Bank Bailouts Explained

What Most People Don't Realize About The Fed's Superpowers

By Elliott Wave International

Since its creation in 1913, the primary intended role of the U.S. Federal Reserve Bank has been that of protector. In theory, the central bank was bestowed with the power to shape monetary policy in a way that would keep both booms and busts in check. The two main tools at its disposal -- interest rates and money creation -- would provide a "ceiling of normalcy" above expansions AND a "net of safety" below contractions.

To this day, the financial mainstream holds great faith in the Fed's ability to fulfill its save-the-day duties -- as these recent news items make plain:

• "Why Raising Fed Funds Rate Is Positive For Equities." (Seeking Alpha)
• "Fed's Moves Lift All Asset Classes." (Associated Press)
• "US Stocks Erasing Losses: The aggressive moves of the Fed have been an important driver for the stabilization of stock prices." (Bloomberg)

But of all the variables the Fed creators took into account, there's one glaring factor they neglected to consider: Namely, it cannot force consumers to spend, creditors to lend, or businesses to borrow. The events of 2007-2009 "credit crunch" and the subsequent "Great Recession" made that obvious. Remember how the government was upset at banks for sitting on the bailout funds instead of lending them out to consumers? And consumers weren't exactly lining up on the street to get a loan, either.

The Fed's inability to change social mood is the central theme in Chapter 13 of EWI President Bob Prechter's NY Times business bestseller book Conquer the Crash. There, Bob describes the Fed's strategy of lowering the federal funds rate to stimulate spending to be as effective as "pushing on a string." Writes Bob:

"The primary basis for today's belief in perpetual prosperity and inflation with an occasional recession is what I call the 'Potent Directors Fallacy.' It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses the immense power to manipulate the stock market. The very idea that it can do these things is false."

And so begins one of the most groundbreaking studies into the very real INABILITY of the Fed to fell the great bears of economic declines, or to feed the great bulls of economic vigor.

The best part is, you can read Chapter 13 of Conquer the Crash in its entirety FREE via a Club EWI resource "You Can Survive And Prosper In A Deflationary Depression." The free report also includes SEVEN other chapters of Conquer the Crash that shed equal light on some of the most misleading notions of mainstream economic wisdom.

Don't stay in the dark. Read all 8 chapters today by joining the rapidly expanding free Club EWI community today. Here's what you'll learn:

• Chapter 10: Money, Credit and the Federal Reserve Banking System
• Chapter 13: Can the Fed Stop Deflation?
• Chapter 23: What To Do With Your Pension Plan
• Chapter 28: How to Identify a Safe Haven
• Chapter 29: Calling in Loans and Paying off Debt
• Chapter 30: What You Should Do If You Run a Business
• Chapter 32: Should You Rely on Government to Protect You?
• Chapter 33: A Short List of Imperative "Do's" and Crucial "Don'ts"

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Basic Wave Patterns: How a Zig Zag Differs from a Flat

By Elliott Wave International

The big picture for Elliott wave analysis is five-wave patterns followed by three-wave patterns. Let's look at the three-wave corrections more closely to get a bead on how they differ from one another. This excerpt from EWI's Basic Tutorial describes in detail what you need to know about so-called zigzag and flat corrections to be able to recognize them on a price chart.

* * * * *

Excerpted from Lesson 3 of EWI's Basic Tutorial

A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C. The subwave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A, as illustrated in Figures 1-22 and 1-23.

Figure 1-22 and Figure 1-23

In a bear market, a zigzag correction takes place in the opposite direction, as shown in Figures 1-24 and 1-25. For this reason, a zigzag in a bear market is often referred to as an inverted zigzag.

Figure 1-24 and Figure 1-25

Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening "three," producing what is called a double zigzag (see Figure 1-26) or triple zigzag. These formations are analogous to the extension of an impulse wave but are less common.

Figure 1-26

The correction in the Standard and Poor's 500 stock index from January 1977 to March 1978 (see Figure 1-27) can be labeled as a double zigzag.…Within impulses, second waves frequently sport zigzags, while fourth waves rarely do.

Figure 1-27

* * * * *

Excerpted from Lesson 4 of EWI's Basic Tutorial

A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1-29 and 1-30. Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction, not surprisingly, seems to inherit this lack of countertrend pressure and terminates near the start of wave A. Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags.

Figure 1-29 and Figure 1-30

In a bear market, the pattern is the same but inverted, as shown in Figures 1-31 and 1-32.

Figure 1-31 and Figure 1-32

Flat corrections usually retrace less of preceding impulse waves than do zigzags. They participate in periods involving a strong larger trend and thus virtually always precede or follow extensions. The more powerful the underlying trend, the briefer the flat tends to be. Within impulses, fourth waves frequently sport flats, while second waves do so less commonly.

What might be called "double flats" do occur. However, Elliott categorized such formations as "double threes," a term we discuss in Lesson 9.

The word "flat" is used as a catchall name for any A-B-C correction that subdivides into a 3-3-5. In Elliott literature, however, three types of 3-3-5 corrections have been identified by differences in their overall shape. In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 1-29 through 1-32. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular" flat, although the word is inappropriate as they are actually far more common than "regular" flats.

Ready to learn more about how to use the Wave Principle? EWI's Basic Tutorial is written to give you all that you need to know to get started on your own wave analysis. To get access to this useful Basic Tutorial, sign up to become a Club EWI member here.
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• What the basic Elliott wave progression looks like
• Difference between impulsive and corrective waves
• How to estimate the length of waves
• How Fibonacci numbers fit into wave analysis
• Practical application tips for the method
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