Which House Are You Blowing Down?

The wolf cried ‘I’ll Huff & I’ll Puff & I’ll Blow Your House Down !’ … from Little Red Riding Hood.

Comments from a former New York Fed Chief:

‘It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.’

— Bill Dudley, former New York Fed president

Wow. Pretty breathtaking. I never realized that was part of the Fed’s mandate. Nor was using the Plunge Protection Team to prevent any negative market reactions to the Fed’s insane money creation.

I would encourage Mr. Dudley to be specific about which house(s) he is planning to burn down. Let’s look at his. The first thing you notice is that the Fed has a $9 trillion balance sheet. That’s a lot of stocks, bonds and mortgages that they bought. God knows what else. Jacking up interest rates to punish borrowers (look in the mirror, Bill) would mean the Fed itself would suffer massive losses on their own holdings.

The Fed is not part of the U.S. government. It is owned by the banks, given an incredible license in 1913 to create money out of thin air. Multiple trillion dollar losses on their holdings probably will not make their shareholders happy. Jamie Dimon of J.P. Morgan, Bill’s primary shareholder, could easily make grown men and women cry. I would love to be a fly on the wall for that job review.

Speaking of the banks, they too are up to their eyeballs in the financial instruments that would crater under Bill’s plan.

Another house to burn down are the private equity firms that own a huge amount of stocks, bonds, homes, and commercial real estate. The last one is already walking dead, and homes are poised to join that category just with the current level of mortgage rates. That’s before Bill’s recommendation.

The next house to burn down is the retirement system. Pension funds are loaded to the gills with stocks, bonds, and alternative investments such as private equity and venture capital. Already way underfunded for years, pensions will have to be massively cut.

Finally, there is his other benefactor, the Federal Government. If they thought they had budget problems before, you can double those systemic deficits if Bill gets his way.

You are bluffing, Bill. If you are not, you are one crazy dude. You blew this bubble. You own it.

Some people say that what is going on is so stupid it has to be deliberate. Occam’s Razor suggests otherwise.

It just might simply be that stupid.