authority that speaks with understanding. 'The difference between myself, and these other wise men, is that I know I do not know' - Attributed to Socrates.

May I only add that chaos is not structure, and structure is not order. Expecting a pattern, that rests on unsound foundations - to repeat - are the madmen Einstein observed, who were hoping for a different result - and not understanding that they were the same madmen - but what they observed was different. And the difference between madmen and you and me? What IS something that can be said to rest on a fundamentally sound foundation? We are all on a blue ball floating in space - that magically - keeps going in circles. Or we are fixed, and the universe, magically, keeps going around us. Flawed assumptions will, paradoxically, repeat the unpredictable results as sound ones will repeat predictable results. The difference is in what is predicted to happen versus what actually happens. Ptolemy's math versus Copernicus'..repetition and symmetry. Clearly Ptolemy's errors rested neither in his mathematics, nor his calculations - but in what he assumed to be true - that was not.
Or as a much less than ancient sage, symmetrically opined:

"It's deja vu all over again."
Your detractors will be assuaged by great auto sales tomorrow lol.
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