Contrary to popular opinion, the Federal Reserve didn't set out to create a Monster Bubble that has escaped its control. Also contrary to popular opinion, the Fed will be unable to "never let stocks fall ever again--ever!" for the simple reason that the monster it has created-- a monster mania of moral hazard in which all risk has vanished because the Fed will never let stocks fall ever again--ever!--is now beyond its control.
And that's a problem for the Fed, which above all else needs control of interest rates, financial markets and the economy.
The problem is that bubbles always pop, and they pop regardless of what central banks do. This is contrary to the popular opinion that if only the Fed had saved Lehman Brothers, the Global Financial Meltdown of 2008 would never have happened.
Wrong. Bubbles pop when too much risky debt unbacked by collateral is issued to marginal borrowers who inevitably default, triggering massive losses in the financial sector, an equally massive unwind of speculative debt and risky gambles and a deep recession as all the debt-fueled malinvestment dries up and blows away.
The 2008 Global Financial Meltdown was the inevitable result of subprime and other debt bubbles bursting which then triggered a panic to unwind trillions of dollars in high-risk speculative gambles in stocks, real estate, junk bonds, etc.
The Fed has another problem which it hasn't been able to solve despite 12 years of trying: to save the financial system from collapse, the Fed has to re-inflate the debt-fueled speculative mania that just popped from unstable excesses of debt, leverage and moral-hazard speculative fever, all piled on a diminishing foundation of actual collateral.
The problem here is history has never recorded a bubble which settled magically onto a "permanently high plateau" and stayed there for months or years. So the Fed has finally reached the point of no return: either it accepts a painful bursting of the monster moral-hazard bubble it has created or it lets the monster lead the stampede over the cliff to a financial collapse that the Fed can't rescue with the usual tools of lowering interest rates and bailing out banks.
After 12 long years of ever-riskier bubble-blowing, the Fed is now boxed in.Instead of reassuring markets that the next 1,000 points are guaranteed and all in only a few more months of mania, the Fed will either have to offer false assurances while it attempts an impossible "soft landing", i.e. a controlled deflation of the Monster Bubble, or it grimly accepts that a 1,000 point decline in the S&P 500 now is a better choice than an implosion later if the Monster Bubble breaks completely free and rampages higher even as the Fed pulls the plug.
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