Of Two Minds
FEB 13, 2018
It’s a shell game you can only play for so long. For all the chest-beating the federal government does about “free markets” and their immaculate capitalist glory, they sure do like interfering with them.
When risk assets go up, no problem. When stocks get to insane, need-to-come-down valuations, well, that side of the free market just can’t be permitted. People lose money. People get angry. People might vote for someone else.
So the Fed, to all of our ever-greater peril, uses every last trick in its substantial bag of fiat-currency, interest-rate-zeroing tricks to keep money flowing into risk assets. There are serious eventual downsides. But hey, that’s the future. Who cares about the future?
Though no one in the financial sector dares say this in public, the possibility that central banks can no longer sustain the illusion that risk has been vanquished is now front and center. If risk can't be corralled and quantified, then it can't be offset with any degree of confidence. If risk can't be corralled and quantified, it can't be offloaded onto unsuspecting others without the possibility that the system itself will collapse once the risk that's been piling up in the global machinery manifests.
The end-game of this self-reinforcing feedback loop is collapse, as risk inevitably emerges where it is least expected. Home mortgages were safe and boring. Well, not quite, after financial alchemy was applied to vanquish risk and thus unleash enormously profitable financialization.
Nobody knows where systemic risk might emerge, or how much risk exposure is lurking in assets. What was once safe is now less certainly safe. So where do you earn those fat returns without risk, the returns the world has come to see as entitlements due capital everywhere, at all times?
The illusion that risk can be limited delivered three asset bubbles in less than 20 years. Each bubble collapse caused more structural damage, and each central bank "save" introduced higher levels of systemic fragility, which is another way of saying systemic risk.