The Great Immoderation: How The Fed Is Sowing The Next Recession

In February 2004 Ben Bernanke famously declared the business cycle had been tamed and took a bow in behalf of enlightened monetary management, claiming it was the principal source of this beneficent development.  Exactly 55 months later, of course, he terrorized the Congressional leadership and a clueless President with the frightening proposition that a Great Depression 2.0 was just around the corner.

As to why he had been so stupendously wrong, Bernanke did not say. Nor did he explain why the brilliantly “stable” US economy had suddenly stumbled to the edge of an abyss despite the Fed’s energetic money printing in the interim. And the Fed had not been stingy in the slightest; it balance sheet had actually expanded by $150 billion or nearly 4.5% annually between February 2004 and the Lehman bankruptcy.

Indeed, six and one-half years on from the financial crisis—-events that made a mockery of the Great Moderation—–the monetary politburo and its acolytes on Wall Street have offered no coherent explanation as to why Armageddon loomed nigh and why the worst business cycle plunge since the 1930s actually materialized. Certainly their lame Monday morning claim that “prudential regulation” had failed doesn’t cut it.

Indeed, depicted below is the staggering growth of household debt in the US economy between the two signal financial events of this century—the dotcom bust and the Lehman meltdown. Households literally borrowed themselves silly during that period, extracting upwards of $3 trillion of MEW (mortgage equity withdrawal) from their home ATM machines, among other delusionary outbreaks. Yet to say that this borrowing binge was caused by inadequate bank supervision is an insult to intelligence. It might as well be argued that the “financial contagion” that fueled the crisis arrived on a mysterious comet from deep space!

In fact, the eruption of $7 trillion of new household borrowing during this period—-or more than all the household debt outstanding at the turn of the century—-is the work of the central bank. It was the Fed’s 1% interest rates and stock market puts that had already triggered the housing and mortgage frenzy, even as Bernanke boasted about its management prowess in February 2004.

Never having explained the causes of the Great Financial Crisis (GFC) or acknowledged its own evident complicity, the Fed has nevertheless energetically doubled down on the same monetary toxins that caused the last crisis. In fact, between the September 2008 plunge that Bernanke said couldn’t happen and the plunge lurking just around the corner once again in March 2015, the Fed’s balance sheet has soared by 4.5X or at a 27% CAGR for nearly seven years running.

So now the third immense financial bubble of this century has been fully inflated. And there are abundant signs that what we really have is a Great Immoderation—–a baleful, not beneficent, development that can be laid exactly at the door step of the central bank.