Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
New York Fed President William Dudley has spoken. He represents
Goldman Sachs, where he was a partner and managing director until 2007.
Goldman owns part of the NY Fed and is one of the 21 “primary dealers”
– TBTF banks and security dealers from around the world, many of them
bailed out by the NY Fed – to which the NY Fed hands the money that it
prints on orders from the FMOC, in exchange for Treasuries and
mortgage-backed securities, currently $85 billion a month. If it sounds
incestuous, so be it.
Goldman et al. want free money for as long as possible no matter what
that does to the real economy, savers, or pension funds. Creating
bubbles? No problem. They’ll make money off them. “We at the Fed have
been working hard to help homeowners and the overall housing market
recover,” Dudley said, hence Housing Bubble II, with home
prices jumping 26% in Nevada year over year in May, and 12.2%
nationwide, according to CoreLogic, the bubbliest rise since 2006, just
before Housing Bubble I blew up.
And that’s good. But Goldman doesn’t want the financial system to blow up again,
of which it is one of the largest beneficiaries. You can milk a cow
many times, but you can bleed it only once. Hence, a modicum of
prudence.
That’s exactly what Dudley proffered in his speech at
the Business Council of Fairfield County, Stamford, Connecticut.
Concerning the national economy, he served up the usual fare of how it
was muddling through, with some things getting better, such as
employment. And then he drew the line in the sand – dotted with some
ifs.
If this pattern continues, the FMOC would “begin to moderate the pace
of purchases later this year,” he said. Whether it would be “in, say,
September,” as Federal Reserve Board member Jeremy Stein had pointed out last
Friday, Dudley didn’t say. But he did agree with Stein: unless a major
fiasco mucked up the scenario, the Fed would taper its money-printing
and bond-buying binge this year.
Goldman said so. CEO Lloyd Blankfein had made it public a couple of
weeks ago when he said that “eventually interest rates have to
normalize,” that it wasn’t “normal to have 2% rates.” They’re all
worried about the same thing: that asset bubbles caused by the
money-printing and bond-buying binge would eventually pop and take down
the financial system [my take... Controlling The Implosion Of The Biggest Bond Bubble In History].
While Stein had put the beginning of the Big Taper on the calendar –
September – Dudley penciled in the completion date. After starting this
year, the Big Taper would proceed “in measured steps” and be complete by
“around mid-2014. A year from now. Participants expect one heck of a
ride, judging from the clicks of seatbelts being buckled around the
world.
He assumed that by then, the unemployment rate would hover near 7%,
with the economy’s momentum allowing for “further robust job gains in
the future.” But he kept an eraser handy. Policy decisions would depend
on the economic outlook “rather than the calendar.” So the scenario he’d
described was just “one possible outcome.” If economic conditions were
to “diverge significantly” – not just a little – the drunken binge could
go on.
He then explained to all partiers what that would mean for the punch
bowl. It would remain on the table, and it would be refilled, but in
such a manner that it would be watered down little by little. The
continued asset purchases, though at a lesser rate, would be “adding
monetary policy accommodation, not tightening monetary policy,” he said.
Based on this logic, bubbles should remain inflated, or deflate
gradually, as the asset purchases would “put downward pressure on
longer-term interest rates.” To keep them from blowing through the roof.
Until mid-2014.
Ah yes, and the Fed would be “likely to keep most of these assets on
its balance sheet for a long time.” Selling the mortgage-backed
securities? Forget it: A “strong majority” no longer favored that. And
raising short-term rates? “A long way off.” So, even if the unemployment
rate dropped below the 6.5% threshold, the FMOC might “wait
considerably longer.” He mentioned 2015, a mirage that keeps moving
further into the future.
A glorious admission that the money-printing and bond-buying binge
glued to a zero-interest-rate-policy has permanently screwed up the
normal functioning of the markets, that the Fed could not return them to
their prior state, that it might never be able to do so, and that
Goldman et al., after having grown immensely fat under this regime,
don’t want to give it up. But they don’t want the financial system to
blow up either. Hence the Big Taper.
Selling bonds and raising short-term rates would be the actual tightening,
but “it’s always: yes, in the long term we need to stop with the policy
of cheap money and just piling on debt, but please not right now; now
the economy must first get back on its feet,” said William White, one of
the few central-bank economists who’d predicted the Financial Crisis.
Read….“For 25 Years, It’s Never Been The Right Moment” To Tighten
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