Many commentators have previously argued that the Fed is too dumb or too inept to identify of categorize asset bubbles.
By focusing on the Fed’s mental acuity, these commentators are overlooking a key factor: the Fed WANTS to asset bubbles.
The reason for this?
Asset bubbles, at least according to the Fed’s models, will paper over the steady decline in quality of life that began in the US roughly 50 years ago.
This fact is staring everyone in the face, though few people make it explicit. Back in the 1950s, the average American family had one working parent and was able to get by just fine. Today, most families have two working parents, sometimes working more than two jobs and they’re still not able to live a stable life.
Indeed, a 2012 study by NYU Professor Edward Wolff found that the median net worth of American households was at a 43-YEAR LOW. The average American in the 21st century was in worse shape than his 1970s counterpart.
This process began to accelerate in the late ‘90s. Indeed, looking at real media household income, one can see clearly that things have generally been downhill for nearly 20 years now.
It is not coincidence that the Fed began blowing serial bubbles starting in the late ‘90s. The Fed is aware on some level that quality of life in the US has fallen. The Fed’s answer, rather than focus on items that it doesn’t understand (job growth, income growth, etc.) was to blow bubbles to paper over this decline.
This is why we’ve had bubble after bubble after bubble in the last 15 years. The Fed doesn’t have a clue how to create jobs or boost incomes. Why would it? Most of the Fed’s Presidents are academics with no real world business experience.
Instead, the Fed believes in the “wealth effect” or the theory that when housing prices or stock prices soar, people feel wealthier and so go out and spend more money. This theory is baloney. People spend based on their incomes, NOT the value of their homes or portfolios.
After all, both assets only convert into actual cash once the owner sells the asset. Anyone who goes out and spends more money because their home went up in value will only end up with credit card debt, which combined with their mortgage, puts an even greater strain on their financial resources.
The Fed wants asset bubbles because they hide the rot within the US economy. If the Fed didn’t raise stock or housing prices, people might actually start to wonder… “hey, why is my life getting more and more difficult despite the fact that I’m working all the time?”
The Fed wants bubbles. So we’re doomed to keep experiencing them and the subsequent crashes.