Monday, May 09, 2011

Those Whom the Gods Wish to Destroy They First Make Fed Governors

The hubris of the Federal Reserve knows no bounds; the Fed Governors' delusions will lead to tragic failure.

In the tragi-comic farce that is the U.S. economy, the Federal Reserve plays the part of the hubris-soaked Hero whose overconfident meddling triggers ruin.

Entire volumes could be written about the folly of the Federal Reserve's policies, but I will limit this to two specific points of a general nature.

Many observers have likened financial systems to natural systems, i.e. an ecology in which complex interactions establish a dynamic harmony of ebbs and flows within a stable framework.

The current global ecology of finance is out of balance and intrinsically unstable.The Federal Reserve and the other central banks are playing the role of financial gods, if you will, intervening in the interactions of mere mortals to create the illusion of stability.

To this end, the Fed has created trillions of dollars behind its veil of secrecy, and used this money to prop up delusional asset values (high) and interest rates (low).

If we look at a decentralized financial system as a self-organizing ecology, we find that the strength of the system lies in the adaptability of the myriad organisms in its many micro-climates and meandering streams. The key strength of a decentralized financial ecology, i.e. one not organized as a top-down command economy, is the "genetic diversity" of its many participants. There is not just one dominant species in the ecology, but many interdependent species.

In a financial ecology, there is not one lender and one class of borrowers, but a huge diversity of lenders, borrowers, creditors and savers, and a wealth of interacting, inter-dependent enterprises.

A centralized financial ecology is a doomed system. The Fed is the equivalent of an ignorant, hubris-infused agency that seeks to "restore" an ecology by flooding it with dammed-up water and unleashing a single predatory species raised in an unnatural, contrived "factory."

The Fed is wiping out diversity and thus the adaptability of the enterprises that survive its crude flooding and replication of a single predatory species.

The Fed is creating a sickly, vulnerable mono-culture of an economy, one dominated by centrally controlled predators which are themselves lacking in genetic diversity. the predators are vulnerable to collapse, and so is the entire mono-culture ecology.

Just as agencies playing god further degrade the natural systems they claim to be "restoring" with ever-grander interventions, so too is the Fed destroying the U.S. economy with equivalent god-like meddling and ever-more grandiose, ever-more delusional interventions in what were once decentralized, self-organizing systems that naturally sought harmony and stability.

Put another way: the Fed has taken the risk from failed institutions and policies, and spread it throughout the entire financial ecology. What should have triggered a "die off" of one vulnerable species--the "too big to fail" mortgage/commercial banks and the Wall Street investment banks--was redistributed to all other species.

In other words, the risk to the entire system has been raised in order to preserve the Fed's "preferred" predators. Risk cannot be massaged away, it can only be cloaked or redistributed. In redistributing the monumental losses and the equally monumental risks of price discovery inherent in those undeclared and masked losses, the Fed is greatly increasing the vulnerability of the entire financial ecosystem.

The Fed's grandiose attempts to play Central Command Economy god, destroying the strengths of diversity and adaptability to preserve its predatory partners, will usher in Nemesis--the culminating destruction brought on by the Fed's folly and hubris.

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