Why Fed Always Denies Asset Bubbles - Brightwork Research & Analysis

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Executive Summary

The Federal Reserve always denies asset bubbles because they are controlled by private banks and private banks make their money from asset bubbles.

Introduction

The fact that the Fed denies asset bubbles when they are occurring is well known among those that study the Fed. This is explained in the following quotation.

“For this reason, Fed leadership cannot accept either of my two definitions of a bubble because doing so would either reveal that the Fed is actually clueless about some of the most important economic developments or is directly responsible for creating asset bubbles. Put simply, if your job is to maintain confidence in the financial systems, the last thing you’re going to do is proclaim your ignorance or culpability in financial disasters.” – The Everything Bubble

How the Ownership Structure of the Fed Means They Primarily Look Out for the Interests of Private Banks

This is answered very easily. The Fed is owned by private banks, and private banks make a great deal of money during asset bubbles. If the Fed were to declare an asset bubble or to mitigate an asset bubble, it would be working against the financial interests of its member banks. This is yet another problem in having the central bank be in private hands. The Fed’s behavior leading up to the subprime mortgage crisis is explained in the following quotation.

“Even more astounding is the fact that Greenspan was cutting rates during a period in which he acknowledged that the stock market was exhibiting “irrational exuberance.” He literally knew things were beginning to get out of control. This again helps explain why Greenspan chose to address the Tech Crash by creating a housing bubble. By turning a blind eye to Wall Street’s OTC derivatives bonanza and refusing to let bad debts clear through the system via the Tech Crash, Greenspan was setting the stage for an ever bigger crash.

By the time the housing bubble burst in 2008, the US mortgage market was $14 trillion in size. But, thanks to OTC derivatives, the actual risk relates to the US housing market was well worth $175 trillion in size. That was more than TEN TIMES the size of the US GDP at the time.” – The Everything Bubble

Source: The Everything Bubble

https://www.amazon.com/Everything-Bubble-Endgame-Central-Policy/dp/197463406X