1/ After reading his incredible [private] whitepaper and having a few discussions on the subject with @parkeralewis, here’s a thread on the utter incompetence + inconsistency of the Federal Reserve leading up to and following 2008.
2/ The two decades leading up to 2008 saw debt in the US nearly quintuple from $11.2T to $52.5T with mortgage and financial debt leading the charge. 
3/ Throughout this period, the Fed reacted to recessionary business cycles by aggressively lowering interest rates (Fed funds rate); from ~9% to ~3% in ‘90 to ‘91 and ~6% to ~1% in ‘00 to ‘03 with rates NEVER reaching the levels of the prior lowering cycle.
4/ During the same period, Debt:GDP increased from 230% to ~360%. The only way for the Fed to sustain these inflated credit levels was to artificially suppress rates, fueling more credit bubbles.
5/ In 2004 Bernanke and crew expressed their beliefs that the monetary policies they had been pursuing reduced volatility of inflation and output. In reality, they were just suppressing the volatility that was unleashed in 2008.
6/ @parkeralewis channels @nntaleb in his paper saying, “ Modern social systems are extremely complex, so the suppression of vol via low s-term rates increased FUTURE volatility.”
7/ “There is no freedom without noise -- and no stability without volatility.”
8/ The subprime crisis was the match that lit the fire, not the fire itself. The real problem was our massively levered financial system. Each US$ had been levered and lent 150 times over.
9/ It is at this point in Parker’s paper and this thread that we turn to prove the Fed pursued the policies they did after ‘08 bc it had a.) no idea what it was doing during the crisis, b.) simply had no other way out or c.) combination of a & b.
10/ In March 2007, after a 5% S&P 500 drop, at a meeting of the Board of Governors a puzzled Bernanke surmised that the “actual money at risk” from subprime defaults was on the order of $50B. The losses stemming from the subprime contagion would eventually reach $10 TRILLION!
11/ Bernanke’s complete miss on this assumption stems from his misunderstanding of the potential systemic risk and poor liquidity profile of the financial markets.
12/ When the crisis hit a tipping point people began to sell stocks, corp bonds, gold, and foreign currencies to get USD to fund their dollar-denominated liabilities. There was $53T in debt and $350B in liquidity, making it mathematically impossible to pay back all of the debt.
13/ As a result, beginning in October 2008, the Fed pursued three quantitative easing programs over the course of ~5-years, increasing the Fed’s balance sheet from $900B to $4.5T.
14/ During QE1, the Fed committed to buying $600B in mortgage-backed securities and expanded its purchases of Treasury securities and bank debt. This injection ended in August 2010 and was quickly followed by the initiation of QE2 in November 2010.
15/ This was around the time Bernanke went on 60 Minutes to assure the American people that the Fed had everything under control and fedsplained that what the Fed was doing did not amount to money printing.
16/ In reality, QE2 was a continuation of the policies that enabled the “Great Moderation” leading up to the ‘08 crisis. Thus proving that the Fed really had no idea what led to the crisis or was too stubborn to admit it was wrong.
17/ What’s often overlooked is that 2011 was the most critical year throughout the crisis and would solidify the Fed’s plan moving forward. Economic conditions deteriorated, proving QE1 & QE2 ineffective.
18/ “After 2011, any baseline assumptions that the Fed reasonably understands the implications of its policy decisions on financial markets and the real economy is willfully ignorant of history.”
19/ Over the course of 2011, the Fed described economic conditions as “improving steadily”, then “moderating” and finally “deteriorating rapidly”. So rapidly that liquidity was becoming an issue again.
20/ Now, the Fed had increased bank reserves to $1.6T through QE1 & QE2. Prior to QE, there were $10 BILLION in bank reserves. Also remember, there was about $350B in total cash within the banking system before ‘08.
21/ Despite this massive “liquidity injection”, by August 2011 liquidity problems were bubbling up again. It seems as though early-2011 Bernanke misunderstood how shallow the liquidity in the market was just as bad as he did in 2004.
22/ 2011 proved, without a shadow of a doubt, that the perceived liquidity in the market will always be insufficient so long as the leverage profile of the system remains at unsustainable levels.
23/ Since the Fed views liquidity through the lens of short-term funding needs, it can’t grasp the extent of the actual liquidity risks that exist in the financial markets.
24/ As a result of the deteriorating situation, in late 2011 the Fed embarked on Operation Twist, during which they sold short-term debt for longer-term debt to extend the maturity profile of the Fed’s balance sheet.
25/ They tried Twist out for a year, but had to change course as people started to get worried about the virility of the recovery. In September 2012 the Fed capitulated and started QE3 for an indefinite period of time, originally a $40B/month purchase of MBS.
26/ Market reactions were not as strong as the Fed was hoping for out of the gate, so three months into the new policy, the Fed more than doubled the amount of purchases they were making per month to $85B ($40B MBS + $45B Treasuries).
27/ From September 2012 to October 2014, the Fed effectively created $1.7 TRILLION, increasing its balance sheet from $2.8T to $4.5T.
28/ Going to stop here for now. Will pick this back up with another thread tomorrow. Huge shoutout to @parkeralewis for collecting all of this data and putting it together beautifully.
