A $2 Trillion cut in lending may be coming our way according to Goldman Sachs (GS).

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a “substantial recession” in the U.S., according to Goldman Sachs Group Inc.

Goldman’s forecast reduction in lending is equivalent to 7 percent of total U.S. household, corporate and government debt, hurting an economy already beset by the slowing housing market. Wells Fargo & Co. Chief Executive Officer John Stumpf said yesterday that the property market is the worst since the Great Depression.

Should one believe Goldman or the Fed?

Kroszner is the latest Fed governor to hop on the “all is well” bandwagon with his assertion ‘Rough Patch’ Won’t Warrant Cuts.

Federal Reserve Governor Randall Kroszner said policy makers probably won’t need to reduce interest rates further to help the economy weather a “rough patch” in the coming year.

“The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate,” Kroszner said today in a speech in New York. Data consistent with such growth “would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate.”

The Fed governor said that against the “backdrop” of rising energy costs, “inflation expectations have remained reasonably well anchored.”

How can inflation expectations be well anchored when the Fed does not even know what it is? Please read Inflation: What the heck is it? and Ron Paul: We Have A Subprime Economic System if you think inflation is about rising prices.

Not only does the Fed pretend that inflation is about prices, they are also pretending that prices are not rising and that consumer expectations about rising prices are well anchored. That is one heck of a lot of pretending by the Fed.

For more on disingenuous pretending by the Fed, president Bush, and Treasury Secretary Paulson please see Paulson, Bernanke, Bush vs. Mervyn King.

Because risk aversion feeds on itself, Goldman Sachs is likely way under estimating the effects of upcoming lending cuts by banks. For more on how risk aversion plays into the spending cuts and how it is affecting retailers like J.C. Penny (JCP), please be sure and read point number 4 Risk Aversion Leads to Risk Aversion in Friday’s Five Things by Professor Depew.

The risks are not balanced, not even close. Who is the Fed fooling here? The only possible answer is themselves.

Mike Shedlock / Mish
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