Monetary Malpractice: Deceptions, Distortions and Delusions

By: Gordon Long | Wed, Dec 26, 2012
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Deceptions Distortions Delusions

The Hippocratic Oath is an oath taken by physicians swearing to practice medicine ethically, honestly and above all, to do no harm to the patient. Unelected central bankers do not take such an oath. They do however swear allegiance to the Constitution.

On February 6, 2006, Ben Bernanke took an oath to the Constitution at his swearing-in ceremony as Chairman of the Board of Governors of the Federal Reserve System. The significance of this is that as a federal officer, despite being the front man for a privately owned, quasi government bank, he can be prosecuted for any violations of the Constitution that he swore to uphold.

Bernanke is likely never to be charged with a crime against the constitution, but he is certainly guilty of malpractice. As a result of his untested and uncharted monetary policies, he has created broad based Moral Hazard and Unintended Consequences that have inflicted immeasurable and potentially fatal harm to the America he swore allegiance to.


Deceptions, Distortions & Delusions

By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.

Moral Malady


Monetary Malpractice

Moral Hazard - Unintended Consequences - Dysfunctional Markets

"An environment where financial crises are seen to be a regular part of the landscape is one where people might actually take more precautions. People would maintain a margin of safety in all their decisions, investment and otherwise, regulations would be well thought out and diligently enforced, and the unscrupulous and the incompetent would quickly fail and disappear from the scene. Modern day attempts to abolish failure only serve to ensure it, as moral hazard - the likelihood that people's behavior changes in response to artificial supports or guarantees - surges. Attempts to prevent or wish away future crises only make them more likely. Only by allowing, even welcoming, episodic failure do we have a chance of reducing the likelihood and magnitude of future financial crises."

~ On The Morality Of The Fed 12/21/12 The Baupost Group

Monetary Malpractice
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Moral Hazard

In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk

Example: persons with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company.

Example: the Euro debt crisis, in which the troika of relief funds (aka the ECB, the IMF, and the EC) for heavily indebted nations like Greece are waiting as long as possible to act. The risks of a money run, and the consequential market crash in Europe is by far not as detrimental to these institutions as to the indebted nations themselves.

In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

"A party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk"

Moral Hazard

Moral Hazard

Final Result: Police state in which the Bill of Rights is ignored and technology is used to suppress dissent while inflation siphons wealth from the 99% to the 1%.

Yester-Year issues with trusts and monoplies


Unintended Consequences

Unintended consequences(sometimes unanticipated consequences or unforeseen consequences) are outcomes that are not the ones intended by a purposeful action.

Unintended consequences can be roughly grouped into three types:

  1. A positive, unexpected benefit (usually referred to as luck, serendipity or a windfall).

  2. A negative, unexpected detriment occurring in addition to the desired effect of the policy (e.g., while irrigationschemes provide people with water for agriculture, they can increase waterborne diseases that have devastating health effects).

  3. A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse), such as when a policy has a perverse incentive that causes actions opposite to what was intended.

"Unintended consequences are outcomes that are not the ones intended by a purposeful action"

Unintended Consequences

Unintended Consequences

> Dysfunctional Markets

> Instability

 

Robber Ben


Dysfunctional Markets

Dysfunctional Marketsare considered operating when normal and expected 'causes and effects' no longer occur.

Dysfunctional Markets exhibit characteristics such as Malpractice, Malfeasance, Mispricing & Malinvestment.

Dysfunctional Capital MarketsBroken Chain


Monetary Malpractice

Europe

Malpractice: Instead of allowing excessive peripheral country debt to be wiped out, ECB is guaranteeing it.

Result: Investors buying bonds they wouldn't otherwise buy, and Spain and Greece continuing to build up debt

USA

Malpractice: Low interest rates lead to a vast oversupply of houses. But instead of letting prices fall to market clearing levels, the Fed lowered rates even further and is now buying mortgage bonds as part of QE3.

Result: Mortgage rates are at near-record lows and home building is rising again, even though we still have too many houses (malinvestment), flipping is back (moral hazard), first-time home buyers are being priced out of starter homes (unintended consequence) and mortgage debt is beginning to rise again (moral hazard). Important to understand is that homes are not productive assets. They eat capital and the more big houses we have the less productive we are as a society (unintended consequence).

Malpractice: Low interest rates are pushing pension funds and individuals into riskier assets.

Result:

  1. They were forced to buy equities and junk bonds to achieve decent yields.

  2. Now the yields on those two classes have been lowered to the point where they don't work, so pension funds are moving back into collateralized loan obligations (CLOs), securities created from pools of corporate loans.

  3. JP Morgan forecasts three times as many CLOs will be created this year as in 2011.

Malpractice: The Fed's willingness to monetize debt prevents the US from living within its means.

Result: Without a printing press we would have to prioritize and limit spending. But with a printing press we don't. The US can run a global military empire and a cradle to grave welfare state, and simply print the money it needs (moral hazard).

An ongoing, accelerating debt buildup (unintended consequence) that:

  1. Makes it harder to live within our means because we first have to pay interest on this rising debt, and

  2. Increases the odds of a catastrophic meltdown as rising debt renders the system more unstable (unintended consequence).


Conclusion

"We must question the morality of Fed programs that trick people (as if they were Pavlov's dogs) into behaviors that are adverse to their own long-term best interest.What kind of government entity cajoles savers to spend, when years of under-saving and over-spending have left the consumer in terrible shape? What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retiree's savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? Not the kind that should play this large a role in the economy."

~ On The Morality Of The Fed 12/21/12 The Baupost Group

Never was so much owed by so many to so few

 


 

Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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