Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

The Central Problem with Central Banks: They Become the Greater Fools/Bag-Holders

admin by admin
May 16, 2015
in Uncategorized
0
0
SHARES
2
VIEWS
Share on FacebookShare on Twitter

by Charles Hugh Smith, Of Two Minds

Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen.

The central problem with central banks is their mandate now includes propping up all asset markets globally. Back in the good old days before the Global Financial Meltdown of 2008-09, central bankers reckoned they could control the “animal spirits” released when the risk-on herd destabilized into a chaotic risk-off stampede.

As former Federal Reserve chairman Alan Greenspan noted in his 2014 Foreign Affairs article Why I Didn’t See the Crisis Coming, the models used by central banks and private economists alike presumed the demand for risk-on assets would remain robust even in a downturn:

Almost all market participants were aware of the growing risks, but they also knew that a bubble could keep expanding for years. Financial firms thus feared that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. In July 2007, the chair and CEO of Citigroup, Charles Prince, expressed that fear in a now-famous remark:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.

They were mistaken. They failed to recognize that market liquidity is largely a function of the degree of investors’ risk aversion, the most dominant animal spirit that drives financial markets. Leading up to the onset of the crisis, the decreased risk aversion among investors had produced increasingly narrow credit yield spreads and heavy trading volumes, creating the appearance of liquidity and the illusion that firms could sell almost anything.

But when fear-induced market retrenchment set in, that liquidity disappeared overnight, as buyers pulled back. In fact, in many markets, at the height of the crisis of 2008, bids virtually disappeared.

Translated into plain English, what Greenspan and other conventional economists expected was a deep pool of greater fools would gladly lose money by buying assets that were plunging in value. Greenspan et al. reckoned the seemingly insatiable demand for exotic financial products implied that greater fools would continue to “buy the dips,” enabling Wall Street financiers to unload the near-worthless exotic financial products to those willing to absorb rapidly increasing losses.

The problem with this model is the pool of greater fools drains almost instantly, leaving Wall Street holding the bag of collapsing-in-value risk-on assets. As the exotic financial products crashed to Earth, the highly leveraged banks were quickly rendered insolvent.

The world’s central banks have attempted to keep the asset bubbles inflated by lowering interest rates and manipulating markets with secret purchases of assets, either directly or through proxies. Whenever markets threatened to collapse, central banks stepped in and “bought the dip,” reinforcing the faith that central banks will never let markets fall.

The problem for central banks is the pool of greater fools is increasingly skittish.Once the herd is no longer willing to “buy the dip,” central banks will have no other choice other than to increase their buying–in effect, replacing private demand with their own purchases of assets.

That works when a few billion dollars spent “buying the dips” reinvigorates private “animal spirit” buying. But when the risk-on herd stampedes into risk-off selling, markets go bidless: there are no more greater fools left except the central banks.

Central banks have inflated the markets to such high valuations that no central bank can possibly buy enough to keep the bubble intact. Here is Doug Noland’s summary:

Total Debt Securities grew to $36.152 trillion, or 208% of U.S. GDP. Total Equities inflated to $36.457 trillion, or 209% of GDP. Having inflated almost 2,000% since 1981, Total Securities ended 2014 at $72.608 trillion, or an unprecedented 417% of GDP.

The Federal Reserve expanded its balance sheet of assets owned from $800 billion in 2008 to $4.5 trillion at the end of its quantitative easing programs in 2014. This massive expansion was enough to calm the stampede and reinforce another six years of risk-on herd buying.

But having succeeded in blowing another unprecedented global bubble in assets, central banks have backed themselves into a corner of direct asset purchases to prop up markets. In the U.S. alone, a risk-off selling spree that liquidated 10% of the $72 trillion in financial assets would require the Fed to print $7 trillion and use every dollar to buy the assets being dumped wholesale by the stampeding herd.

Can central banks double, triple and quadruple their balance sheets almost overnight to absorb the mass dumping of risk-on assets? Will there be no consequences, political and financial, to central banks becoming the greater fools who will buy even as asset values are crashing?

The conventional view is that the Fed will never need to print-and-buy more than a few hundred billion dollars to stem the tide of selling. But the conventional view has a fatal flaw that Greenspan outlined in his Foreign Affairs article: when markets go bidless, “animal spirits” may be beyond calming. Once central bank buying fails to stem the tide, markets will truly panic.

At that point, central banks will have to decide to buy trillions of dollars of rapidly depreciating assets or finally let the market find its own level. Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen.

Previous Post

Trefis: Highlights Week Ending 15 May 2015

Next Post

Will Growth In Cost Of Home Rents Beat Home Purchase Price Growth?

Related Posts

U.S. Treasury Drives Russia Close To Default: What Comes Next?
Econ Intersect News

U.S. Treasury Drives Russia Close To Default: What Comes Next?

by John Wanguba
May 29, 2022
MasterCard CEO: SWIFT Payment System May Be Non-Existent In 5 Years
Business

MasterCard CEO: SWIFT Payment System May Be Non-Existent In 5 Years

by John Wanguba
May 28, 2022
Gap Cuts Profit Forecast As Inflation Drains Demand, Old Navy Staggers
Business

Gap Cuts Profit Forecast As Inflation Drains Demand, Old Navy Staggers

by John Wanguba
May 27, 2022
Microsoft Finally Joins The Virtual World, Unleashes New “Industrial Metaverse”
Business

Microsoft Finally Joins The Virtual World, Unleashes New “Industrial Metaverse”

by John Wanguba
May 26, 2022
Basketball Star “Kevin Durant” Files Patents For 26 New NFTs And Metaverse Apps
Business

Basketball Star “Kevin Durant” Files Patents For 26 New NFTs And Metaverse Apps

by John Wanguba
May 26, 2022
Next Post

Will Growth In Cost Of Home Rents Beat Home Purchase Price Growth?

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business Coinbase crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi digital assets Elon Musk ETH Ethereum Ethereum blockchain finance funding government investment market analysis Metaverse mining NFT NFT marketplace NFTs nonfungible tokens nonfungible tokens (NFTs) price analysis regulation Russia social media technology Tesla the US Twitter

Archives

  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • U.S. Treasury Drives Russia Close To Default: What Comes Next?
  • MasterCard CEO: SWIFT Payment System May Be Non-Existent In 5 Years
  • Gap Cuts Profit Forecast As Inflation Drains Demand, Old Navy Staggers

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish