Never Let a Good Crisis Go to Waste

“Never let a good Crisis go to waste when it’s an opportunity to do things you had never considered or you didn't think were possible.” – Rahm Emanuel, Chicago Mayor, former Congressman and the Obama Administration Chief of Staff

If Rahm is willing to admit such things in public, how much of a stretch is it that he would not try to prevent a looming crisis, or even willfully cause one, if it allowed the opportunity to implement policies he has always believed in, but thought were impossible. Mr. Emanuel is not unique in his thoughts surrounding crisis, he was just the one who allowed the truth to slip out. The above quote was actually a clarification for a previous comment, “You never want a serious crisis to go to waste”, which he is often credited with. His clarification brings no comfort.

Politics is far from the only realm where crisis is thought of as an opportunity, or even a tool, that can be employed to achieve an agenda. It could be used in economics just as easily. I bring up this seemingly obvious point because of some phrases you have undoubtedly heard over the past months such as ‘The fed would never raise rates because the economy could not support it’ or ‘the fed can’t raise rates because the markets would crash forcing them to reverse course’.

These conclusions would be correct if the goal of the economists making that decision was only to prevent market volatility, but if they want to change the monetary laws and framework, a crisis may be exactly what they need.

A firefighter may preach fire prevention but if his real motivation is getting a new fire truck or even the excitement of fighting a fire, a burning building may be exactly what he wants. Statistically volunteers fire fighters are the most likely to be arrested for arson. This is not a judgement on firefighters because of a few bad apples, only an example of how apparent and real motivations can be polar opposite, as well as how many thrive on the drama of a crisis. A driver cutting off another and slamming on their breaks makes no sense until you realize the scheme. The drivers desire isn't safe transportation, but to sue, and collect from their victims insurance. It isn't hard to imagine a general preferring a military solution to an international incident, even if conflict is not in the best interest of his nation.

A driver pulling in front of a car, a general advising against diplomacy, or a fire fighter setting a fire may be confusing simply because we don't understand their true motivation.

Not taking prudent and rational steps to prevent crisis could even be subconscious. The responsible party may not try quite as hard as they should, or convince themselves the wrong steps are right, because deep down they want the failure to provide opportunity.

In the field of economics these seemingly irrational contradictions are likely even more pervasive. The apparent human need for drama coupled with a profession where new theories are regularly popping up, but can't be tested due to laws and regulation, could easily provide an atmosphere where preventable crisis is allowed.

Two of the most prominent solutions to address the monetary issues of the day are to ban cash and implement negative rates. There is no chance that if bills were raised today in Congress to ban cash, or allow negative yields on treasuries, that it would pass, but if the markets were to crash, anything would be possible. Many economists have been, and are, theorizing about how to deal with the zero lower bound, and some are quite radical. Some serious market turmoil caused by an increase in rates may be a perfect opportunity for them to get the green light to test those theories in the real world.

As in other professions the goal of individual economists are not all included in their institutional mission statements. It would be wise to consider that the members of the Federal Reserves Board of Governors may have differing aspirations than their stated goal of full employment, stable prices, and moderate long term interest rates, or at least shocking ways of getting there.

"The Fed should not be raising interest rates, and yet they don't want to be at zero. They're in a conundrum,"..."They might raise rates just to see what happens." Jeff Gundlach of Doubleline Capital

Clarification- This post was not meant to convey that I believe keeping rates pegged at zero is the correct course of action, that will only exacerbate the many asset bubbles that are currently inflated, eventually result in a crash anyway. The fed has no good options at this point.

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