Bill Dudley Speaks: Hints At The Endgame - Dollar Devaluation

Tyler Durden's picture

More doomed rigid theoretical analysis based on flawed theories that now facilitate the shortening of the economic and market amplitudes from low to high. What the Fed's concern should be at this point is how to make sure the market only crashes to a triple digit when its bluff is finally called by someone big and brave enough. Most notably, Dudley hints at the inevitable endgame: "The fact that our foreign indebtedness is for the most
part denominated in our own currency is a huge advantage in the event
the dollar were to come under significant downward pressure

Remarks at the Washington and Lee University H. Parker Willis Lecture in Political Economics, Lexington, Virginia

you for that kind introduction and the opportunity to speak here today.
The past few years have been an extraordinary time for policymakers. We
have been very aggressive in providing support to the economy, and it
now appears that a sustainable recovery is underway. However, given the
headwinds created by the collapse of the U.S. real estate market and
its consequent damage to the financial system and household balance
sheets, it seems unlikely that the recovery will be as strong as we
would desire. As a result, the substantial amount of slack in
productive capacity that exists today will likely only be absorbed
gradually. Consequently, trend inflation, at least over the near term,
should remain very low. This is why the Federal Open Market Committee
(FOMC) concluded at its March meeting that “... economic conditions,
including low rates of resource utilization, subdued inflation trends,
and stable inflation expectations, are likely to warrant exceptionally
low levels of the federal funds rate for an extended period”.

What I would like to do today is to explain in some detail the
logic underlying this expectation that economic conditions will warrant
exceptionally low levels of the federal funds rate for an extended
This conclusion stems from the observation that the current
economic environment is qualitatively different from previous
post-World War II business cycles. Most post-war recessions were
preceded by high rates of resource utilization and rising trend
inflation. This prompted a tightening of monetary policy, which, in
turn, dampened interest-rate sensitive spending, particularly on
housing and consumer durable goods. Then, as underlying inflation
pressures subsided, monetary policy was eased and interest-rate
sensitive spending rebounded, often quite sharply.

The current
business cycle is different in one key respect. It was preceded by a
global financial crisis. The financial crisis was due, in large part,
to excessive leverage and excessive investment in real estate assets.
It will take time to unwind these excesses.

Today, I will offer a
framework for assessing the forces that have shaped the recent
performance of the U.S. economy. This framework will provide context to
the fiscal and monetary policy responses to what is now being called
the “Great Recession.” Then, I will discuss the economic outlook for
the United States over the next year. Before I proceed, I want to
emphasize that these views are my own and do not necessarily reflect
the views of the FOMC or the Federal Reserve System.

Building an Analytical Framework
Say's law—named after the French economist Jean-Baptiste Say—states
that the aggregate value of incomes earned in an economy over some
period of time must by definition equal the value of all goods and
services produced over that same time period. Or, put somewhat
differently, on an ex post (i.e., realized) basis, saving must equal
investment. Investment in this case means current spending on new
physical, human and intangible capital. This insight is the conceptual
basis for national income accounting and the gross domestic product
(GDP) statistics that we follow so carefully.

Even so, economists have been debating the implications of Say's Law
since it was first expounded. Classical economists argued that this ex
post balance would occur in a way that kept the economy quite stable at
full employment. If there were shocks to saving or investment spending
that pushed the economy away from full employment, prices and wages
would adjust quickly, providing the market signals needed to bring
about the reallocation of resources required to restore full employment.

The global depression of the 1930s raised serious questions about
this classical theory. Although saving must equal investment on an ex
post basis, the two can diverge ex ante, potentially sharply. For
example, when ex ante (i.e., desired) saving exceeds ex ante (desired)
investment spending, inventories rise above desired levels. If prices
of the products in question do not fall sufficiently rapidly so that
this unwanted build-up of inventories is sold quickly, then production
and employment must fall. Perhaps most famously, Keynes, in The General Theory of Employment, Interest and Money,
argued that there are institutional rigidities that inhibit price and
wage flexibility. This means that periods in which ex ante saving
exceeds desired investment might lead to periods of persistent

In this respect, the financial system plays an important role.
Financial intermediaries match borrowers and savers. If the financial
system is under stress and lending standards are being tightened, ex
ante investment is likely to decline relative to saving, all else being

The financial intermediation process and the creation of credit is
the primary channel through which monetary policy affects the economy.
By influencing the volume of credit creation, monetary policy strives
to keep ex ante saving and investment—alternatively, aggregate demand
and aggregate supply—in rough balance. Too rapid a pace of credit
creation would overstimulate investment relative to saving, potentially
increasing the rate of inflation and this, in turn, could damage the
economy's long-run performance. Too slow of a pace of credit creation
would likely lead to an ex ante shortfall of investment relative to
saving, causing unemployment to increase.

This analytical framework also applies to the global economy, but
with an added level of complexity. At the global level, income equals
output and saving equals investment on an ex post basis. However, for
an individual country, saving can exceed investment or, alternatively,
production can exceed domestic demand to the extent that a country's
exports exceed its imports. This requires that, for some other economy
or group of economies, investment must exceed saving, or alternatively,
domestic demand must exceed production and imports must exceed exports.
This means that what happens abroad in terms of desired saving and
investment also influences the performance of our domestic economy.

framework provides a simple way to evaluate the recent economic
environment and the current economic outlook. When desired investment
rises relative to saving on an ex ante basis, then an economy tends to
strengthen. If the strengthening persists, inflation may rise to levels
above what is regarded as consistent with maximum sustainable growth
and full employment. This was the story for much of the 2004-06 period.
The Federal Reserve responded to rising trend inflation by tightening
monetary policy to keep the economy from overheating.

contrast, when investment falls relative to saving on an ex ante basis,
an economy weakens and may slip into recession, as was the case between
2007 and mid-2009. During this period, the Federal Reserve tried to
support employment by cutting its federal funds rate target nearly to
zero; by creating a number of special liquidity facilities to support
the extension of credit; and by engaging in a large scale asset
purchase program, buying Treasuries, agency debt and agency
mortgage-backed securities.

An economic recovery requires that
desired investment must rise relative to saving. This has happened
recently as fiscal stimulus and an inventory cycle have led to a fall
in ex ante saving relative to investment. But for the recovery to
strengthen further, this process must continue. There has to be a
further demand impulse—be it a decline in household saving rates, a
rise in business investment relative to profits, a further expansion of
fiscal stimulus or an improvement in the net trade balance via an
increase in exports relative to imports.

Let's now apply this framework to evaluate what happened over the past decade and what it implies for the economic outlook.

last three decades have been marked by a shortage of U.S. domestic
saving relative to investment. The United States has almost
continuously run a current account deficit since the early 1980s (Chart
1). In 2005 and 2006 that current account deficit averaged around 6
percent of GDP. Yet, the real exchange value of the dollar today is not
terribly different from what it was in the early 1990s (Chart 2). A
massive flow of saving into the United States from around the world
offset forces that otherwise would have driven the exchange value of
the dollar lower.

In addition to its sheer size, this inflow of saving into the United
States is significant in several respects. First, note the direction of
the flow. One might expect that capital would flow from the developed
world to the developing world, but just the opposite has been the case.
In addition, foreign savers have been willing to lend to the United
States in the U.S. currency. This means that foreign savers are exposed
to the exchange rate risk that the dollar's value might change relative
to their own currencies. Finally, one might expect that over time, as
their holdings of dollar-denominated assets increased, foreign savers
would demand higher interest rates, but, in fact, U.S. interest
rates—in both nominal and real terms—have been generally declining over
the past three decades1 (Chart 3).

These facts are at
odds with the prevailing view that spendthrift U.S. consumers and
governments are pulling those savings into the United States. Indeed,
for some time the “twin deficits” view held that large fiscal deficits
in the United States were causing large U.S. current account deficits.
However, even when the federal government ran surpluses in the late
1990s, our current account deficit continued to increase. Subsequent
research at the Federal Reserve Bank of New York indicates that the
link between fiscal deficits and capital inflows is not as strong as
commonly suggested.2

Before proceeding, a few important qualifications are in order.
First, despite the large flow of foreign saving into the United States,
our international financial position does not appear precarious at the
present time. The United States still has substantial investments in
foreign countries, and income from U.S. investments abroad still
exceeds the income generated by U.S. assets owned by foreigners. Part
of the reason is that U.S. firms operating abroad earn higher rates of
profit than foreign firms operating here. In addition, low interest
rates minimize the cost to the United States of our substantial
negative net debt position.

In addition, the fact that our foreign indebtedness is for the most
part denominated in our own currency is a huge advantage in the event
the dollar were to come under significant downward pressure
. That is
because a decline in the dollar would raise the value of the income
earned on our foreign direct investment and foreign-currency
denominated assets, relative to the income that foreigners earned on
their dollar-denominated investments in the United States. All else
being equal, this would boost our net investment income balance.

that borrowing per se is not necessarily a bad thing. The key is what
the borrowing is used for—to finance consumption or investment. And, if
it is used to fund investment, it is also important how productive that
investment turns out to be over time.

So what did we do with this
inflow of foreign saving? We invested in a substantial volume of
physical capital, particularly residential and nonresidential real
estate (Chart 4). It seems clear that one important factor behind this
investment was the decline in long- term interest rates. For example,
from 2003 through 2005 mortgage rates declined to just under 6 percent
on average, the lowest level since the first half of the 1960s. These
lower mortgage interest rates were capitalized into asset prices.
Rising prices for residential and nonresidential real estate assets
induced entrepreneurs to produce more of those assets. In the housing
market, this increase in prices was helped along by the relaxation of
loan underwriting standards, which made it easier to obtain a mortgage
and become a homeowner. Credit growth was the strongest among
households with relatively low credit scores (Chart 5). The
homeownership rate rose after being relatively stagnant for two decades
(Chart 6). The increased availability of credit to lower income
borrowers and the sharp rise in housing values contributed to the rise
of consumption as a share of GDP and the decline of the personal saving
rate3 (Chart 7).

Now, with the aid of hindsight, it is
clear that we built too many houses, invested in too much commercial
real estate and overvalued both significantly.
The market overshot for
several reasons. First, there was rampant speculative behavior. The
longer these asset prices continued to rise, the stronger the belief
became that they would keep rising in the future. Second, the rise in
prices reinforced the initial relaxation of underwriting standards.
During the period of rising prices, defaults and loan losses were very
low. A homeowner who had difficulty servicing the debt could typically
sell the home for a profit and pay off the loan. Third, the boom was
fueled by new financial products, such as collateralized debt
obligations that were backed by subprime and Alt-A mortgages. Investors
misunderstood how risky these products were and this resulted in lower
mortgage rates for non-conforming residential mortgages and lower
funding costs for commercial real estate borrowing.

In the
housing sector, these factors interacted to create a strong reinforcing
dynamic. The relaxation of underwriting standards that made it easier
to become a homeowner and the low mortgage rates—supported in part by
the new financial products—made it easier to speculate in real estate.
Moreover, as home prices rose, household net worth increased, making
households more willing to consume a greater share of their current

Not surprisingly, this bout of speculative fever ended badly.
Eventually, the supply of houses caught up with and then vastly
overshot demand. Easing underwriting standards to support demand could
only go on for so long. Prices turned down. At the national level, home
prices peaked in late 2005 to early 2006 with commercial real estate
prices peaking about one year later (Chart 8). From those peaks, home
prices have fallen by about 30 percent on average, with much larger
declines in some areas, while commercial real estate prices have fallen
by about 40 percent on average.

As price declines intensified,
the number of serious mortgage delinquencies surged and, in fact,
continue to rise (Chart 9). Research indicates that by 2007 the
percentage of nonprime mortgages that went into default within their
first year rose to 10 percent compared with 3 percent of such loans
originated in 2003. While falling home prices appear to be the primary
factor explaining this sharp increase in early defaults, most of the
increase cannot be explained by traditional risk factors.4 A
potential explanation is that individual home buyers often falsely
indicated on their mortgage applications that the property they were
buying would be their primary residence. Using an extensive set of data
on loan performance that we have developed with Equifax, we find that
multiple first mortgage lien holders—that is, people owning more than
one home—account for about 40 percent of the dollar volume of seriously
delinquent mortgage balances, up from about 5 percent in 2004

As delinquency and foreclosure rates rose, structured
finance products backed by riskier mortgage loans performed
particularly poorly. The securitization market for non-conforming
mortgages collapsed. Credit availability tightened as underwriting
practices became much more restrictive, even for plain vanilla

The cascading effect of the sharp increase in mortgage
delinquencies and the resulting steep decline in the market value of
mortgage assets was a key contributing factor to the financial crisis.
As the financial crisis intensified and the economic outlook
deteriorated, equity prices eventually declined by 50 percent from
their late 2007 peak before bottoming out about one year ago.

while the value of real estate and equities plunged, the debt incurred
to acquire those assets remained, leaving households very highly
leveraged. According to the Flow of Funds Accounts, the ratio of
household liabilities to net worth rose from around 20 percent to
nearly 30 percent in just three years (Chart 11).

The result was a sharp decline in desired investment relative to
saving. The number of housing starts plunged, commercial real estate
investment fell and households cut back on their spending as their net
worth plummeted. The economy slumped into what is now called the “Great
Recession”. [some call it the ongoing Second Great Depression. We shall see how is right in the end]

The Dimensions of the Downturn
According to the Business Cycle Dating Committee of the National Bureau
of Economic Research (NBER), the U.S. economy has experienced 10
recessions since 1950. The duration of those previous recessions
averaged slightly less than a year during which real GDP fell an
average of 1.75 percent and the unemployment rate increased an average
of 2.3 percentage points.

The Great Recession was far worse. From its peak, real GDP declined
3.8 percent—more than double the average decline of prior downturns
(Chart 12). The unemployment rate began to increase in the second half
of 2007. Over the next two years, it increased 5.5 percentage points.
The rise would have been even more pronounced except that the average
workweek and the labor force participation rate declined unusually
sharply (Charts 13 and 14). Overall, total hours worked in the nonfarm
business sector declined a staggering 10.6 percent (Chart 15). In
addition to the decline in demand for labor, the manufacturing capacity
utilization rate declined to 65.1 in June of 2009, the lowest level of
the post-World War II period.

The result is that the “output gap”—that is, the difference between
actual output and the output achieved at the highest resource
utilization rate consistent with price stability—has climbed sharply.
This, in turn, has put downward pressure on trend inflation. For
example, on a year-over-year basis, the core inflation rate declined to
1.5 percent in January 2010 from nearly 3 percent in the fall of 2006
(Chart 16).

The Road Ahead
Fortunately, the U.S. economy is very flexible and resilient. Although
it does not adjust as fast as classical economists envisioned, in the
United States prices and wages respond relatively quickly. Moreover,
policymakers have been aggressive in supporting the economy by easing
monetary policy and by implementing a large fiscal-stimulus program.

As a result, although the unemployment rate remains unacceptably
high, output has begun to expand again, and we appear to be on the
verge of seeing sustained growth in employment. We'll know more about
this tomorrow when the March employment figures are released. Equity
prices have recovered sharply and home prices and commercial real
estate prices appear to be stabilizing. Household indebtedness is
declining, due to a combination of debt repayment and credit that has
been written off by lenders. After falling off a cliff during the first
half of 2009, global trade has rebounded. Both U.S. exports and U.S.
manufacturing output have expanded rapidly over the past six months
(Chart 17).

Although these are encouraging developments, I believe that the
recovery is likely to be quite muted compared with past recoveries.
This comes back to the framework discussed earlier. For faster growth,
we need ex ante investment to rise relative to saving and ex ante
spending to rise relative to the current trend of income. But it is
difficult to see where this impulse will come from in the near term.

The early stages of past recoveries have been led by consumer
spending, particularly for durable goods and residential investment.
For example, in the first year of recovery following the deep
recessions of 1973-1975 and 1981-1982, real consumer spending increased
an average of 6.5 percent and residential investment rose an average of
38 percent. It is unlikely that we will experience this type of
strength this time. Households have suffered unusually large shocks to
both income and wealth and many remain highly leveraged (Chart 18).
Although the household debt to net worth ratio has declined
considerably from its peak, it is still around 26 percent, well above
the already elevated average of the past decade (Chart 19). Moreover,
even if consumers wanted to borrow, credit availability is still
constrained and underwriting standards remain relatively tight. Real
consumer spending increased at a 2.25 percent annual rate over the
second half of 2009 and looks to be growing at about that rate in the
first quarter of 2010.

Given that the personal saving rate is
still relatively low, it will be hard for consumer spending to grow
more quickly without large increases in real labor income. But big
increases in real labor income won't be possible without a much
stronger recovery in output. And a much stronger recovery in output is
unlikely without stronger consumption.

Residential investment did
increase over the second half of 2009, boosted by relatively low
mortgage interest rates, lower home prices and the first-time home
buyer tax credit. But recent data on the housing sector indicates that
the recovery has stalled (Chart 20). As with consumption, we are
unlikely to see the typical surge of housing starts and residential
investment that was a key feature of most past recoveries. There is
already an unusually large volume of vacant homes for rent and for sale
(Chart 21). More are likely to come onto the market in the months ahead
due to the large volume of mortgage loans currently in the foreclosure

For the government sector, large federal budget deficits are a
constraint and fiscal policy is slowly shifting from an expansive
policy back toward restraint. At the state and local level, the
constraints are even more binding, as budgetary gaps will need to be
addressed by spending cuts and tax increases (Chart 22).

Exports rebounded sharply over the second half of 2009, particularly
to the emerging world (Chart 23). However, domestic demand in Europe
and Japan—important export markets for the United States—remains very
weak. This suggests that the U.S. trade balance is likely to change
little over the next year or two, and, thus, will be relatively neutral
in terms of its impact on growth.

Only business fixed investment
is in a position to be a true locomotive of growth. Profits have stayed
high relative to investment, and corporate balance sheets are awash
with cash (Charts 24 and 25). However, even here, the growth impulse is
likely to be weak. Prospective startup businesses are going to find it
difficult to obtain funding. And larger businesses will unlikely
increase investment spending sharply at a time when capacity
utilization rates remain unusually depressed (Chart 26).

Relatively sluggish growth implies that the output gap will be
closed very gradually. This suggests that inflation pressures will stay
subdued. The excess supply of housing is putting downward pressure on
rents, which represent a large share of the consumer price index (CPI)
(Chart 27). In addition, unit labor costs have declined sharply over
the past year due to the combination of unusually rapid productivity
growth and slowing labor compensation growth (Chart 28). Fortunately,
longer term inflation expectations remain well anchored. These
expectations have not declined and are broadly consistent with my views
on the appropriate inflation goal (Chart 29). This is actually a
welcome development right now because it will likely help to keep the
trend inflation rate from falling too much.

Lessons to be Learned
We have just lived through a period in which rapid increases in asset
prices led to a serious misallocation of resources and a severe
financial crisis. What do we need to do to minimize the likelihood of
avoiding this type of experience in the future?

As I noted in a recent speech, we face three major challenges that
will determine how smooth this economic expansion turns out to be.5
First, we need regulatory reform that makes our financial system more
stable and resilient. This requires many steps, including systemic risk
oversight and solving the so-called too-big-to-fail problem. In this
respect, we need to think hard about what we can do to prevent the type
of speculative bubbles that occurred from causing so much damage in the
future. In particular, are there macro prudential tools that the
Federal Reserve and other regulators can use to limit leverage and
speculation and thus prevent the type of asset price booms and busts
that have proved so troublesome?

Second, we need viable exit strategies from this recent period of
monetary and fiscal policy stimulus. On the monetary policy side, we
have been working hard to ensure that we have the tools in place so
that we can be effective in tightening monetary policy when the time is
right, even with an enlarged balance sheet. Third, we need a
rebalancing of global economic growth. That means a smaller share of
consumption relative to GDP in the United States and offsetting shifts
in Asia.

Circumstances have improved considerably from what they
were a year ago. But job creation is still much too slow and we have
much to do on the regulatory side to make our financial system more
resilient and robust.

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


1Brender, Anton and Florence Pisani. 2007. “Global Imbalances: Is the World Economy Really at Risk?” Dexia SA.
2 Bartolini, Leonardo and Amartya Lahiri. 2006. Twin Deficits, Twenty Years Later, Federal Reserve Bank of New York Current Issues in Economics and Finance, 12, no. 7 (October).
are a few caveats to note about this trend. First, there are several
categories of spending by households that are lumped into the personal
consumption expenditures category in our official GDP statistics that
can fairly be counted as investment. These include spending on consumer
durable goods, education, and, possibly, medical care, and their
combined share of total personal consumption expenditures (PCE) rose
over the period in which the saving rate declined. Second, other forces
were at work to push down the personal saving rate. Prominent among
these is a secular decline in the share of health care expenditures
paid out-of-pocket by consumers, lessening the motivation for
precautionary savings.
4Haughwout, Andrew, Richard Peach, and Joe Tracy. 2008. “Juvenile Delinquent Mortgages: Bad Credit or Bad Economy.”, Journal of Urban Economics, 64, no. 2 (September): 246-57.
5Financial Market Turmoil: The Federal Reserve and the Challenges Ahead, William C. Dudley. Federal Reserve Bank of New York, March 6, 2010.



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buzzsaw99's picture

That longwinded bastard can blow me.

akak's picture

Well, in that regard he learned from the finest: Alan Greedspasm, the Maestro of Obscurantism and Obfuscation himself.

Ripped Chunk's picture

Al G. thought he was so clever by inventing his own language called "Fedspeak"

He has addmitted as much on a number of occasions. That admission should tell you who and what you are dealing with.

swamp's picture

Tell me, what's the difference between fedspeak and jive?

asteroids's picture

Right. We are in unexplored lands and these asshats think they know the way out. As long as the bankers survive they couldn't care less about the rest of us.

RockyRacoon's picture

Buzz, your eloquence is legendary, but you've outdone yourself this time.

My take:  This is a merry-go-round and nobody's getting off unscathed.  And some of us, never.

Given that the personal saving rate is still relatively low, it will be hard for consumer spending to grow more quickly without large increases in real labor income. But big increases in real labor income won't be possible without a much stronger recovery in output. And a much stronger recovery in output is unlikely without stronger consumption.


SDRII's picture

institutional rigidity = fed single spectrum doctrine

Cindy_Dies_In_The_End's picture

Um, re-tool the title to this article?

4shzl's picture

Ooooooh faaaaa.  The only thing more toxic than the Fed itself is the turgid, theoretical blather that inflames the colorectal canals of college campuses -- also known as economics departments.

Carl Spackler's picture

"Billy, Billy, Billy..."

Actor Ted Knight as Judge Smails


Here is the greatest fallacy in your speech..."Household indebtedness is declining, due to a combination of debt repayment and credit that has been written off by lenders."


Reality:  Household indebtedness is rising geometrically, and, indirectly, the future standard of living is falling. 

You fail to grasp the financial accounting smoke and mirrors and you fail to recognize that real indebtedness is actually being temporarily transferred from some (Obama's core supporters...the stupid, lazy and entitled crowd, GM, Citibank, AIG, etc.) households (not all households) to the federal government, creating a future liability for all American households, and a real one at that, in the form of increased future tax liabilities...psst, it hits us like a sledge hammer when when the currently-issued Treasury debt approaches maturity. 

As posted on this board..."Billy, do not watch the hand of the magician, but rather, watch everything else going on around the magician." 




Sudden Debt's picture

I won't be just A bubble...


<img src="" width="512" height="288" /></p>

msorense's picture

"The fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure."

So devaluing the currency by monetizing the debt would relieve the downward pressure?  I don't think so.

swamp's picture

Do ya think that the longwinded bastard (tribute to buzz) has ever looked at a long term dollar chart?

" .. in the event the dollar were to come under significant downard pressure .. " 

It's closer to next to zero than it is to it's high. Like it hasn't fallen off a couple of cliffs already. Follow Buffoon sell out Buffet over the last and one remaining cliff. You could overlay it to an Enron chart and it would be ditto.

akak's picture

We have just lived through a period in which rapid increases in asset prices led to a serious misallocation of resources and a severe financial crisis. What do we need to do to minimize the likelihood of avoiding this type of experience in the future?

Uh, maybe strike at the real root of the problem: financial central planning via oligarchic central banking.

End the Fed, Dudley Do-Wrong!

Rogerwilco's picture

More FOMC - Fed open mouth committee. There are other means at their disposal to deal with increasing yields. Even the ugliest whore in town becomes more attractive when she's the only one with a roof and a bed.

Shameful's picture

Good telling your creditors you are planning on stiffing them doesn't spook them at all.

Might as well be shouting out "We are going to stiff you" from the rooftops.

Mad Max's picture

Cue SNL skit of Wen Jibao "then why do you MAKE SEX WITH ME!?!?!"

Shameful's picture

Was stunned to see that was like watching honest reporting but from SNL.  Just another day living in the Twilight Zone. 

waterdog's picture

These ex-Goldmanites are so sincere. Barack should get them to explain why a US attack sub sank a South Korean warship during a simple war game excersize was a good thing.


h4rdware's picture

This really offers an insight into the breadth and depth of the disconnect between the prevailing academic viewpoint and the 'real'.

Clinging to dead, failed doctrine. No adaptation, creativity, predictive capability. Inability to interpret real consequences. Fantasy viewpoints. Denial.


Scary stuff.

fetchpuppy's picture

All in all it's a very enlightening paper to read. We all can take a little something away from this. The tab for over consumption, over indulgence in greed and forgetting what really matters in life must paid somehow and at sometime. This time it'll be with a weakened economy as the baby boomers are heading for the final round-up. It'll be our legacy. 

Gimp's picture

Wind bag. I just wasted fifteen minutes reading this opinion. No wonder we are in trouble with minds like this at work.

We're all monkeys.


Al Gorerhythm's picture

I got through the first 5 mins. and it starting hurting my brain at the two minute mark. Sucker for punishment. Oral flatulence. Needs belting with a sock full of diarrhea.

QuantumCat's picture

How do you devalue paper currency, linked to nothing, created only in debt, and moved through the system by natural economic action? The Fed is not nearly as powerful to control inflation and deflation as people think. 

Like the run on banking institutions during the great depression, a run on soveriegn debt may be the making of our generation's economic collapse.  Does that devalue the dollar?  What would all that debt be exchanged for?  Dollars. The last bull market is cash.

Shameful's picture

You loan it into existence secured by a garbage asset.  "You have a bag full of cat feces...yeah I think I can value that at 14 trillion Mr. Dimon."

Literally there is 1.5 quadrillion in derivatives contracts out there.  So the Fed has plenty of assets they can buy to flood money into the system.  If you think they can't inflate the money supply then where have you been for the past 100 years?  And increasing the money supply is the devaluation.  More supply weakens the value of each dollar already in existence.

QuantumCat's picture

If the FED wishes to destroy itself, I guess you are right.

However, I don't think they are ready to kill their golden goose.

Shameful's picture

What do you think they are doing right now?  They are trading Fun Bux for assets good and bad.  Really the Fed is the bad bank, look at Maiden Lane.  If it kills itself to better those who are members then the members are quite happy, JPM for example.  When you can make money for nothing and buy real things life is good.  And USA is going down anyway.  We not only cannot pay the debt we cannot pay the promises we made to the Boomers.  The ship is taking water on fast, they are grabbing loot and piling into lifeboats.

Sometimes you have to break the piggybank to get the last few coins out of it.

tip e. canoe's picture

"Really the Fed is the bad bank, look at Maiden Lane."

welcome to nationalization, american-style.

ED's picture

A "huge advantage" to those that have moved their wealth out of the USD. Who the * does he think he's kidding?

JR's picture

The past few years have been an extraordinary time for policymakers. We have been very aggressive in providing support to the economy, and it now appears that a sustainable recovery is underway. However, given the headwinds created by the collapse of the U.S. real estate market and its consequent damage to the financial system and household balance sheets, it seems unlikely that the recovery will be as strong as we would desire. ~ Bill Dudley

It’s interesting that when crisis and problems occur—AIG, Greece, Lehman, California, “the collapse of the U.S. real estate market and its consequent damage to the financial system” via Fed policy and risky securitized sub-prime mortgages and loan fraud and $531 trillion dollar derivatives time bombs—Goldman Sachs is always there. And now, leading the parade of the alleged recovery is... ta-dah, none other than Dud.

Aren’t Americans too far down the road to be listening to Dudley, aka Goldman, aka the FRBNY, aka the Fed, on anything?  Perhaps those at Washington and Lee University would be better served from these words by Robert Reich:

Fraud on the Street

March 30, 2010 - The Securities and Exchange Commission announced Monday it had begun an inquiry into two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.Where on earth has the SEC been?

It’s now clear Lehman Brothers’ balance sheet was bogus before the bank collapsed in 2008, catapulting the Street and the world into the worse financial crisis since 1929. The Lehman bankruptcy examiner’s recent report details what just about everyone on the Street has known since the firm imploded – that Lehman defrauded its investors. Even Hank Paulson, in his recent memoir, referred to Lehman’s balance sheet as bogus.

In order to look like it could borrow $30 for every dollar of its own money, Lehman shifted liabilities off its books at the end of each quarter. Its CPA, Ernst and Young, approved of this fraud against the advice of its own whistle blower, whom Ernst and Young fired.

Lehman’s practices couldn’t have been all that different from those of every other big bank on the Street. After all, they were all competing for the same business, and using many of the same techniques. Lehman was just the first to go under, causing a financial run that led George W. to warn “this sucker could go down” unless the federal government came up with hundreds of billions to bail out the others

In other words, the TARP covered the other bankers’ assets and asses.

We now know, for example, Goldman Sachs helped Greece hide its public debt and then placed financial bets that Greece would default, using credit-default swaps to avoid risking its own capital. It’s the same tactic Goldman used for (and against) American International Group (AIG): Hide the ball, and then bet against the ball and fob off the risk to investors and taxpayers, using derivatives to remove the risky tactics from the balance sheets. Even today no one knows the fair value of the complex derivatives underlying these and related maneuvers, which is exactly the point.

Congress is now struggling to come up with legislation to stop this from happening again. And the Street is struggling to stop Congress. As of now, the Street’s political payoffs seem to be working. Proposed legislation still allows secret derivative trading in foreign-exchange swaps (similar to what Goldman used to help Greece hide its debt) and in transactions between big banks and many of their corporate clients (as with AIG).

But wait. We already have a law designed to stop this sort of fraud. It’s called the Sarbanes-Oxley Act of 2002.

Think back to the corporate looting scandals that came to light almost a decade ago when the balance sheets of Enron, WorldCom, and others were shown to be fake, causing their investors to lose their shirts. Nearly every major investment bank played a part in the fraud — not only advising the companies but also urging investors to buy their stocks when the banks’ own analysts privately described them as junk.

Sarbanes-Oxley – Sarbox, as it’s come to be known – was designed to stop this. It requires CEOs and other senior executives to take personal responsibility for the accuracy and completeness of their companies’ financial reports and to set up internal controls to assure the accuracy and completeness of the reports. If they don’t, they’re subject to fines and criminal penalties.

Sarbox is directly relevant to the off-the-balance-sheet derivative games the Street played and continues to play. No bank CEO can faithfully attest to the accuracy and completeness of its financial reports when derivatives guarantee that the reports are incomplete and deceptive.

So where has the SEC been?

I was on a panel a few weeks ago with a former chair of the Securities and Exchange Commission who was asked why the commission has so far failed to enforce Sarbox against Wall Street. He had no response except to mumble that legislation is meaningless unless adequately enforced. Exactly.

Bottom line: While financial reform is needed, there’s no reason to wait for it. Sarbox is already there. And even if financial reform is enacted without loopholes, there’s no reason to think it will be enforced if laws already on the books, such as Sarbox, aren’t. (emphasis mine)

Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.

Jim in MN's picture

Jesus H. Christ, Reich, Sarbanes-Oxley is known as SOX, not Sarbox.  Haven't been hanging around any corporate finance or reporting departments for the past ten+ years, eh?

JR's picture

The Sarbanes–Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002. It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH). ~ wiki

Jim in MN's picture

Letter to Salon re an article on Enron by Gary Weiss, 2006:

worst 'business' article I've read

I'm not usually one for slamming on articles on the web but this one is really horrible.

First off, he blew credibility with me by introducing the term "sarbox". I thought, maybe my company is the oddball, but it's SOX to us and to our consultants. I was involved in the SOX process, never heard the term "sarbox" before this article.

A little research on Google. There are about 124,000 articles with the terms "Sarbanes-Oxley" and "sarbox" but not "sox". There are 1.8 million with "Sarbanes-Oxley" and "SOX" but not "sarbox". So my perception is correct, SOX is by far the preferred term in the real world.

Kind of trivial, but like I said, it blows his credibility as having actually talked to any business people about it.

anonnn's picture

That's a strawman.

Please consult dictionary for definition of "strawman".

Jim in MN's picture

'Straw dog' is more politically correct...but in your case 'asshat' is more relevant.  Please consult a mirror. 

The 'bold off' button is in the top left corner BTW.  And the 'mouse' is the little plastic thingy with the clicky clicky.  So you can turn the boldface off.  Hope that 'helps'.

Jim in MN's picture

OK, OK, sigh, let's start to take this apart.

1.  Say's Law says we can only grow the economy via capital investment (that is productive).  Check.

2.  Residential and commercial real estate counts as productive fixed investment.  WRONG.

3.  The purchases of our glorious Treasury bonds by the surplus-runners (China, Japan, OPEC) created the real estate bubble, not anything the US policy cabal did.  WRONG.

4.  US consumers will be hard pressed to spend more with declining real wages.  Check.

5.  US small business is dead in the water with no hope in sight.  Check.

6.  We are screwed.  Check.

7.  It wasn't policymakers fault.  WRONG.

8.  Everything is as OK as it can be under the circumstances because we can't analyze the situation accurately/honestly or think of anything else to do about it.  YOU'RE FIRED.


How'd I do?

FEDbuster's picture

9. Beans, band aids, bullets and bullion. Check, check, check, check.

I sure do miss walstreetpro2 (Kevin Rowland)

swamp's picture

10. Water purifier. Check.

Carl Spackler's picture


Billy, Billy,'s a bit of free wisdom for you...the first time you screw your creditors you may get away with it. BUT, they will not be there for you the next you need them.

Once again, you prove to us that the old adage holds true, "Those that can do, and those that can't work for the Fed or CNBC!"

What_Me_Worry's picture

As far as most of the government shills go, he is at least leaning towards reality.  He slyly skips the fact that devaluing our currency does not make our off-balance sheet obligations (SS and Medicare) become easier to service.  I cannot imagine he made the points he does in his speech without recognizing that point.

He is definitely trying to add to the great lie told by the financial sector/government officials.  He must know $50T+ in off-balance liabilities eventually becomes current obligations.

Ned Zeppelin's picture

"Investors misunderstood were cleverly misled by firms such as my former employer as to how risky these products were and this resulted in lower mortgage rates for non-conforming residential mortgages and lower funding costs for commercial real estate borrowing."

Thought it needed a bit more editing.

Spitzer's picture

This was one of the worst pieces of keynesian trash that I have ever read, the auther needs the same treatment as Krugman, a baseball bat to the head.

excellent's picture

Wow Spitzer so is frequenting this site why you actually seem to want to bang up the banks and other things up a bit?

anonnn's picture

These are identities:





car salesman

investments advisor



While an identity is doing its identified job and commits harmful fraud with intent to deceive, omit vital data, falsely represent, etc,... the identity changes to con-man.

Transparency rules. Seek justice. Only justice. All else is the stuff of RedHerringDebateClub.

wackyquacker's picture

he had me at hello......there's a reason his name is DUDley.

lucky 81's picture

Dud the dud, where does he get the wind? we have a goldmanite running canada( central bank) and it seems to make us a co-conspirator in the planet's largest ongoing criminal conspiracy.

We have a monstrous real estate bubble caused by loose credit used to pump up the GDP numbers so people will feel better and spend more. What insanity. Gold is the ultimate tell when valuing paper money. That is why it is called a political metal. Let the price float free of interference and you will end up with devaluation. The ship is going down and no amount of hot air is going to stop it.

also have a look at Garth Turners website, The Greater Fool , Mark Carney does.

Brick's picture

Actaully I don't think it is that bad a speech, alot of it is well thought out, but I would like to pick up on one point and I think it illustrates why economists tend to get too immersed in their modelling to think through real world consequences. The section I am refering to is as follows.

In addition, the fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure. That is because a decline in the dollar would raise the value of the income earned on our foreign direct investment and foreign-currency denominated assets, relative to the income that foreigners earned on their dollar-denominated investments in the United States. All else being equal, this would boost our net investment income balance.

Thinking this through in real world terms I guess he is suggesting that on paper GDP looks good and business will show a profit. What he neglects to mention is that the consumer gets massively squeezed and jobs get lost. I want economists to try to start their modelling from the point of view of maximising the general populations wages and conditions rather than maximising business profits and balancing government expenditure. In essence there is a missing ingredient from their models which is population contentment.

RSDallas's picture

Nothing new here.    Babaaaaababaaaaabaaaababaaaaaabaaaaaabaaaaaaa.  WAKE UP AMERICA! 

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