In Parting Interview, Bill Dudley Admits Why The Fed Got It All Wrong

While EU's Jean-Claude Juncker admits to "lying, when it's serious," it appears America's elites have a simple threshold for crossing the dangerous line into truth-saying - whether they are employed by the state, or not.

In the last few years for instance, since leaving office:

Former Fed Chair Alan Greenspan has confidently admitted that "Ron Paul is right, Gold is money" - the only real money - despite dismissing such a blasphemous phrase during his tenure at The Eccles Building.

"...today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. "

Of course, Greenspan ignores his own role in the creation of the boom-bust cycle which has doomed the world to series of ever more destructive bubbles and ultimately, hyperinflation which will likely be unlashed once the helicopter money inevitably arrives. In retrospect, the 90-year-old, who clearly is looking forward not backward, has a simple solution: the gold standard.

If we went back on the gold standard and we adhered to the actual structure of the gold standard as it exited prior to 1913, we'd be fine.  Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we've had in the United States, and that was a golden period of the gold standard.  I'm known as a gold bug and everyone laughs at me, but why do central banks own gold now?

Greenspan was not alone.

Just a year or two after leaving office amid soaring stock markets, plunging volatility, and collapsing yield curves, former Fed head Ben Bernanke proclaimed that "there will be no interest rate normalization in his lifetime."

Hardly fitting with a) his projections during his tenure running the world's most powerful central bank, b) his own proclamations throughout his reign that The Fed knows what it is doing and will normalize rates 'soon'; and most importantly c) the current 'confident' refrain from The Fed that rate-hike normalization.

Not exactly a great track record anyway.

And now there is Bill Dudley.

The outgoing New York Fed President sat down with Liberty Street Economics' editor Trevor Delaney for his exit interview... and  - whether by intent or accident - Dudley let's slip a couple of 'truths' that we suspect Jay Powell would rather 'we, the people' were not aware of.

"One of the challenges going into the financial crisis, for example, if you look at the big DSGE model - dynamic stochastic general equilibrium model - it didn’t include a finance sector.

...

So the whole experience of what actually happened during the global financial crisis - the collapse of the financial system and that taking down the real economy - wasn’t an actual possibility within the major macro models that some economists were using to forecast the economy."

...

"The financial market indicators give you a lot more information about what people expect to happen tomorrow and how the economy is likely to evolve, conditioned by those economic indicators.

For twenty years now, I’ve been a big proponent of thinking about things through a prism of financial conditions. In other words, the Federal Reserve sets monetary policy, and that monetary policy sets financial conditions, and those financial conditions are what actually drive the economy.

Historically macroeconomists imagined that changes in federal funds were transmitted directly from the Fed to the macroeconomy.

But in my mind, the linkage between the federal funds rate and financial conditions is quite variable.   

So if you just focus on the federal funds rate, you’re going to, at times, make pretty bad forecasts about what’s actually going to happen in the real economy."

Read the full transcript here...

Simplifying Dudley's lawyerly utterances ...

He proclaims the "no one could have seen that coming" defense to explain The Fed's inability to comprehend the massive bubble they had created - which led to the curtain being pulled back from the 'emerald city' that is The Eccles Building during the Great Financial Crisis - because such an event was not even a possibility in their myopic (and now clearly proven useless) academicall-rigorous model...

And then Dudley admits that, in their attempt to rescue the world from a fate worse than death - i.e. global deflationary credit collapse and the unveiling of where asset values really lie - The Fed has lost control of its transmission mechanism through the interest rate channel and "has created a monster..."

And then, in a flourish of typical academic arrogance, Dudley points out how crucial it is to use financial market prices and indicators to inform policy decision, clearly missing the reflexive impact that Fed policy has on those very same market indicators. Just how well did the repressed and conditioned collapse of global volatility inform policy as February so rudely sparked the biggest tightening of financial conditions in history - with no apparent warnings whatsoever (that is, of course, if one ignores Minsky).

Still... having left office now, with barely a scratch on his reputation, he can rest assured that any renewed lifting of the veil and consequent collapse in asset values will have nothing to do with him... because: "there has been progress incorporating financial factors into these models. We were nowhere, now we’re probably at the first or second grade."

Reassured much?

Comments

Pinto Currency JRobby Sun, 06/03/2018 - 19:34 Permalink

Sir Alan Greenspan & the Western central banks knew they were short circuiting gold in London and faking goods price inflation (CPI) values while proclaiming a 'new normal' of exploding asset prices w/ putatively low inflation. Magic.

Blowing bubbles by forcing down interest rates - one massive fraud.

 

https://safehaven.com/article/9117/a-letter-to-governor-dodge---part-1

In reply to by JRobby

philipat gatorengineer Sun, 06/03/2018 - 20:11 Permalink

The (unintended - which only makes it worse) arrogance and hubris of these people is astounding. They live in their ivory towers playing with their little "models" without any regard to what is actually happening in the real economy then, when they have tinkered with the real world to force it comply with their models to the extent that they lose control, their excuse is "well our models didn't predict that this could happen"

They should get out more! In fact, they should just get out!!

In reply to by gatorengineer

Harry Lightning philipat Sun, 06/03/2018 - 22:31 Permalink

You are absolutely correct. There are a zillion ways to take the temperature of the economy, and all of them start with the first premise of looking at real time and forward-looking economic indicators, including forward prices of financial instruments. Problems cannot be found through abstract models, but rather only by looking at the actual economy and not some mirage of what you think the economy will be. Traders do this all day long, but regrettably they don't put traders on the FOMC.

Instead the put economists on the FOMC, people highly trained at trying to drive a car forward while looking in the rear view mirror.

And then they wonder why they get it wrong all the time. 

The Fed should be taken out of the interest rate business and only be responsible for providing liquidity to the banking system when requested. Let the market of banks and borrowers sort out the proper lending rates, and leave the Fed solely to clean up failed banks and be the lender of last resort with a restriction (a credit limit if you will) on purchasing sovereign debt securities. 

In reply to by philipat

Harry Lightning Pinto Currency Mon, 06/04/2018 - 01:18 Permalink

Maybe you should familiarize yourself with the way they make bnanking regulations in America. The Parliament (which they call "Congress" passes a bill and sends it to the President. If he signs it, the bill becomes a law, and the banks then follow that law at the risk of penalty. If they gamble illegally its up the the regulatory agencies of the Justice and Treasury Departments to exact punishment. The Fed has no role in what the banks do with their capital.

Because of the history of bank collapses in America due to lack of central liquidity in the US bankiong system in the years prior to the creation of the Federal Reserve, the institution was created by law in 1913 to be the lender of last resort,. The concept is that if the banking system loses capital due to the normal ebbs and tides of the business cycle, or through bad investments or bad "gambles", the failure of a bank should not be allowed to endanger the entire banking system. This is exactly what used to happen as fear gripped bankers and depositors alike, and banks could not get enough daily liquidity to remain solvent in times of economic downturn. If you were watchiong carefully enough in 2008, you saw that its not loss of capital that endangers a banking system, its loss of available liquidity.

So the Federal Reserve System was created by law to be the backstop against liquidity crises that could en=danger the entire banking system, and it has fulfilled that role quite well since its inception. There has been only one economic Depression since the Fed started providing liquidity to the banking system, and that Depression was the result of a poorly constructed monetary policy to support the dollar in the early years of the economic downturn of the late 1920s. Prior to the creation of the Federal Reserve, economic Depressions occurred once every 20 to 40 years in America, because small bank problems mushroomed into huge system wide banking problems.

Hence, you need to separate in your mind the difference between banking regulation and the role of the Fed. The Fed is the fireman that shows up to put out your house fire and try to salvage some of your possessions regardless of whether your own negligence started the fire. And that is a necessary function to any economy. This function does not entice banks to gamble, because if banks gamble against the rules that they are bound to follow by their respective charters, they will be put out of business by the Treasury Department and the executives who engaged in the gambling can be prosecuted. That is not the role of the Fed to do, the Fed simply keeps the bank's losses from endangering the banking system until a solution is devised to ring fence the bank losses from causing a domino effect throughout the system. 

Banks inevitably will have good years and bad. Some banks are better than others, the same way as some companies are better managed and more profitable than others. Some banks as well as businesses fall prey to bad or even illegal policies of their management. To the degree possible, your financial security and assets should not be endangered because of these typical situations in business. The Federal Reserve being the lender of last resort, providing needed liquidity to the banking system in times of distress, ensures that you will not have your financial security put at risk when a major bank that you have nothing to do with happens to suffer a huge loss. 

In reply to by Pinto Currency

Elentari philipat Mon, 06/04/2018 - 07:47 Permalink

But ie has been going on the same way since Babylon!   Five thousand years!    They do it the same way - for five thousand years.

If you read   "The Babylonian Woe".    by David Astle you will see that it all began with some people called the Habiru who were traders who traveled with their donkeys from city to city - and that is where usury began.

Or read William Engdahl and Michael Hudson.

In reply to by philipat

stefan-coast Sun, 06/03/2018 - 18:35 Permalink

Hi everyone...another question for ya'all....I only have a little, little bit of gold but much more in silver..Do you think Silver will go up as the gold price goes up, if gold does go up?

Endgame Napoleon stefan-coast Sun, 06/03/2018 - 19:16 Permalink

If they go back to the gold standard, will they do what FDR did: devaluing the gold of the goldbugs? The goldbugs will not like that at all; they might just turn into a rich band of Deplorables at the Bastille gates.

But think about it: A shift to the gold standard in the Trump Administration has visual symmetry. Trump is synonymous with gold. It would be visually apropos. It would make for good book covers and movie themes. 

I have no problem with it, and as everyone knows, I am at least as much of an authority on complex, economic math as the MSM on various topics outside of Russia / Russia / Russia and porn stars. 

That said, since MSMers spent the day lauding Obama for admitting he was wrong, and that the Kumbaya Messiah “came too early,” Greenspan deserves at least as much credit for admitting that his pedestal was also set too high. 

In reply to by stefan-coast

Creative_Destruct Endgame Napoleon Sun, 06/03/2018 - 19:30 Permalink

"...if you look at the big DSGE model - dynamic stochastic general equilibrium model - it didn’t include a finance sector."

THIS illustrates clearly why these guys are indeed IYIs (Intellectuals Yet Idiots, Per NN Talib): NO inclusion of finance sector in their macro econ models IN A HIGHLY FINANCIALIZED ECONOMY!!!

And these lame-brains run our lives....

Bring out their Dunce caps and file that one under DUH.

 

In reply to by Endgame Napoleon

Ima anal sphincter stefan-coast Sun, 06/03/2018 - 19:39 Permalink

Think of the word "value".

Land, cars, homes, skills, guns......... an un-brainwashed mind.

Gold AND silver hold value. It took work and investment to get them out of the ground.

When those little pieces of paper with ink on them are seen for their "real" value, people will stampede for whatever item of value the can lay their hands on. (And no, I don't think a dollar bill would be a good ass-wipe at all, but if there are millions green cracks walking around...... people will have "finally" figured out what a dollar actual worth.)

Gold and silver will skyrocket.

I shouldn't of included skills and un-brainwashed mind above...... two items that I  consider to be of extreme value to me.

In reply to by stefan-coast

BankSurfyMan Sun, 06/03/2018 - 18:42 Permalink

My underwear has several yellow stains that I cannot seem to remove, fuc' bleach, next time use the FED POWER. Detergent and retirement, what a gig! Thank ASS honk!

Fantasy Free E… Sun, 06/03/2018 - 18:45 Permalink

The pay for the pretense of knowledge is enormous.

I could tell you countless reasons why Federal Reserve policy never has a chance of producing a positive outcome. For today, here is just one and really the only one you need to know.

http://quillian.net/blog/politics-and-animal-behavior/

Besides the fact that improving the economy is not even their attention, they rely on economic models. In economics there are no independent variables. Without at least one independent variable no model has even a remote chance of working as intended. Calling a variable independent does not mean it actually is.

Kidbuck Sun, 06/03/2018 - 18:57 Permalink

The Fed, and its friends,  impoverish more people every day than all the other thieves in America impoverish in a century.

It's telling of their cowardly character that even with their vast degrees and credentials and their fat salaries that their first instinct while at work is the same as that of any lowly cop or postal worker: Cover your ass until retirement.

Scipio Africanuz Sun, 06/03/2018 - 18:57 Permalink

"...today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. "

Many accuse Greenspan of being a hypocrite, for loving gold until he became Fed Chairman. I think many misunderstand, he is, was, and will always be a gold bug, but when people don't listen to reason, give em what they ask for. That's what he did!

The only way to make errors apparent, is to let the errors happen!

God told the Israelite that a king would oppress them and still, they chose to have one, so he told Samuel to give them one, Saul. All that God warned them would happen, did, but by then, the damage was done!

Alan Greenspan is indeed, The Maestro, and those who wanted a free lunch, suckers! There'll be HELL to pay, and it must be paid!

Now, there're no markets, only casinos, and no transactions, only bet wagers...

 

 

Endgame Napoleon Scipio Africanuz Sun, 06/03/2018 - 19:33 Permalink

I do not agree with the part in this article, indicating that the boom-and-bust cycles between 1870 and 1913 were great for most Americans.

For most citizens, that was the period of mass immigration, sweatshops, child labor, factory piecework and subsistence farming, with a boom-and-bust stock market and monopoly capitalism for a few bigwigs. 

Still, these same forces are alive and well today in slightly different forms without the monetary stability of a gold standard that anchors money in something solid and orange yellowish. Piecework is even back in the form of the gig economy.  

It would be interesting for someone to write a book, with characters that illustrate the ways that the restoration of the gold standard would play out in the lives of everyday Americans or even worldwide.

 

In reply to by Scipio Africanuz

ElTerco Sun, 06/03/2018 - 19:08 Permalink

Leverage drives everything.... Duh! They populate the Central Bank with people that won't acknowledge this fact. In other words, honest people need not apply.

Roger Ramjet Sun, 06/03/2018 - 19:15 Permalink

So the Fed's model didn't take into account the finance sector?  While debt was growing exponentially throughout the economy, the Fed didn't think that mattered?  This goes well beyond being shortsighted, it's economic malpractice of the highest order.  These people are simply too stupid (or corrupt) to be managing the US monetary policy.  All should be immediately fired!  At the least, all involved should never look back on their careers as being anything but a waste and adding no value to society.

GreatUncle Sun, 06/03/2018 - 19:31 Permalink

If you cannot bust the FED for fraud then nationalize the FED so at least those taxpayers on the hook are not forced through economic policy to pay for criminals.

Then you pay for those services you need ONLY not what the government says you got to pay.

Those 2 chains jail the bankers operating a ponzi.

As for the gold standard it only failed because some were creating money without the gold to back it up.

So they dropped the gold standard but keep on creating money in even large amounts.

 

J J Pettigrew Sun, 06/03/2018 - 20:16 Permalink

"The Fed will normalize rates when unemployment dips below 6'5%"

Bernanke also said that the Fed would normalize in a 2009 July WSJ article....

How much larger did the Fed balance sheet get after he wrote that article?

 

UnhingedBecauseLucid Sun, 06/03/2018 - 20:28 Permalink

["One of the challenges going into the financial crisis, for example, if you look at the big DSGE model - dynamic stochastic general equilibrium model - it didn’t include a finance sector."]

 

Wow ... a Steve Keen quote. Talk about burning bridges...

 

 

Avichi Sun, 06/03/2018 - 20:38 Permalink

Fucking "CABAL" Dudly knows Di- Diddly! When you work for your "Masters Globalist" you fuckers have a agenda, look at all your fucking CABAL Member Helicopter Ben, Yellen is Gellen and Maestro ...motherfucker BITCH, now go and work for Walmart atleast you can do some "Data Analytics" for projecting inventory levels and sales....fucking IDIOTS

 

Now that #MAGA has come in and KICKING you mother fucker out of the "DEEP-STATE" syndicate...you fucker need to be hunted down by WE THE PEOPLE - GO PATRIOTS !

Captain Nemo d… Sun, 06/03/2018 - 20:49 Permalink

Wow. Honesty for a change: You cannot predict the future. The experts cannot predict the future. My astrologer cannot predict the future. My guru can, but he doesn't want to tell. My alien contacts say it is a technology we humans must not try to use.

It is more important to design a system that focuses on the basic aim intrinsically and leaves the rest to whatever happens as an expression of individual choice.

If you were to wake up in a world where your daily survival needs were provided to you, guaranteed, like manna from heaven, what kind of system would result? Of course there is no use pursuing such stupid assumptions further because such a system does not exist so why bother. Stupid left-wing utopia that ends up oppressing everyone.

Look up the proof free markets are better than any other system in Copeland and Weston. It starts with assuming that manna falls from heaven so that the survival needs of all are met regardless of the happenings in the market. Of course this is so scientific so we move on quickly and keep deriving and solving second-order continuous time differential equations that even those selling them do not understand.

In the meantime let people be left-wing or right-wing and keep busy calling the other side names. Who funds grass-roots movements on either side? People with money. To make more.

Zorba's idea Sun, 06/03/2018 - 23:11 Permalink

Lets get this straight, the FED didn't see the bubble effect from pumping Assets to infinity and beyond. Hell, I bet you Stormy Daniels would have known everything you need to know about pumping asse(t)s...and she a professional.

TeraByte Sun, 06/03/2018 - 23:57 Permalink

The entire saga of saving the financial system was an outright lie.
Persons, who selected means, were same, who benefited from these and well aware of huge distortions these created. Now the problem instead is, the gravy train they created has no brakes and hence they have started growing worried about a logical outcome.

Batman11 Mon, 06/04/2018 - 04:30 Permalink

Bernanke and Greenspan were idiots, it’s not as hard as it looks.

Alan “Kamikaze” Greenspan

http://newsimg.bbc.co.uk/media/images/45089000/gif/_45089770_us_rates_oct08_226gr.gif

He’s forgotten the delays in the system.

There were delays while the teaser rate mortgages reset; the new mortgage repayments became unpayable; the defaults and other losses accumulated within the system until everything came crashing down in 2008. 

Ben “Debt doesn’t matter” Bernanke

Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.

https://www.wsj.com/articles/SB113392265577715881

“Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”

What has Ben Bernanke got wrong?

The creditors are the banks and the repayments go into the banks reducing the overall debt and money supply.

It doesn’t go to creditors who then get the money to spend.

Debt does matter Ben.

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

He can’t see the problem in 2007 because he doesn’t know where to look.

 

Batman11 Batman11 Mon, 06/04/2018 - 04:38 Permalink

Let’s understand the system and the economy.

What is GDP?

The amount of money spent into the economy by consumers, businesses and the Government plus the income we receive from the trade balance with the rest of the world.

The aim is to increase the amount of goods and services within the economy at the same rate as the demand for those goods and services, whilst increasing the money supply to allow those extra goods and services to be purchased.

Now we see the problem with the gold standard, it limits the money supply and growth.

How do you create the money supply?

The Government can create money by spending into the economy and remove it with taxes.

https://www.youtube.com/watch?v=ba8XdDqZ-Jg

Private Banks can create money with loans and it gets removed again as these loans get paid back.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Money is nothing really, it’s just numbers in memory locations; its value comes from what it can buy.

The only nett money in the economy comes from Government spending.

When the Government runs a surplus it pushes the private sector into debt.

Richard Koo shows a graph central bankers use and it’s the flow of funds within the economy, which sums to zero (32-34 mins.).

https://www.youtube.com/watch?v=8YTyJzmiHGk

Government assets + corporate assets + household assets + transfers from/to the rest of the world = zero

They can’t all be positive.

The US runs a large trade deficit and this money needs to come from somewhere.

It is the Government that should run the big deficit to fund the other three and if you clamp down on government spending your economy can’t grow unless it starts running on bank debt. The corporate sector and households have to get into debt to balance this zero sum equation.

A Government surplus requires an indebted private sector unless you are Germany and run a trade surplus.

This is the US (46.30 mins.)

https://www.youtube.com/watch?v=ba8XdDqZ-Jg

Clinton was proud of the Government surplus but he didn’t realise that this meant the private sector had to go into debt. The last Government surplus occurred in 1927 – 1930, it precedes crises.

Richard Koo’s video shows the Japanese Government ran a surplus just before the Japanese economy blew up.

The private sector doesn’t pay enough wages to consume all the goods and services the economy produces and the Government has to fill the gap. Credit is only a short term solution.

The Government needs to create jobs and wages to produce the extra spending power the economy needs. As robots come on line productivity will be so high the Government will become more and more important in creating demand for the stuff they produce.

There is no point producing more goods and services if there is no demand for them and this is why GDP measures the spending in the economy. The goods and services need to produced and consumed, supply and demand need to rise together.

Governments create money, and taxes should just be used to fine tune the economy in a much better way than the broad brush of interest rates.

The perfect economy.

Supply, demand and the money supply rise together.

Extra money is needed to consume the extra goods and services the economy now produces.

In reply to by Batman11

Batman11 Batman11 Mon, 06/04/2018 - 04:42 Permalink

These clueless fools use neoclassical economics that doesn't consider debt and it's the repayments on the debt that make their forecasts wrong.

The economy would pull up if it wasn't for the debt they don't look at.

Janet “Inflation Mystery” Yellen

Richard Koo had got the answer to Janet Yellen’s inflation mystery.

The West’s “new normal” of “secular stagnation” is Japan’s “old normal” of “secular stagnation”

Richard Koo knew what would happen in 2008.

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

It wasn’t hard.

The West went through its Minsky Moment in 2008 as Japan had done at the end of the 1980s.

Richard Koo has had twenty years to study it ......

https://www.youtube.com/watch?v=8YTyJzmiHGk

It’s called a balance sheet recession Janet.

In reply to by Batman11