For charts and live links go to discussion.fool.com - Control panel central banks add moral hazard

Of the many books on the history of finance I have read, the most illuminating is “21st Century Monetary Policy,” by Benjamin S. Bernanke, Chairman of the Federal Reserve during the Great Financial Crisis of 2008.

The essence of the book, in a nutshell, is that the job of the Fed is to stabilize the financial system of the U.S. (and the world, in a pinch). To do this, the Fed will communicate its future actions clearly, tune the fed funds rate continuously and will step in with an endless tsunami of fiat money to rescue speculators who have run over the ledge of being able to meet their liquidity needs.

Naturally, many METARs are enthusiastically supportive of this policy since it has led to a rising sea of money (including astronomical borrowing) that led to all asset prices rising together - stocks, bonds, real estate, etc.

wsj.com - Central banks are stuck in a rinse and repeat cycle of crises


Central Banks Are Stuck in a Rinse-and-Repeat Cycle of Crises
By becoming market makers of last resort, policymakers are pumping up leverage and risk

By James Mackintosh, The Wall Street Journal, Aug. 15, 2026

Central banks may be accidentally subsidizing government borrowing through their efforts to prevent a repeat of past market blowups, and policymakers are starting to worry that anticrisis lending facilities could even be interfering with their own monetary policy.

The source of the problem is the switch from central banks being the lender of last resort to, in 2008 and 2020, also being market makers of last resort, ensuring corporate—and government—debt markets keep functioning. During a crisis, support is often essential to prevent a downward spiral that destroys the financial system.

But backstopping markets removes a key risk and encourages more borrowing—especially for the hedge funds that now own trillions of dollars of U.S. Treasurys.

Offering either an explicit or implied guarantee that government-funding markets will remain open and liquid means hedge funds have less risk of being unable to finance highly leveraged trades. This is particularly true for the overnight repurchase, or repo, market, where borrowers pledge bonds for cash. The result has been a huge expansion of two popular government bond trades, arbitraging Treasurys or British gilts against bond futures or swaps.

Moral hazard is increasing, even for banks. In the 2023 bank bailout, the Fed accepted less-than-full collateral, recognizing Treasury bonds at face value rather than their (much lower) market value... [end quote]

The new Fed chair, Kevin Warsh, is against moral hazard financed by the Fed. He will probably see this article and understand it as a message supporting his bias.

Only time will tell what the Fed will do during future crises. Would they rescue a large bank like Silicon Valley Bank by recognizing Treasury bonds at face value rather than their (much lower) market value and by encouraging the FDIC to bail out depositors with more than the limit in their accounts?

When push comes to shove, it takes a cold-blooded decision-maker to tell frantic speculators that they took the risk and now they must pay the penalty.

It’s one thing for Wall Street (and METAR) speculators to pay the penalty, but what about workers on Main Street? They have already been paying the penalty as inflation cut away their real incomes and raised the price of housing to unaffordable levels.

nytimes.com - Inflation worker pay


As Inflation Eats Up Pay Gains, Workers Fall Behind

When prices spiked in 2021-22, wages failed to keep up for many workers, new research shows. Now the pattern is repeating.

By Ben Casselman, The New York Times, Aug. 15, 2026

Americans’ paychecks are losing ground to inflation.

Again.

Government data released this week showed that consumer prices rose 3.4 percent in July from a year earlier, outpacing a 3.2 percent increase in hourly earnings over the same period. That means that, for the fourth month in a row, Americans’ real wages — how many sandwiches, haircuts and gallons of gas they can buy with an hour’s pay — actually fell.

Falling real wages aren’t the only sign that households are struggling to manage higher prices. Personal income after taxes — a broader measure that takes into account other sources of cash such as retirement benefits and rental income — also fell in inflation-adjusted terms in the second quarter. And the savings rate has plummeted as Americans try to maintain their standard of living... [end quote]

sca.isr.umich.edu


Surveys of Consumers

Consumer sentiment fell about 8% this August, ending two consecutive months of improvement. While views of personal finances saw only minor declines, expected business conditions sank 11% for the short run and 17% for the long run. [end quote]

Wall Street partied on as the indexes increased and volatility declined. The Fear & Greed Index is in Greed. The trade is risk-on. The bubble is still inflating.

The Treasury yield curve steepened as short-term yields fell slightly while the 30 year Treasury and TIPS yield rose. Both are at multi-decade highs. Treasury funding is focusing on short-term financing to avoid locking in these high yields long-term. But now that the bond market is setting the long term rates (no QE from the Fed) the long-term rates might go even higher, given endless growing government deficits, the huge borrowing for AI construction and the withdrawal of international purchasers of Treasurys.

The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows that financial conditions are steady and very loose.

CPI inflation changed little in July.

The Atlanta Fed’s Third-Quarter GDPNow Estimate for 2026:Q3 is 4.3%, which is much higher than the Blue Chip Economists’ consensus and much higher than 2026:Q1 GDP growth.

The METAR for next week is sunny.

Wendy