'Fed Underestimating Buildup Of Risk In Credit Markets': Alberto Gallo

by JASmius

Cue the "Mr. Bubble" theme:



Not the one you were expecting, is it?  Well, I couldn't find the one I was looking for, but this one fits the post theme a lot better.

Because when this bubble pops, it's going to blow away a lot more than a bathtub ring:

The Federal Reserve has made clear that interest rates will remain near record lows for a long time, and Alberto Gallo, head of macro credit research at RBS, thinks that's a mistake.

"The Fed is underestimating a buildup of risk in credit markets, which is threatening financial stability," he writes in the Financial Times.

The Fed has a two-pronged policy, including clear communication and macro-prudential regulation, the latter of which is designed to prevent financial instability. "Both are ineffective," Gallo notes.

Have you ever asked yourself how the Dow could be over 17,000 without any real economic growth over the past seven years?  With over a hundred million Americans exiled from the labor force?  And with the U.S. economy now once again in freefall?  Doesn't make much sense, does it?  What could be getting blown up the bloomers of the stock market to inflate it to this many orders of magnitude?

Funny you should phrase the question that way:

"Providing certainty about the low path of interest rates is self-defeating. It gives an even stronger green light to investors and companies engaged in risk taking. U.S. firms are adding record debt through mergers and acquisitions and share buybacks."

Oh, come now, Mr. Gallo, they're just following their government's example.  Without the government's ability to debase the currency.  Which is why Janet Yellen continues to do it for them.

It isn't just Mr. Gallo saying this, either:

Meanwhile, Stephen Roach, a lecturer at Yale University and former chairman of Morgan Stanley Asia, says the Fed's massive easing program might spark another global financial crisis.

"Monetary accommodation, to the point of ignoring the stresses and strains of financial stability and what they mean for asset markets and credit markets, is something that needs to be seriously rethought," he tells CNBC.

The only thing preventing monetary "hyperventilation," as it were, is the fact that Obamanomics won't allow the economy to breathe at all.  More to the point, the Fed's churning out of this endless avalanche of wastepaper we call Federal Reserve notes can only continue so long as interest rates remain artificially subterranean.  It's the reason why the Fed is the only "customer" for U.S. debt anymore - it's such a laughable risk that no genuine creditor will buy it apart from a huge increase in interest rates to offset the sky-high risk, since it's pretty much a guarantee that no U.S. creditor is ever going to see one thin dime of their "investment" back.  All of which, in turn, illustrates how phony-baloney/plastic banana the process is.  The federal government is escalatingly indebted to the Federal Reserve.  But the Federal Reserve has no incentive to call in any of its "investment" because it doesn't "need" a return on it.  It's balance sheet shuffling.  Monetary masturbation for the impotent.

It's like walking down the street stark naked, having convinced yourself that you're invisible.  Maybe if you do so in someplace like Portland, Oregon, where such a thing isn't out of the ordinary, you can pull it off for a while.  But even there, sooner or later somebody will notice.  And when they do, the result won't be pretty.

So what happens when interest rates are forced up - or "the music is about to stop," as Mr. Gallo puts it?  The walls of this financial Jericho come a-tumbling down.  The federal budget becomes nothing but interest payments on the existing $17 trillion "official" debt, with no room for anything else; since libs would never stand for any kind of austerity, all the debt would explode even faster; since nobody wants our debt, the Fed would have to monetize it even faster; and, well, you can see where this crazy train is headed.

Forget the purported origin of the universe; the stock market, the public and private debt - this is the REAL "big bang".  And when it pops....



....let's just say the Panic of 2008 will be akin to a Forth-of-July sparkler.

And don't think Barack Obama doesn't know it.