Dysfunction at the Fed
By Daily Bell Staff - November 25, 2015

The Fed is About to Make Life Harder For Big Banks … It's considering changes to its annual stress test. The Federal Reserve administers stress tests to the largest U.S. banks each year to see how they would fare in a hypothetically turbulent economy. The regulator is expected to make those tests more difficult to pass. No changes have officially been proposed but, as the New York Times reports, a senior official says that the Fed is considering different modifications. – Fortune

Dominant Social Theme: The Fed is on the job, always trying to make the banking system better and safer.

Free-Market Analysis: Fortune magazine gives us a heads up on what the Federal Reserve may soon mandate for banks, as can be seen in the excerpt above.

The test is actually fairly simple, though doubtless the details are complex. First the Fed figures out how much money a bank would lose in a volatile market. This number is removed from the bank's capital and if the result brings the total below the minimum requirement, then the bank is not considered to be in compliance.

Now the Fed wants to raise the minimum requirement – that is, the amount of capital a bank has to hold. Supposedly, this would make big banks "more resilient" and less likely to fail.

The trouble with this, of course, is that the bank model is derived from a time when banks held gold and silver as capital. Today, they simply hold electronic digits and those digits can be multiplied at will by the Fed itself.

During the 2008 crisis, the Fed supposedly gave away trillions in short-term loans to ensure that banks didn't "fail." Of course, today, with derivatives markets totaling well over one thousand trillion, any catastrophic failure would require the Fed to print an astronomical amount of money.

Within this context, "stress tests" can be seen more as financial drama than financial reality. Like airport security, the stress tests provide consumers with reassurance but little else.

When one examines the larger operations of the Fed and central banks in general, one comes away convinced that most of what the Fed does is simply for show. The bottom line here is that a small group of people standing in the shadows invented and presumably control the money printing process. They've erected quite a large charade to justify it.

Over at, we find an unusual article that illustrates this supposition rather well. Entitled "The Federal Reserve's Economic Modeling Is Out of Touch With Reality," the article asks, "How good has the Federal Reserve been at predicting how its policies will affect the behavior of the U.S. economy?" and then answers, "Not that good."


So, what's wrong with the Fed models? John Dizard of the Financial Times has taken on the economic forecasting approach used by the Federal Reserve.

"My problem is not just that the DSGE [dynamic stochastic general equilibrium modeling] group has failed to achieve its publicly stated goals," Dizard said. "It has pursued policies that lead to results that not only defy common sense but result in perverse outcomes."

He rails against the economics profession: "Even within the Profession, the DSGE's obliviousness to the mechanics of financial markets, let alone crises, has been remarked upon.

Does this sound familiar, dear reader? We've written about it plenty of times, explaining that this sort of econometrics is flawed for the simple reason that you can't use backwards-looking statistics to arrive at forward-looking conclusions.

Dizard explains it somewhat differently, writing that the "Dynamic Stochastic General Equilibrium model is the macroeconomic model of the neo-Keynesian school of economics" – but that very few actually understand the model.

In any case, he says, "it does not work" and has "little if any forecasting power." The DSGE model also contains the "Phillips Curve," which he describes as "the empirical relationship between inflation and unemployment that indicates that, in the short-term, there exists a trade off that can be exploited by policy makers to meet the U.S. Congressional mandate for the Fed to achieve low levels of unemployment for the country."

Dizard explains that the Phillips Curve is based on the idea that consumer expectations revolve around previous inflationary periods. Central bankers can manipulate these expectations in order to stimulate the economy. But Dizard also points out that, hypothetically anyway, people will eventually adjust their inflationary expectations "based upon what they have seen policy makers do and not upon what actual inflation turned out to be."

For this reason, Dizard tells us the Phillips Curve model doesn't work much better than DSGE. And that means that the two main models the Fed relies upon are basically dysfunctional.

How these models can be expected to reflect the real world of today with only minor treatments of the financial sector is mind-boggling.

Dizard concludes that Fed economic models "have little if any forecasting power." Therefore, Fed statements "do not provide forward guidance but rather forward confusion. "

Dizard doesn't take his article to its logical conclusion, which is that central banking itself is nothing but dysfunctional price fixing. However, to see this sort of argument turn up in the mainstream media merely further confirms our suspicion that the paradigm itself is collapsing. People – media and otherwise – are suddenly realizing that it makes no sense, that it is a kind of monetary propaganda.

Couple econometrics with the fedgov's entirely untrustworthy statistics and you have the ingredients for a devil's brew of nonsensical analysis that people are nonetheless supposed to believe in.

It is, of course, the Internet that has exposed central banking as nonsensical and destructive. Central bankers have not been able to resist its scrutiny and the result is a body politic that has increasingly lost faith in the fundamental underpinnings of the West's economic system.

This kind of cognitive dissonance cannot long survive. People need to believe in their systems or they will seek other ones. And that is what people are starting to do.

After Thoughts

The ramifications are significant and profound. We are facing an immense paradigm shift, and probably it won't be a pretty one. Protect yourself.

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