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Momma Fed – Another Overprotective Parent

Imagine a kindergarten child who tells his mom that he has been punished by his teacher for misbehaving in class and, the mom shows up in school the next day to override the teacher and avert the punishment. Imagine that same thing happens over and over, as the child stumbles and the parent rescues him from any form of suffering. What will that child have learned about the concept of cause and effect? Not much, really, except that there are no negative consequences regardless of performance.

Until 2008, the financial market involved a degree of mystery. Rates moved up and down, as did asset values, often confounding the most expert forecasters and market-makers.  The market until then was free and fun, offering innumerable lessons and reacting to the push and pull of supply and demand. But in 2009 everything changed.  Momma Fed came to the rescue, and I’d posit that market expectations became forever changed.

Like the mother/child example above, the Fed rushed in to save all of us, using extraordinary and unprecedented powers to manipulate financial asset values higher. Since then, until very recently, any mention of the Fed reversing these efforts resulted in market tantrums, and a quick reversal by the Fed to accommodate the desires of their child who has no threshold for suffering. The child cried in 2009, then again in subsequent years, the mom rushed in to the rescue, and no pain was felt.

Now, the Fed seems intent upon nudging rates higher, perhaps desiring to back out of its manipulative ways and allowing market forces to once again determine rate and asset value levels. Or, perhaps they are thus motivated to put some future ammo back in their arsenal so that they can reduce rates when/if the time comes that stimulation is needed – such as in another market crash. There is, however, one major problem with this game plan that they probably never thought through when intervening in the first place. We all now know, or at least believe based upon anecdotal evidence, that it is indeed within the Fed’s power to manipulate rates lower, as they have done this now for a long while. So, if/when rates were to rise, as they inevitably do at some point when things are left to market forces, the hue and cry from the public for Mama Fed to come in and save them, to reduce rates and re-inflate asset values, will be overwhelming. The public will howl at the unfairness of suffering diminished wealth when it has been clearly demonstrated that it is within the Fed’s power to avert this suffering. They will demand help from their politicians, who will exert immense influence on the Fed to intervene. Imagine newspapers running on their front-page pictures of the Fed Open Market Committee members, labeling them the scrooges who are to blame for people’s financial problems.  The pressure to jump back in and save us will be too great to resist. I believe that this has always been the dark side of their ’09 intervention, and is consistent with our over-protective society - parenting and government - which has fostered the illusion that pain can and should be averted rather than experienced as the teacher it naturally is.

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