Wednesday, July 29, 2009

William Dudley Blows Smoke and Bubbles...

Bill Dudley, former Goldman Sachs employee and now Goldman's representative as head of the NY Federal Reserve Bank (the branch of the Fed in charge of oversight of Goldman Sachs), issued a call for growth in the second half of 2009. Well, we're 28 days into the second half of 2009 and the REAL economic numbers continue to deterioriate, including the durable goods orders number released to day, which was much worse than expected. We are also seeing unemployment continuing to rise, real inflation-adjusted retail sales decline and shipping and transportation indexes tank. There are several other key measures of economic activity not reported in the press or promoted by the Government which continue to deteriorate. I would argue that we have a better chance of seeing world peace in the second half of 2009 than any signs of economic growth or even stability.

He also argues that the Fed has the "tools" to cap inflation. We would love to see these "tools." Bernanke also has alluded to these "tools" under oath in front of Congress but has yet to reveal what these "tools" would be.

Dudley says that by paying interest on the reserves banks keep at the Fed, it will help prevent the banks from unleashing all the cash the Government has given them into the system. Yet, in the same breath, he says the Fed TALF program is lowering credit spreads to consumers. So Dudley thus argues the Fed can limit inflation by preventing banks from lending into the system and yet he is promoting the Fed TALF program as making it easier for consumers to get credit. Either Dudley is speaking out of both sides of his mouth in an attempt to blow smoke up our ass, or he lacks the intelligence to realize that his highly scripted speech is full of conflicting ideas. I would argue strongly for the former.

I'm not sure what other "tools" Dudley thinks the Fed can pull out of its ass. I do know that the Fed has reported markdown losses in the several 10's of billions of dollars on the toxic assets it has been purchasing. We don't know what the Fed is paying for these assets (which are backstopped by the Treasury aka taxpayer money) and we don't know who the sellers are, but we do know that the Fed would not be able to sell these "assets" to drain even close to the amount of money from the system that it injected by buying these "assets." In fact, the Fed wouldn't be able to find any bids for most of the crap.

Before you go out and start loading up on stocks based on Dudley's speech, consider who he is, where he came from, who he represents and understand that every single member of the Federal Reserve system has been saying that the worst is over and they've contained the losses in the financial system. Don't believe them as their forecasting track record is dismal.

1 comment:

  1. If the banks didn't need the cash between them, they would merely buy treasuries. Problem is the system over ran its liquidity. Cash as it is discussed here isn't cash as we believe it to be cash on the outside, but a mechanism of balancing out what banks owe each other. The Fed is monetizing assets that have already been monetized in bank accounts, in some cases for years.