Replacing One Bubble with Another

Beware the ‘central bank put’ bubble –

It seems to me that the Federal Reserve’s has a bubble replacement policy.

In the 1980’s the United States grew due to a real estate bubble fueled by cheap loans as the Fed lowered interest rates to stimulate economic growth following the deep recession of 1981-1982. The banks made too many bad loans to real estate deals on the margins, and this bubble exploded spectacularly culminating in the recession that cost the first President Bush his job.

Once again, the Fed rode to the rescue lowering interest rates. This action caused a stock market bubble. People always focus on the silly Internet companies of this era where much money was lost, but there were also ridiculous valuations across the entire market. This bubble burst of its own accord in 2000 and was exacerbated by the 9/11 attacks.

Of course, the solution here was to lower interest rates even more. The Fed’s policy helped reinflate the stock market to an extent and caused a massive housing bubble that burst in 2008.

Since interest rates could not be lowered to less than zero, the Fed began embarking in a huge money printing scheme using Gutenberg’s invention to purchase government bonds and mortgage and asset backed debt in an attempt to stimulate economic growth. This has created the “Central Bank Put Bubble” discussed in the article.

This is really an asset price bubble, a combination of stock, bond, commodity, real estate and even risk currency bubbles. Each time the Fed has acted, it has created a larger, more dangerous bubble than the one that it has replaced. The effects of the bursting have gotten progressively worse. From a mild recession in 1991 to a virtual depression in 2009.

Using the current pattern to predict the future of the current bubble paints an ugly picture, or do you think that this time will be different?



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