On Friday, Fed Vice Chairman Stanley Fischer delivered a speech entitled “Macroprudential Policy in the U.S. Economy” at the Federal Reserve Bank of Boston. What can we learn from it?
The Fed’s no. 2 policy maker spoke last week on the possibility of asset bubbles in the economy and the toolkit that the U.S. central bank has to deal with them. Basically, he said that he does not see immediate risks of financial bubbles in the U.S. It is a bit surprising, given the fact that the biotech bubble may just finally have popped. And there is obviously no subprime auto loans bubble, there is no bond bubble and high yield credit spreads are not blowing out. Right. Instead, everything is perfectly fine:
“Banks are well capitalized and have sizable liquidity buffers, the housing market is not overheated and borrowing by households and businesses has only begun to pick up after years of decline or very slow growth”.
If the economy is not overheated, why couldn’t the Fed hike interest rates? If the U.S. financial sector is so stable, why was the September FOMC meeting – accidentally, after the decline in the stock market – so dovish?
The truth is that the Fed created every single U.S. bubble, not seeing this. The unusually low interest rates caused the stock market bubble in 1920s, the dot.com bubble (and Greenspan did not see it), the global commodity bubble, as well as the housing bubble (Bernanke did not notice it). The ZIRP, initiated after the outbreak of the Great Recession, led to further capital inflows to emerging countries and commodity markets, and to stock market and corporate bond bubbles (not surprisingly, Yellen and Fischer are as blind as their esteemed predecessors).
The alleged fact that “banks are well capitalized and have sizable liquidity buffers” is completely irrelevant, because since 2010 liquidity has been surging predominantly through capital markets, not through banks. And do not forget about the shadow banking system. In 2008 banks were considered to be in good shape, simply because regulators did not notice their connection and exposure to shadow banks. As Fischer admitted himself, “banks currently supply about one-third of the credit in the U.S. system”.
To sum up, the Fed is blind, or it simply fears bursting the economic bubbles. This is good news for the gold market, since it implies that the U.S. central bank, not seeing all the financial imbalances in the economy, is going to continue its unusually easy monetary policy. The longer the bubbles grow, the bigger the burst and the following harm for the economy, as well as the potential upswing in the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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