Black swans expose the fed's cheap credit booms
- Mark Thornton discusses how black swans are the result of economic imbalances driven by the Fed's cheap credit policies.
- He references James McLure's idea of sequestered capital and highlights past financial crises resulting from similar conditions.
- Thornton concludes that the solution lies in removing the offering of easy money instead of imposing more regulations.
In a recent episode of the podcast Minor Issues, Mark Thornton discussed the phenomenon of black swans, emphasizing that these unexpected events are not root causes of financial crises, but rather an outcome of economic imbalances. He noted that these imbalances are often instigated by the Federal Reserve's policies, notably the provision of cheap credit which can lead to reckless financial behavior. Thornton pointed to the concept of sequestered capital introduced by James McLure. This idea explains how financial innovations and private assets can remain hidden from the public eye, fostering conditions that may ultimately lead to economic downturns. Thornton highlighted a historical perspective, referencing instances such as the Dutch Tulip Bubble and the investment trusts of 1929. Each of these financial events illustrated a cycle where policy-induced credit expansion led to the creation of risky and opaque financial instruments, which when real declines occur in the market, become the 'unknowns' that contribute to crises. Today, similar patterns can be observed in several sectors including hedge-fund private deals, AI data centers, and commercial real estate. The discussion suggests that while regulation may be a response to financial instability, it fails to address the core issue: the facilitation of easy money by the Federal Reserve. Thornton argues for a reevaluation of monetary policy, advocating for the removal of the mechanisms that allow for such credit booms in order to mitigate future crises. The long-standing effects of these actions can lead to significant economic repercussions. The podcast episode also recommends further reading, specifically McLure's work titled “Sequestered Capital: An Overlooked Lacuna in the Capital Structure” to delve deeper into the implications of sequestered capital in today’s economy. It is evident that understanding these dynamics is crucial for both policymakers and investors as the economy navigates complex challenges driven by monetary policy.