The Fed’s Moral Hazard Monster Is About to Lay Waste to “Wealth”, by Charles Hugh Smith

When everyone thinks they can’t lose, they’re going to lose, big time. From Charles Hugh Smith at oftwominds.com:

If the Fed set out to destroy the financial system, they’re very close to finishing the job.

If you set out to destroy markets and the financial system, your most important weapon is moral hazard, the disconnection of risk and consequence. You disconnect risk from consequence by rewarding those making the riskiest bets and bailing out gamblers whose bets went bad.

You reward those making the riskiest bets by pushing markets higher regardless of any other factors. Nothing matters except your support of ever higher markets.

This implicit guarantee that any bet on markets lofting higher will be a winning gamble rewards those making the riskiest bets. The punters who played small with cash made a few bucks, but the punters who borrowed heavily and then leveraged those bets to the hilt made a killing.

In other words, moral hazard incentivizes maximizing debt and leverage to increase the risk and size of bets because every bet is a can’t-lose proposition. The hesitant, the cautious, the prudent, those who hedge their riskiest bets, are all left in the dust. Anyone who doesn’t max out borrowing and leverage is a loser.

By pushing markets ever higher, you bail out every participant. To make up any losses, all the punters have to do is increase the size and risk of their next bet.

To make sure everyone is properly incentivized and assured, you bail out the biggest gamblers should they somehow lose. You do this by offering them unlimited lines of credit (so they can leverage up their next bet and and win back their losses), you eliminate transparency in market pricing to mask their losses (eliminate mark-to-market requirements, etc.) and you overlook fraud, racketeering, price-fixing, collusion and embezzlement because all these activities serve to increase risk-taking and delegitimize markets.

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One response to “The Fed’s Moral Hazard Monster Is About to Lay Waste to “Wealth”, by Charles Hugh Smith

  1. “…$53 trillion in phantom wealth generated by leveraging up the Federal Reserve’s $8 trillion expansion of its balance sheet since 2008 seven-fold.”
    I have been wondering how much “helicopter money” the Fed’s balance sheet expansion created.

    Like

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