Economy and Finance

IS THE FED GOING TO ATTEMPT A CONTROLLED COLLAPSE?

Published on

July 9, 2014

As most Fed watchers know, last week was interesting because Janet Yellen, speaking at IMF came out and said something quite surprising. In a nutshell, she said “It’s not the Fed’s job to pop bubbles”. While many market participants immediately took this to mean, “To the moon, Alice!” and started buying equities hand over fist, there’s another possible explanation for Mrs. Yellen’s proclamation of unwillingness: The Fed could be preparing to do exactly what it said it wouldn’t.

Here’s a quick re-cap of events: In the recently released Annual Report of the BIS: Bank for International Settlements (commonly thought of as the “central bank’s central bank”) the BIS made a rather ominous recommendation to it’s member banks: Pop this bubble now. Their specific language wasn’t quite so direct, but the message was just as clear.

The risk of normalising too late and too gradually should not be underestimated… The trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on.

Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms,” …

“The road ahead may be a long one. All the more reason, then, to start the journey sooner rather than later.”

As we noted last week, there are a couple of fascinating things to note about this recommendation. First, for anyone who thinks that the concept of intentionally crashing the stock market is the stuff of conspiracy theorists, that notion is now dead and buried. It’s extremely clear from the BIS’ language, that the concept of initiating a collapse is openly discussed as a policy measure. This was a direct recommendation to bring on the crash – or as they say so colorfully, to “bring forward the downward leg of the cycle”.