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.