Risks That Crouch Hidden In the Grass

“As prudent investors and managers, we must be aware of the realities we face.” ~ John Mauldin

No one would argue that there has been plenty of time for discussion of the 2008 financial crisis among central bankers. But coming up with answers, well, that’s a different crouching tiger. Central bankers have accepted no responsibility for ignoring the warning signs of excessive debt, keeping interest rates too low for too long, ignoring housing market bubbles, or failing to regulate banks properly. In fact, they were hugely rewarded with money, power, and prestige, leaving taxpayers to foot the bill for bailouts.

Does this point to the need to remove banking supervision from central banks? Or to put politicians in charge of setting interest rates? Clearly, reform of the Federal Reserve is sorely needed. However, more rules and regulations are not needed – rather, holding the feet of central bankers to the fire, forcing accountability for bankers’ management of the banking system.

The Big American Lie

For years, central banks have foisted a lie upon the American public – that low interest rates spur consumer spending and increase employment. This untruth was heavily promoted even at the hidden risk of ruining the financial lives of both savers and retirees. Given that retirees and savers have less to spend and, therefore, consume less, this thinking is counterproductive, at the very least. According to Mauldin, “It is financial repression of the most serious variety, done in the name of the greater good; and it is hurting those who played by the rules, working and saving all their lives, only to see the goal posts moved as the game nears its end.”

The fact that central banking models have been spectacularly wrong for decades seems to evade central bankers, who continue to pursue micromanagement of the economy with ever-renewed vigor. The tiger crouching in the grass is the destruction of future returns of pension funds. We’re headed for a carry-trade currency few truly understand, except for the bankers and sophisticated investors who anxiously await its implications.