That the Fed has a problem is increasingly well known - despite the blather from the mainstream media that QE monetization can continue ad infinitum. Their problem, of course, is running out of government-provided liabilities to monetize (as deficits shrink and their ownership of the entire Treasury complex surges). They face other problems (as we have noted before) but the admission that they are boxed in would have major ramifications in the market's faith. So, how does the Fed, faced with the knowledge that they have created asset bubbles, broken the bond market, and are boxed in by their own excess still meet the market's undying desire to keep the flow going? Bill Dudley just, perhaps inadvertently, dropped a hint of the next 'market/scapegoat' for monetization - Student loans.
Bear in mind that the "taper" is all about economic cover for a forced move the Fed has to make, because:
1. Deficits are shrinking [11] and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets [12] due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; [13] if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly - and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. [14] As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time...
So they need a scapegoat!
- *DUDLEY SEES `VERY RAPID RISE IN STUDENT LOAN DEBT'
Yes - Mr. Dudley - Very Very Rapid indeed...
As we recently noted, student and car loans are responsible for 99% of all consumer credit created this year [15].
[16]
Thank you Uncle Sam for making yet another generation of indentured servants who are studying geology on the taxpayers' dime, who will never get a job, who are up to their neck in debt, but at least can afford a Chevy Silverado.
And while the Fed itself is responsible for the $1trillion bubble that has grown in easy cheap student loan debt [17]...
as the NY Fed disclosed moments ago [18], federal student loans officially crossed the $1 trillion level for the first time ever. Notably: the quarterly student loan balance has increased every quarter without fail for the past 10 years!
[19]
It would appear Mr. Dudley is getting the joke that a younger generation burdened with debt is a problem...
- *DUDLEY: RISE IN STUDENT LOAN DEBT COULD IMPAIR ECONOMIC OUTLOOK
and, as we notd here, the delinquency rate on student loans is soaring and has just hit an all time high of 11.83%, an increase of almost 1% compared to last quarter. [17]Even according to just the government lax definition of delinquency, a whopping $120 billion in student loans will be discharged. Thank you Uncle Sam for your epically lax lending standards in a world in which it is increasingly becoming probably that up to all of the loans will end up in deliquency.
[20]
and furthermore, as we noted here, of the 28 million Americans with federal student loans, 60%, or 17 million, don't pay the US government a single cent! [21]
[22]
Hopefully this highlights just how acute the severity of the student loan bubble is when stripped of all spin and mitigating rhetoric.
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So where does that leave us?
1. The Fed knows it needs to taper at some point - no matter what the rhetoric, unless the Fed admits the US is still in crisis mode, it risks losing its credibilit entirely (and control of the bond market) if it does not taper.
2. Smaller deficits mean the Fed is boxed in with its ability to monetize Treasuries and keep the "flow" flowing...
How to escape that box?
1. Identify a bubble (but it cannot be an asset-bubble because if it were then the collateral chains and rehypothecation would contagiously collapse every other asset class).
2. Scapegoat that 'Bubble' as potentially a headwind for growth that needs to helped by government intervention.
3. "Help" the people by monetizing that bubble (and implicitly keeping the "flow" flowing)
The Answer - as Bill Dudley just opined - is Student Loans.
1. A perfect bubble (forget about who created it) that needs to be popped by a responsible overseer
2. Lots of debt to monetize (keep the "flow" flowing)
3. A perfect excuse to slow Treasury buying (economy stabilizing, jobs stabilizing, stocks doing well)
4. A voter-friendly way of "helping" those in need that does nothing but enable more flow.
How will they monetize Student Loans? No one is sure yet, but Dudley's comments on Human Capital
- *DUDLEY: `BUILDING HUMAN CAPITAL' IMPORTANT FOR FUTURE ECONOMY
make one think of the book "The Unincorporated Man" [23]
The Bottom Line - Bill Dudley just floated a strawman that the Fed will taper Treasuries and the scapegoat will be Student Loans - which they will directly monetize to save us all from ourselves (and the problem they created).
(as an addenda - we warn of the unintended consequence of this action - should they do it - that will merely encourage banks to securitize student loans and flip them to the government en masse, creating demand for moar student loans and enabling supply - ths growing the bubble ever larger).