Fraud generates risk, and risk eventually breaks out in the “safest” parts of the financial plumbing, the ones nobody gives a second thought to because they’re “low risk.”
Let’s go all the way back to the last time a central banker actually spoke the truth in public: December 5, 1996, 18 long years ago. It was on that day that Federal Reserve Chair Alan Greenspan gave a typically dry speech that hinted stocks could actually become overvalued (gasp!) due to irrational exuberance and subsequently plummet when rational valuations returned:
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
Global stock markets promptly sold off hard at the shocking revelation that stocks might actually become subject to unexpected and prolonged contractions. This sharp reaction to a fundamental truth about markets–that they are prone to the irrational exuberance of participants, and the computer trading programs keyed to this momentum magnify the irrationality–caused central bankers to avoid any upsetting truth from then on.
For the past 18 years, all we have heard is a relentless spew of lies, obfuscations, misdirections and toxic propaganda from central bankers, the most famous examples being we will do whatever it takes and when it becomes serious, you have to lie.
But soon, evasive reassurances were not enough, and central banks had to intervene with unprecedented force to keep markets from collapsing to their “true price discovery” levels. The Fed issued $23 trillion in backstops, guarantees and loans, and other central banks chipped in more trillions. Tens of trillions of credit-money was created and pumped into the financial system to keep gravity from laying waste to trillions of dollars in phantom collateral and assets.
