The last financial crash was momentous. Its momentum is currently measured by ZIRP.
Zero-Interest-Rate-Policy was the tool chosen by the Fed to control for the risk–not reduce it. Again, risk management is an associative property. Kick it out the front door and it just comes in the back.
If you want to manage risk, you have to see it–keep it out in front of you so you can control it. This is why there is so much resistance to the push-out rule.
Delaying implementation of the Volcker rule is argued to be in the interest of stabilizing the risk, not reducing it. What is the fear-factor, here?
It’s the liability!
Making the same mistake over and over again is not too bright. There has to be a way to reduce the liability associated with it, and the best way to do that is to associate it with hard-to-understand technical programs used to manage the risk. Since understanding it infers you are really smart, what you are doing does not easily associate with not being too bright.
Bernanke is a really smart econometrician. He is an expert on what causes deflationary trending, like the Great Recession, yet he could not prevent it.
There is a powerful incentive involved with intending the risk proportion. It’s called economic desperation.
Since economic desperation is such an ugly picture, there has to be a way to make it look pretty. It is given an interpretation, describing a functional utility that benefits everybody (what Pareto described as being “optimal”). Being “descriptive” is key to understanding the rationalization of a limited liability, which also associates with why the same mistake occurs again and again with expertise.
Right now, financial markets are looking at the event of massive margin compression. Naturally, as everybody crowds into high yielding assets, prices rise and yields fall under pressure–ZIRP!
Notice the risk tautology.
Bernanke decided it best to intend the risk with really low rates of risk-free interest.
To get yield, ZIRP is intended to encourage TBTF businesses to take risk, but “they” don’t really need more yield–you do, which means you are actually taking all the risk without the reward. There is a liability associated with that, and it naturally distributes with the reward.
TBTF corporates have all the economic desperation they need to keep the naturally coercive value of the free market consolidated, diminishing the capacity for labor to make demands (and passively aggress the resistance) in the name of “making markets more efficient.”
The risk is so consolidated in a TBTF dimension that it defines the expected return at the risk-free rate, which just happens to be naturally zero, creating the incentive to make interest rates go negative.
When the risk-free rate goes negative under pressure it’s not risk free anymore, which reflects the real propriety of the risk value, correlating with the equal distribution of income (ECV-symmetry).
The incentive at the negative rate is to invest in economic growth, isn’t it?
So what happens when the incentive goes wrong at the negative rate (to bail you in) and the only tool left in the box (to bail you out) is to raise the interest rate?
Is this what going gamma looks like?