Bill Dudley Speaks Again: Will iPad 2 Serving Suggestions Follow?

Tyler Durden's picture

The last time Bill Dudley hosted a Q&A on inflation, he made the now legendary phase, noted here, that people should just eat iPads and let their betters worry about such trivial problems as "transitory" inflation. Today Jan Hatzius' predecessor and Goldman's plant at the New York Fed continues his Titans of Taste (substitution) world tour, speaking in Tokyo, Japan, where he is experiencing one after another aftershock while discussing "Regulatory Reform of the Global Financial System." Select highlights from the speech:  US economy in better shape than last summer; QE2 is partially responsible for recent rebound although the US economy has lost momentum in past few months due to oil prices; oil prices are negative to economic outlook; big focus for Fed is inflation expectations; expectations have not become anchored; CPI rise in US may be more modest than other countries as US starting at lower base; "it is important to not to overreact to rise in headline inflation as its likely to be temporary", there is more slack in the US economy than in Europe; "there should not be too much enthusiasm about tightening monetary policy too early", and many other such dovish rambling which once again confirm that Hatzius and Dudley are laying the groundwork for additional QEasing.

Full speech link:

Regulatory Reform of the Global Financial System

Remarks hosted by the Institute of Regulation & Risk North Asia, Tokyo, Japan

I am pleased to be here today to speak about the issue of regulatory reform and the global financial system.

But before I begin, I would like to express my deepest sympathies
and those of my colleagues at the Federal Reserve to the people of
Japan following the tragic events of the past month. We mourn your loss
even as we admire the heroism of those who risked their lives to help
others and the quiet fortitude with which so many of your citizens have
borne their suffering and grief. We know that the character of the
Japanese people will enable you to overcome the challenges before you,
working together in common national purpose to rebuild and restore.

the subject of my talk today, a stable and resilient financial system
that allocates credit in an efficient manner underpins and supports
economic growth and rising standards of living around the world. As we
saw recently, however, a financial system that is prone to booms and
crashes can not only lead to an inefficient allocation of real resources
during the booms but can also have devastating consequences for global
economic activity and employment during the crashes. In an integrated
global economy, severe negative consequences can be felt far away from
the center of the financial crisis—as they were in Asia in late 2008 and
early 2009. This underscores our common interest in promoting financial
stability on a global basis.

Truly effective reform would
generate sizable and widespread benefits. However, there are significant
challenges to achieving this. One challenge arises from the fact that
we have a global economy with many large, globally active financial
firms, but our regulatory regimes are implemented at the national level.
Another is that any attempt to improve regulatory standards will
inevitably meet with resistance from parties that have a vested interest
in the status quo.

Today I will comment on the actions underway
in the United States and internationally to make the financial system
more resilient and robust. I will focus on the logic behind the reform
efforts, progress to date, and areas where there still is considerable
work to do. As always, what I have to say reflects my own views and not
necessarily those of the Federal Open Market Committee, the Federal
Reserve System, or my international supervisory colleagues with whom I
work closely with on a regular basis.

The financial crisis exposed
significant vulnerabilities in the financial system. Without revisiting
all the causes and consequences of the credit boom and bust that led to
a boom and bust in the U.S. housing market, the bottom line is that our
regulatory system failed in two important dimensions. First, a
significant number of large, internationally active financial firms
reached the brink of failure. Second, the financial system was not very
resilient when these firms got into difficulty. Instead, the threat of
failure propagated further shocks that reverberated throughout the
global financial system.

These two shortcomings reflect many
factors including inadequate capital and liquidity buffers, poor
incentives to correctly measure, price and manage risks ex ante, the
opacity of firm balance sheet and counterparty exposures, and the manner
in which large financial firms were interconnected within the financial
system. In the end, there was too much leverage in which large amounts
of highly illiquid, long-term assets were financed by short-term
liabilities. The fact that a large amount of the wholesale funding used
to finance these assets was provided by leveraged financial
intermediaries to other financial intermediaries increased the system's
vulnerability to adverse shocks. As it turned out, the amount and
quality of capital was grossly inadequate relative to the quality of the
assets and off-balance-sheet exposures of many of the major global
banking institutions. Moreover, many institutions had inadequate
liquidity buffers. The lack of liquidity forced the fire sale of assets,
which depressed prices and increased the pressure on capital.

troubled institutions did fail, this exacerbated the pressure on the
remaining institutions. Aggravated by the lack of transparency about
their counterparty exposures and the contingent liabilities they faced,
the problems of a single institution quickly became the problems of
many. This was fueled in part by concern that the counterparty claims on
failed institutions would be frozen and unable to be realized quickly.

only did some core firms have inadequate capital and liquidity, they
also faced conflicting incentives as to how to manage their capital
resources. For example, many firms that came under stress were slow to
cut their dividends or to raise new capital because of fears that such
actions would signal their underlying weakness. Obviously, the failure
to conserve capital made these institutions weaker rather than stronger.

crisis also underscored severe deficiencies in the international
dimension of the regulatory environment. Financial institutions, flows
and activities are global, but the vast majority of regulation and
information sharing is contained within national boundaries. Where
resolution regimes existed, they generally existed only for banking
entities and were not set up to handle the orderly resolution of a large
internationally active bank holding company or non-bank financial firm.
This cross-border problem persists to this day.

interconnectedness of the financial system also caused shocks to spread
quickly. For example, the failure of Lehman Brothers led to losses at
the Reserve Fund, which precipitated a widespread money market mutual
fund panic. It also led to actions by U.K. bankruptcy authorities that
had the effect of freezing the assets owned by hedge fund and other
clients of the firm and this encouraged such investors to pull assets
from other institutions perceived to be weak. These and other
propagation channels in turn, led to virtual stoppage of lending and
borrowing activity in the money markets and, ultimately, a credit crunch
that reverberated throughout the global financial system. For example,
the crisis led to a sharp constraint on the availability of trade credit
in the fall of 2008 that had a devastating impact on economic activity
in emerging markets in Asia and Latin America, as well as Japan. This
region felt the full economic consequences of the crisis even though
banks in the region were generally healthy and far from the U.S. housing
boom and bust and the subprime mortgage debacle that could be viewed as
the initial spark that ignited the crisis.

The crisis also underscored another area for further cross-border work:
Our international approach to liquidity provision and
lender-of-last-resort services to globally active institutions.
Cooperation among liquidity providers, for example, through some central
bank dollar swap arrangements, played an important role in stabilizing
global money markets. However, the division of lender-of-last-resort
responsibilities between home and host countries remained ambiguous
through the crisis. This needs further attention.

So what steps have been taken to address some of these sources of
vulnerability? There are literally dozens of initiatives underway
nationally and globally, not only in traditional bodies for such
cooperation such as the Basel Committee on Bank Supervision, but also
among newer international groups such as the Financial Stability Board.
Most of these initiatives can be grouped into three major categories:

  • Actions to significantly reduce the probability of failure of large systemically important financial institutions.
  • Measures
    to broaden the oversight of the financial system to include activities
    that occur outside of the core banking system. The shadow banking
    system, which is composed of the wide range of financial intermediation
    activities that occur outside of the traditional purview of bank
    regulators, needs greater attention. In particular, shadow banking
    activities that involve maturity transformation are vulnerable to shocks
    because such activities do not have the support of bank deposit
    guarantees or access to central bank liquidity and, thus, are vulnerable
    to funding runs.
  • Steps to strengthen the resolution regime and
    the core financial market infrastructure to ensure that when a large
    complex financial firm fails, the failure doesn’t threaten to bring down
    the entire financial system.

Turning to the first set of
initiatives designed to reduce the probability of failure of large,
systemically important financial institutions (SIFIs), the tougher
capital and liquidity regimes that the Basel Committee has devised are
probably the most important elements. On the capital side, Basel III
significantly increases requirements with respect to both the quantity
and quality of capital. On the quantity side, there have been two
important changes. First, the capital requirements have been raised so
that internationally active banks must have common equity ratios of at
least 7 percent of risk-weighted assets when the standards are fully
phased in by 2019. This 7 percent standard consists of a 4.5 percent
minimum plus a 2.5 percent capital conservation buffer. Banks whose
capital ratios fall into the buffer range will face increasingly
stringent restrictions on capital distributions such as dividends and
share repurchases and discretionary bonus payments to staff. This should
act as a form of "automatic stabilizer" to their capital resources and
change the incentives banks face during periods of stress. Second, for
many globally active banks, the amount of capital required will also
rise because the amount of risk-weighted assets against which the
capital ratios are calculated will increase. Explicit capital
requirements for operational risk and counterparty credit risk, as well
as increased requirements for certain trading activity and transactions
between financial institutions should result in a significant rise in
risk-weighted assets.

On the quality side, capital requirements
have been toughened by narrowing the definition of what can be counted
toward common equity capital for regulatory capital purposes. The
emphasis has been put on common equity because of the superior
loss-absorbing capacity of this type of capital on a going concern
basis. Tighter limits have been put on certain types of assets—such as
mortgage servicing rights and tax-deferred assets—in which the values
depend on a firm remaining viable, and that might not be easy to realize
in the midst of a financial crisis.

On the liquidity regime side,
several major initiatives are underway. The Basel Committee has
proposed a liquidity coverage ratio (LCR) requirement for globally
active banks. In essence, this standard would require that large,
internationally active banks hold sufficient short-term, liquid assets
so that a bank could fund its operations for at least 30 days, without
needing to borrow funds from the central bank. By creating a pool of
liquid assets that the bank could sell or allow to mature, the liquidity
buffer would buy time for the bank to explore options to restore market
confidence. Such steps might include selling businesses and other asset
dispositions, raising additional capital, or by making changes in
senior management. The LCR requirement is being carefully evaluated to
ensure that there will be no deleterious, unintended consequences when
it becomes effective.

Also, apart from the Basel initiative,
supervisors are placing greater emphasis on liquidity. For example, in
the United States, supervisors have emphasized the importance of
adequate liquidity buffers and many banks have been pushed to bolster
their liquidity resources through the supervisory process.

this emphasis on a greater quantity and higher quality of capital and
larger liquidity buffers should make banks individually, and the banking
system as a whole, more resilient to adverse shocks. The goal is to
enable banks to retain market access to capital and funding even when
large losses occur or the banks are subject to other adverse shocks. The
ability to retain access should enable banks to manage through their
problems, avoiding the types of liquidity runs that led to the forced
unwinding of positions and that pushed what might have been solvent
institutions over the edge into insolvency.

In addition to the
Basel III standards for capital and liquidity, an international effort
is underway to further reduce the probability of failure for
systemically important financial institutions or SIFIs. The basic logic
behind this effort is that the failure of a larger, more complex firm
can have disproportionately large negative systemic consequences. As a
result, such firms should be forced to hold additional capital in order
to reduce their probability of failure below that of smaller firms. An
additional capital requirement on such SIFIs would also help to level
the playing field between larger and smaller firms by offsetting the
funding advantage that accrues to the largest firms that stems from the
perception that they are "too big to fail." Although there are
potentially other options, I believe that a SIFI surcharge could best be
satisfied by requiring SIFIs to hold additional common equity above and
beyond the Basel 7 percent Tier I common standard.

The move
toward a tougher capital and liquidity regime undoubtedly receives the
greatest attention in terms of the measures being implemented to make
large banks safer. However, there also are a number of other important
changes being made to supervisory practices in the United States and
elsewhere. One noteworthy example is the more widespread use of
horizontal stress tests to ensure that banks have adequate capital. This
is a very important development, because it makes the evaluation of
capital more forward-looking. The issue is not just how much regulatory
capital a bank has currently but how that bank’s capital level is likely
to evolve over time in adverse economic circumstances.

In the
United States, another important change is that we are refocusing our
supervisory practices to identify structural weaknesses and to push firm
managements to remedy their shortcomings relative to "best practice"
standards. Horizontal reviews across the large banks are being
undertaken to identify firm-specific deficiencies. At the Federal
Reserve, we are placing greater emphasis on understanding banking
organizations' business models and strategies—in other words, better
understanding the specific markets and activities from which the banking
organizations make money over time and the nature of the risks they
take in this process. Strong risk management practices within
organizations are particularly important, as risk managers must be
empowered to stand up to those in the front office and prevent
activities and practices that create risks or incentives that are
incompatible with bank safety and soundness. Compensation practices are
being reviewed to ensure that the incentives created by the compensation
regime are consistent with a banking organization remaining in sound
financial condition.

Another key supervisory innovation has been
the more extensive supervisory engagement on the processes that banking
organizations use to assess and plan for their capital needs. Recently,
the Federal Reserve completed a Comprehensive Capital Analysis and
Review (CCAR) program for the 19 largest U.S. bank holding companies.
The purpose of the CCAR process was to assess the way these institutions
allocate capital over time against the risks they run, including how
robust that allocation is to changes in the economic and financial
environment. As part of this exercise, banking organizations had to show
how their capital would hold up under a stress environment specified by
the Federal Reserve, as well as how they expected their activities and
capital positions to be affected by changes such as Basel III. The CCAR
built on lessons learned during the crisis about the importance of
taking a forward-looking and comprehensive approach to assessing capital
adequacy, including an assessment of the level and composition of a
bank holding company's capital resources under stressed economic and
financial market conditions.

This exercise received considerable
attention because an assessment of bank holding companies’ plans for
increasing dividend payments and implementing stock buyback plans were
an important part of the review. However, the CCAR's focus was much
broader than simply assessing proposed capital distributions. Instead,
the goal of the CCAR was to help ensure that large bank holding
companies have strong, firmwide risk measurement and management
processes to support their internal assessments of capital adequacy and
that their capital resources are sufficient given their business
activities and the resulting risk exposures.

The second important
strand of reform is to ensure that regulatory oversight is sufficiently
broad to include the activities of the so-called shadow banking system.
This aspect of reform and oversight is still in its early days. But work
is underway. For example, the Financial Stability Board is undertaking
work to identify potential sources of vulnerability caused by the
activities in the shadow banking system and how such vulnerabilities
could be addressed. Also, in the United States, the Financial Stability
Oversight Council (FSOC) views its mandate broadly with respect to
identifying systemic risks and proposing remedies. For example, on an
ongoing basis, the FSOC will monitor and assess which non-bank financial
intermediaries in the United States are systemically important and,
thus, require greater regulatory oversight.

But the focus will not
just be on large financial firms. Activities and practices that occur
outside of the core institutions are also important. For example, the
activities of money market mutual funds is one area receiving close
scrutiny. As you know, a run on the money market funds developed in the
fall of 2008 when the Reserve Fund broke the buck when Lehman Brothers
failed. This underscored a critical structural weakness of money market
mutual funds created by the convention that the net stable asset value
could be fixed at par. When a money market mutual fund incurs losses
that cause it to "break the buck," this encourages investors to rush to
withdraw their funds from other funds before they break the buck. The
result can be a run on money market mutual fund assets. In the United
States, the Securities Exchange Commission has already tightened the
rules with respect to liquidity, quality and the average maturity of
so-called 2a-7 fund assets, but there is still more to be done to
address the remaining vulnerabilities.

As mentioned earlier, the
final major strand of regulatory reform is to strengthen the core of the
financial system and make the system as a whole robust to the failure
of a large bank or non-bank financial institution. In this realm, there
are several notable initiatives.

First, an effort is underway to
create robust resolution regimes that allow large systemically important
financial institutions to be wound down smoothly in a way that
minimizes contagion and the risk of a broader panic or that causes
damage to other parts of the financial system. For example, the
Dodd-Frank Act gives enhanced resolution powers to the Federal Deposit
Insurance Corporation (FDIC) to use to wind down large, complex non-bank
financial institutions. If such a firm becomes troubled, the
regulators, with concurrence from the U.S. Treasury, can avert a
bankruptcy filing and instead put the non-bank financial company into
resolution. As part of such a resolution process, regulators are working
to ensure that systemically important firms have viable recovery plans
and that such firms have "living wills" that can help guide how such
firms can be managed through a resolution situation.

Second, to
reduce the likelihood of disruptive and highly costly failures,
regulators around the world are evaluating whether bail-in forms of
capital might be used to help recapitalize firms when they would
otherwise lose their viability, or, alternatively, to help facilitate
the orderly wind-down of a firm. Bail-in capital might consist of a
well-identified tranche of debt that would convert to equity only if and
when a particular set of trigger conditions were met. Such triggers
might include breaching a certain level of regulatory capital and/or a
regulatory determination that without conversion the firm would no
longer be viable. One considerable challenge is how to define a set of
triggers in a way that is sufficiently transparent and objective so that
the bail-in process does not act as a catalyst and precipitate a run on
other firms that might appear to have similar characteristics. In
principle, however, by helping to recapitalize the firm, bail-in capital
could help to forestall the need for a forced, rapid liquidation of
assets and this might help to facilitate the orderly wind-down of a
large, global firm that otherwise could not otherwise be easily

Third, efforts are underway to reduce counterparty risk
exposures by requiring that over-the-counter (OTC) interest rate swaps,
credit default swaps, and equity and commodity derivative trades be
standardized where feasible—and that all standardized trades be cleared
through central counterparties (CCPs). Standardized clearing through
CCPs reduces the complex web of counterparty exposures that exist in the
bilateral world of OTC derivatives. Everyone that centrally clears
becomes the counterparty to the CCP. This enables a high level of gross
bilateral exposures to be netted down to a much more manageable set of
net exposures to the CCP.

Fourth, recognizing that mandated
central clearing will only reduce risk if the CCPs themselves are
robust, efforts are underway to strengthen financial market
infrastructures. In the United States, for example, the Dodd-Frank Act
instructs the Financial Stability Oversight Council to designate certain
financial market utilities (FMUs) as systemically important. Such FMUs
would be subject to a tougher regulatory oversight regime. On a parallel
track, at the international level, the Committee for Payment and
Settlement Systems (CPSS) and the International Organization of
Securities Commissions (IOSCO) are revising and strengthening a set of
regulatory oversight principles and minimum business standards for
financial market infrastructures (FMIs). These principles include
numerous standards with respect to governance, access, risk management
practices, and capital and liquidity standards. As Chair of the
Committee on Payments and Settlement Systems and someone deeply involved
in the CPSS-IOSCO work, I believe that adoption of an agreed-upon
global set of minimum standards for FMIs is essential if we are to have a
safe global financial system.

Recently, CPSS-IOSCO issued a
revised set of such principles for consultation. Responses to the
proposed principles are due back by late July. The CPSS-IOSCO plans to
publish a final set of standards early next year. I hope and anticipate
that countries will adopt these principles as the minimum regulatory
standards for the systemically important FMIs that operate in their

In summary, considerable effort is underway to enhance financial stability.

said, I think it is important to recognize some of the important
challenges in designing and implementing effective reform. Four broad
challenges immediately come to mind. First, the resolution of large
financial firms that operate in multiple jurisdictions remains largely
out of reach—at least in the near- to medium-term. This is due to the
fact that legal rules are not harmonized across the different regulatory
regimes with respect to bankruptcy and liquidation. For example,
although the Dodd-Frank Act establishes a resolution regime for the U.S.
operations of a large global financial firm domiciled in the United
States, this resolution framework stops at the nation's borders.
Supervisors from different nations are working together in an effort to
create more effective cross-border crisis management tools and
resolution regimes, but this work is still in its very early stages and
there are formidable obstacles to overcome.

A second challenge is
the uneven progress that has been made in reforming bank regulation and
supervision across the different jurisdictions. For example, in some
cases, the supervisory authorities have been quite forceful in making
banks domiciled in their countries raise capital. In other cases, the
response has been less aggressive. The uneven progress of reform makes
comprehensive reform more difficult. It shifts the tenor of the
discussion away from what is the proper macroprudential framework and
set of capital and liquidity requirements to one that focuses too much
on issues of relative competitiveness. Too often the questions asked
are: What is most beneficial to the banks of my particular country? Do
the regulations bolster or harm my "national champion"? The focus shifts
away from the goal of bolstering global financial stability to finding
ways of tilting or adjusting the new standards to achieve a national
competitive advantage.

This is in not in anyone's interest. As
discussed earlier, every nation has an interest in promoting financial
stability globally, since the effects of systemic financial stress in
one place can swiftly spread throughout the global economy. Moreover,
although a relatively loose regulatory regime may attract business from
other financial centers, there is no free lunch here. A more lax
regulatory regime is likely to expose that country’s taxpayers to huge
tail risks.

A third challenge is the sequencing of reforms. For
example, many jurisdictions are focusing on banking reforms, but have
not yet applied the same intensity to shadow banking activities. If
regulatory requirements for banks are increased significantly, the risk
of stimulating the growth of the non-regulated shadow banking sector
also increases. This suggests that the regulatory oversight effort has
to be broadly applied so we just don’t trade one problem—for example,
undercapitalized large banks—for another—a shrunken regulated banking
sector and an enlarged, unregulated non-banking sector.

So what
needs to be done? In short, plenty. Although we have made some progress
in making the global financial system safer and more secure, there is
much more to do. Several examples illustrate the range of issues that
are still outstanding.

First, we do need to adopt an additional
capital requirement on large global systemically important financial
institutions. We need this to reduce the risk of failure of such
institutions to very low levels because we do not yet have the tools in
place to resolve these institutions on a cross-border basis in a
non-disruptive manner. We also need to do this because such
institutions—by being perceived to be too big to fail—obtain a funding
advantage, which higher capital charges can help offset. Without such a
requirement, large banks can gain a competitive advantage just through
their size.

Second, as discussed earlier, we have much more to do
to ensure that we have a relatively level playing field. We need that to
discourage regulatory arbitrage and beggar-thy-neighbor policies that
might benefit narrow national constituencies at the expense of global
financial stability.

Third, we need closer cooperation among
regulators. While regulators have successfully worked toward a much
tougher regulatory regime for capital and liquidity, there are still
huge opportunities for further progress. For example, regulators need to
adopt more far-reaching protocols that allow for greater sharing of
supervisory information on a cross-border basis to facilitate more
effective supervision. But, this needs to be done carefully, so that
proprietary business information is protected. Currently, regulators
generally do not have access to the necessary information to fully
assess the condition of foreign banks that operate within their borders.
They have supervisory information about the activities and state of
condition of the foreign bank branches and subsidiaries within their
borders, but do not always have good access to information about the
parent company or what the banking entity looks like on a consolidated
basis. This has long been a difficult issue, though efforts are underway
to find ways to enhance information-sharing.

Similarly, protocols
need to be developed to share regulatory information about systemically
important financial market infrastructures that operate on a
cross-border basis. Access to the trade records of OTC derivatives
activity that will be recorded in trade repositories also needs to be
made available to be shared among regulators.

Fourth, we need
greater clarity concerning the responsibilities of the home versus the
host country, especially when a bank encounters problems.

we need to work out how emergency liquidity should be provided on a
cross-border basis. If a major financial market utility in London, for
example, needs dollar liquidity to stay in operation, who will provide
in it? Who will bear the risk and on what terms and conditions?

political unrest in the Middle East and North Africa underscores once
again the fact that we operate in a shared world economy in which events
in one country and region can have large impacts globally. And to
support this globalized economy, global financial firms and a global
payments and settlement infrastructure are needed to support this
activity. Yet, we currently operate with a financial system that is
largely regulated on a country-by-country basis.

This is not
tenable. What’s required is not some global authority dictating what
national authorities can do but instead greater cooperation and trust in
exchanging information and agreement on harmonized standards such as
those laid out in the Basel III capital requirements and the CPSS-IOSCO
Principles for Financial Market Infrastructures. There needs to be a
good faith commitment to try to achieve a level playing field. The
regulations and supervisory practices that are put in place should be
determined by what is good for the public good writ large, rather than
what benefits some narrow set of private financial institutions or

Finally, we need to be persistent. There is much work
that still lies ahead. As the crisis recedes in memory, the natural
reflex will be to relax and grow complacent. Already, some bankers are
arguing that it is time to get back to "business as usual." We have seen
that "business as usual" results in unacceptable outcomes. So we need
to keep working on a continual basis to make the global financial system
more resilient and robust. We will not be able to avert all future
failures or crises, but I know we can do much better in limiting the
frequency, severity and the breadth of their impact when they occur if
we keep pushing forward.

Thank you for your kind attention. I would be happy to take a few questions.

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cossack55's picture

Lyin' ass FED Bitchezzzzzz!!!!!



With any luck he will tour the inside of all 4 reactor buildings. Crispy FED scumbag, comin' up.

TooBearish's picture

Inflation transitioning into what?  Deflation with btr economy - o goldilocks how do we love thee...

LongSoupLine's picture

May a quake compromised building fall on his fat Goldman head.

quark288's picture

With China raising the resource tax on rare earth Mr. Dudley would soon find even his Ipad increasing in price, wonder what would he eat next

Global Hunter's picture

Its not inflation, its headline inflation.  Didn't any of these muppets read 1984 in High School?  

Internet Tough Guy's picture

Dudley is one of a special class of elites purpose-bred to oversee the decline of the empire. Britain developed the same class of clueless blue-bloods to oversee the decline of their empire. The special skill this group has is their total inability to see and understand events as they unfold; this allows them to do their jobs as it all crashes down around them. Obama, Bernanke, Geithner, the list of distinguished fools traveling from ivy leagues to government service is long and deep.

smeagol's picture
U.S. Treasuries 'Ponzi scheme': ex-PBOC official

A former adviser to China's central bank said on Monday that China should have retreated from the U.S. government-bond market and instead allowed the yuan to appreciate more freely, warning that U.S. sovereign debt was akin to a giant Ponzi scheme, according to a newswire report that cited an editorial on Caixin Media Group's website. Yu Yongding, a former member of the People's Bank of China monetary-policy committee and now a member of a state-run policy group, said allowing appreciation of the yuan against the U.S. dollar under a free-floating currency regime would have reduced China's need to acquire U.S. Treasuries. He likened the U.S. Treasury market to a "giant Ponzi scheme," arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy


topcallingtroll's picture


If.china lets the yuan float we will see the japanification of the chinese economy as it grays at a more rapid rate.

China knows if they let the yuan rise then industry will move to vietnam bangladesh etc.

We got the chinese right where we want them. They are.screwed no matter what they do. The easiest solution is to continue to pay tribute to their usa master by keeping the peg, but it will become increasingly painful to them.

topcallingtroll's picture

Jeez tyler, is it possible no one is laying the groundwork for qe3?

I think dudley and the rest believe the economy is mostly self sustaining now.

The only real risk at this point appears to be.japan not being able to buy as many treasuries as expected.

Sure the transitory inflation has a ways to run. But it is necessary and expected. The nicer way to say it is that the economy is rebalancing.

The end of qe2 may be a non event.

If we have to replace japanese buying that is a big issue

SheepDog-One's picture

'Self sustaining economy' yes...well as long as they keep monetizing the debt daily with about $8 billion new Fiatscos, seems to be fully self sustaining while the transitory inflation plunges bankrupt america into the 3rd'est nation in the world.

Tyler Durden's picture

Certainly "dudley and the rest believe the economy is mostly self sustaining now."

SheepDog-One's picture

Transitionary inflation....guess that means we'll have higher and higher inflation until we transition into a 3rd world nation. 

Twindrives's picture

We have the product of a 3rd world relationship as president now so we're half way there. 

topcallingtroll's picture

Global labor arbitrage.

Third world comes up.

We go down.

All of us.hold hands as we meet in the middle.

anynonmous's picture

The political unrest in the Middle East and North Africa underscores once again the fact that we operate in a shared world economy in which events in one country and region can have large impacts globally. And to support this globalized economy, global financial firms and a global payments and settlement infrastructure are needed to support this activity


So here you have in one paragraph Dud talking about a New World Order, a global currency with global financial firms at the center.  And I thought those protesters in Egypt and Libya simply wanted new leadership; who knew they were asking for Lloyd and Jamie to come to the rescue.

Manthong's picture

"I triple guarantee you, there are no American soldiers in Baghdad"

Don Birnam's picture

Brevity does not appear to be Dudley's strong suit.

In any case, let's have a look at the breakfast menu at Dudley's Diner: I'll have a small tomato juice, an onion bagel with the fresh chive cream cheese, and two Xooms, over-easy. Hold the iPad.

hedgeless_horseman's picture


Click this link and select the one year chart, then speak.


AldousHuxley's picture

Truth is that the all powerful members at the Federal Reserve do not know what they are doing. We are just guinea pigs in the Federal Reserve experiment. They thought iPads would calm the jobless and inflation would create quality careers.

TruthInSunshine's picture

Bill Dudley is a man of integrity who has views grounded in reality.



NoTTD's picture

Is he speaking in a lead lined room?

luckly123's picture

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