Goldman Instructs The Fed: Taper To Keep The Financial System From Blowing Up, But Don’t Tighten

Wolf Richter's picture

Wolf Richter

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 FOMC, 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 – instead of also selling bonds and raising short-term rates, which would be the actual tightening, because.... “For 25 Years, It’s Never Been The Right Moment” To Tighten.

And here’s David Stockman on bubbles: “One of the great ironies of the Greenspan bubbles” was that his free market convictions enabled the Fed to drift “irreversibly into its eventual submission to the Cramerite intimidation,” he wrote in his bestseller, The Great Deformation, turning “a blind eye to lunatic speculations in the stock market, dismissing them as the exuberances of capitalist boys and girls playing too hard. Read.... Deal Mania: The Rise Of ‘Chase and Crash’


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starman's picture

well according to Bobby fng Lutz head of GM, car sales are  up 13.9%!  theyve sold 9.09mill globally in 2006 and 9.37mill  in 2013.


enoch_root's picture

This Tapering business reminds of an old joke ...

Q: Why are Turds Tapered ?

A: So your arse doesn't close with a bang.

Seems applicable ... QE is the biggest turd in history, laid by the Fed asshole.

outofhere's picture

Only that turd hasn't reached the taper yet!


walküre's picture

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.”

Go fuck yourselves Blankfein & Co. You rotten scum of the earth now filled to the gilts with paper. You fat fucking bastards have loaded up on paper that will guarantee your ilk the eternal paydays. Fuck you. Go to hell and take your entire ilk with you. There are enough lampposts in NY to hang all you scum by the neck after beating your balls with a club.

You fucking parasites are of no good. Always wanting your cake and eating it too. Always draining the world out of its livelyhood. Same as it ever was and make no mistake, your fate will be the same as it always has been.

Men will rather die free than be your eternal slaves.

MeelionDollerBogus's picture

I feel like you're holding back.

Renfield's picture

And don't begin with italics please. Alas, how I love to up-vote a good rant.

Shooting Shark's picture

Don't mince words, then.  Out with it.

SmittyinLA's picture

if they sell MBS the buyers might actually look at them,  by buying all the MBS they keep the public in the dark as to the extent of their fraud. 


Once unloaded their "new lending standards" will be disclosed and its game over. 

They can't unload ever, they're stuck.

What we need is an massive political shift, bend over the bankers, withdraw all public support, take the hit now rather than later,  foreclose and prosecute and seize, the bankers would retaliate with interest rate increases, for every point they raise rates we deport 1 million illegal aliens.    

Big Ben's picture

Home sales are running about 5 million/year. Assuming a sales price of $175K, that works out to about $73 billion per month. But the Fed is currently buying $85 billion of Mortgage Backed Securities per month. Is it any wonder that we are having a mini housing boom?

The Fed plan seems to be to get retail investors to buy up the foreclosed home inventory of the banks. If the Fed tapers its MBS purchases, mortgage rates will rise and Housing Bubble II will bust.

Hohum's picture

Officialiy, FWIW, 45B UST and 40B mortgage securities.

Not Too Important's picture

The housing bubble is bursting as we speak.

And no one is buying muni bonds, either. That can only go on for so long.

Colonel Klink's picture

Goldman...bloodfunnel of money.  Enough said.

SKY85hawk's picture

re: Selling the mortgage-backed securities? Forget it: A “strong majority” no longer favored that.

A  majority of fed governors?  A majority of bankers?

We can be sure they know the utter garbage that lurks under the sheets of those foul beds!


RaceToTheBottom's picture

Get the Vampire Squid out of the Financial Management of the USA....

Eric L. Prentis's picture

The Fed is at the point of no return on the ongoing 2008 credit crisis, and is not able to stop QE3&4, without the stock market crashing. Even QE3&4 tapering—this late in the debt monetization process—is a gamble. As to the options remaining, let the insolvent banks go bankrupt and put the fraudsters in prison. This is the only way to bring the economic system back into equilibrium.

Bear's picture

Does the Federal Government stand behind all deposits in the failed banks? FDIC would go broke with one major bank failing. There are so many unintended consequences for any course of action. When the banks were allowed to conduct business as usual in 2008-9, we guaranteed ourselves of a major crisis. A simo-run (a simultaneous run on all major banks) would serve to throw the US (and globe) into crisis with completely unknown consequences.

So if we had a simo-run, what would be safe? Gold, silver ... probably, but would the price escalate with all banks broke, where would the financial infrastructure come from for people to get cash to buy PM's.

Other than physical PM's, which may crash upon collapse, where do I put my cash? Real estate ... this is a sure loser since it will collapse right along with the banks. Maybe hold PM's and pay cash  (PM's) for farm land?

SeattleBruce's picture

"where would the financial infrastructure come from for people to get cash to buy PM's."

Much barter would occur, among other more dangerous means of acquisition, until a new monetary system was attempted/established. Phys. gold and silver would serve as a major source of unofficial/official money during such a transition.  Those with PMs in possession will have a major advantage - if they can protect their stash - and ally with others who honor it as a store of wealth.  I can imagine 'market makers' (if you will) that will put farmers together with food purchasers, gun & ammo makers with militias and local police forces, and use gold and silver to complete the transaction during however long the monetary chaos lasts.  A basic barter/monetary system would form/persist in locales, until groups united to restablish a broader monetary system.

My two cents (!) - the monetary system after the reset should be non-debt based money, the money supply should be closely monitored and based on statutory limits tied to population growth and strict inflation targets, and violations of these strictures, and fraud should be met with severe penalties - prison.  You can see how several key pieces are missing from our current 'system' that has allowed massive fraud, abuse, and criminality to spread like gangrene.

Renfield's picture

Bruce, marked you up, but must disagree on "inflation targets".

In a free market economy, centrally-planned inflation is unnecessary and, I would argue, distorts markets and sets a poverty trap for the majority of producers.

I agree with all the rest of what you had to say. Had to point out this one camel's nose in the tent.

malikai's picture

Monetarism is not THE, but part of the reason we are where we are today.

It's the idea that a little bit of inflation is good, provided it is clean, and of a good family. Well, I'm here to tell you that inflation is not clean and of a good family.

(If you know the source of my "clean" reference, then you truly understand what inflation is all about.)

assistedliving's picture

'You're in a prison, Evey. You were born in a prison. You've been in a prison so long, you no longer believe there's a world outside. That's because you're afraid, Evey. You're afraid because you can feel freedom closing in upon you. You're afraid because freedom is terrifying. Don't back away from it, Evey. Part of you understands the truth even as part pretends not to. You were in a cell, Evey. They offered you a choice between the death of your principles and the death of your body. You said you'd rather die. You faced the fear of your own death and you were calm and still. The door of the cage is open, Evey. All that you feel is the wind from outside.”
? Alan Moore, V for Vendetta

involuntarilybirthed's picture

Here is the US Treasury connection.  Seems they have the whole program covered.

Here is the link where these bank members tell (recommend) the Treasury what the finance schedule will be for the next quarter (and you thought the treasury was running things):  It is actually called the TBAC Recommended Finance Table for Q3 2013.

Here is a statement from their 2nd Q Report to the Secretary:

"Against this economic backdrop, the Committee’s first charge was to examine what adjustments to debt issuance, if any, Treasury should make in consideration of its financing needs."

You can read the complete statement here: (they do this every quarter)

Treasury Borrowing Advisory Committee (aka bankers) Members are:

Renfield's picture

<<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>>

I have no doubt that the Fed will "taper" this year - but mysteriously the debt will continue to increase exponentially, with increasing levels central bank money shoved into the banksters' black-hole balance sheets.

I have no doubt that Pres Barky's "unemployment rate" will hover around 7% (as usual), as employment participation continues its long fall.

I have no doubt that house prices will continue to "recover" until a few banksters (and then, the government) own every property on the continent.

There's something really sweet about making your benchmarks the very same statistics that you yourself generate, rather than the reality that contradicts them.

<< market convictions enabled the Fed to...>>

Fucking oxymoron. The chief central planner has "free market convictions"? The hell can anyone write this without apparent irony?

Wolf, I love your articles, but this one screams IRONY at me in just about every line.

Downtoolong's picture

Can we go back to TARP, please. At least that bailout had a cap to it.


blindman's picture

woody allen said it before goldman.
goldman: Dr. , by brother thinks he's a chicken.
dr.: here, give him two of these and he should be fine.
goldman: dr., you don't understand, we need the eggs.
fraudulent induction is apparently insufficient, they also
need fraudulent distribution. there it is.
who will stop the rain?
Creedence Clearwater Revival - Who'll Stop The Rain - Vietnam Montage

marathonman's picture

So now that Goldman has gotten rid of its worthless mortgage bonds at par value with free money from the Fed, it's time to make their money valuable again?!  What a freaking criminal operation those guys are.

Go Tribe's picture

Just another corporation on welfare.

Buck Johnson's picture

In a nutshell, in a nutshell.


Herd Redirection Committee's picture

I've heard criminal banksters compared to fishermen (no offense to fishermen).  They let out a bit of line, but just enough to reel you in.  The 'boom' in the economy and housing prices from 01 to 07 was that bit of line. The same for the current American stock and USD bubble.

economics9698's picture

The squids will hang on the end of a rope.

Decimus Lunius Luvenalis's picture

You'd think so, but even revolutions need financing to govern.  Ask the Jacobins.  After all, government operations are financed in a currency whose value is determined by a privately controlled bank.  So no, the squids will not hang at the end of a rope.  

MeelionDollerBogus's picture

If enough of us can run, hide as their minions & tie a good knot, they will.