Posted by Karl Denninger
Members noted the importance of continued close monitoring of financial markets and institutions–including asset prices, levels of leverage, and underwriting standards–to help identify significant financial imbalances at an early stage. At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.
Really? A couple of charts. First, what Government has done:
No misalignment there! Heh, it’s totally normal for the government to replace on a two-year running basis more than 20% of GDP, and to have a current replacement rate of almost 12% of GDP.
Then there’s the stock market, of course:
There’s no misalignment there either!
Ed: Well, actually, there isn’t if you want to be technical about it – government borrowing and spending $3 trillion in two short years, replacing a collapsed consumer and business final economic demand, will indeed produce a ferocious stock market rally.
The problem of course is that this “rally” and this “turn in the economy” is exactly the same sort of event that happened in 2003, when intentional blindness toward making liar loans and other similar silliness in other areas of credit (“covenant light”, “pik/toggle bonds” and other stupidity) without concern for ability to pay essentially blew up the world. Never mind that this was all an intentional act to paper over the recession and corrective influence of the markets that should have occurred in 2000.
For those who are ignorant of history, the same sort of game was attempted in 1930. It didn’t work. Oh sure, it seemed to, and it produced a huge market rally. For a while.
But in the end the cash flow won, as it always does – and as it will again.
Unlike the Latin American debt crisis when Paul Volcker threatened Citibank and others with closure if they didn’t take his “willful blindness” as an opportunity to get all of the trash off their balance sheet, this time around nobody has purged anything from anywhere. We have instead simply left the crap there and pretended it was performing when it is not.
Now it may be true that this story will not end the same way as 1930 did, or as Japan did in the 1980s, but all I can do is look to the past and the mistakes that were made there.
We’re making the same errors made throughout history as a consequence of regulatory capture and even outright fraud, adding even bigger and newer errors on top of the old ones.