Assets' prices rest on a foundation of virtually no concrete―equity―and immense sand―debt. While elevating asset prices has not done much for economic growth, any collapse in prices, because of the leverage stretched so thin across the global financial system, would result in severe economic contraction. Every financial asset is someone else’s debt. Because collateral is pledged and re-pledged (the technical term is re-hypothecation) the entire financial chain is only as strong as its weakest link, which is why we had all those bailouts in 2008 and 2009, why the too big to fail institutions are still too big to fail (those that survived are bigger now than they were then), and why when they fail again, the taxpayers will pick up the tab again. A vitally important, and not wholly resolved legal issue concerns re-hypothecation: who gets the collateral when it has been pledged as security multiple times? Court battles over this issue gummed up rescue efforts during the last financial crisis (some of them are still unresolved) and they will do so during the next one as well.

Look at equity and debt markets negative reaction to the mere hint that the Fed would slowly taper, not even end, its balance sheet expansion. Curtailment may ultimately be the wrecking ball for the whole house of cards, which is why Bernanke had to quickly reverse course. The myth of the Fed’s omnipotence has been partially restored with the economic and financial rebound since 2009. However, shadow banking―the creation of high powered leverage and speculation in financial derivatives within and outside the banking system―has turned conventional economic theory on its head. No one knows which snowflake or loud noise will trigger the avalanche, but when it comes, a hopelessly under collateralized shadow banking system will be wiped out as asset prices collapse, and the Fed will be swept away with everyone else.

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