Risk? What Risk?

Fed chair Janet Yellen recently uttered what sounded to us like a stunningly clueless assessment of the potential danger the echo bubble represents. She indicated on the occasion that she was certainly in no hurry to raise the administered interest rate from its current near-zero level.


“I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” said Ms Yellen.

“That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macro-prudential approach.”


“Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical,” said Ms Yellen.


(emphasis added)

Of course no Fed chair of recent memory has displayed even the slightest ability to recognize bubbles or to realize that they might pose a danger.

As to the remark about the “resilient financial system”, this is surely a joke. Does anyone remember how Fed officials and politicians (such as then treasury secretary Hank Paulson) were going on and on about the supposed ruddy health of the US banking system in 2007? Never had they seen the system in better shape than in 2007! By late 2008 it was close to complete collapse, but as they say, errare humanum est.

Don't get us wrong: we are not trying to dispense advice as to what the Fed should do. We would welcome its dissolution and the replacement of central monetary planning with free banking and a free market in money, but that's about it. We have no intention of recommending a “better plan”, given that we think there should be no plan at all (there are certainly different degrees of competence even among central planners, but that is beside the point; as previously noted, they are faced with an impossible task). We also certainly don't think that monetary policy should be turned over to politicians. That would be the one thing even worse than having a central bank.

We only want to point out that the capacity of monetary bureaucrats to learn anything from the events of recent years is at almost precisely the same level as the Federal Funds rate: namely zero.

We leave you with one more comment by the Chair (put the coffee down):


“Broad measures of credit outstanding do not suggest that non-financial borrowers, in the aggregate, are taking on excessive debt” 


Once you're done laughing, take a quick glance at the following charts:


Non-Fin corporate debtUS non-financial corporate debt – perhaps that's not “aggregate” enough? – click to enlarge.


total credit market debt vs. GDPThen consider the pièce de résistance – total US credit market debt vs. real GDP – click to enlarge.

Charts by: St. Louis Federal Reserve Research





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4 Responses to “Janet Yellen Chimes in on the Bubble Question”

  • Hans:

    “Members of the Fed purposely lie to the public. They are in a conspiracy with other Fed governors, some of whom claim they want the Fed to hike sooner than later because they see potential asset bubbles and inflation problems. The whole thing is a setup to convince the public there is discord when there isn’t. They all realize there is an asset bubble, because no one could possibly be so stupid as to not see it. Yet, collectively they choose to ignore those bubbles even after the experience of the housing collapse, and in spite of what the BIS says.

    Yellen, Paul Krugman, and others live in academic wonderland, devoid of real world experience, and are incapable of recognizing asset bubbles, income inequality, and other problems caused by QE, low interest rates, and monetary printing.”

    Read more at http://globaleconomicanalysis.blogspot.com/#ya106VOqK9ybW8AB.99

    Mr Pater Tenebrarum, Mish, read your article with approval, may I say!

  • Hans:

    As reported in Barron’s this week.

    The BIS or Bank for International Settlements (Central Bank
    for Central Bankers) warned that the “euphoric financial markets
    have come unhinged from economic reality.”

    The Bank of Yellen response, was to reject the advice from the BIS
    to begin the rise in short-term interest rates, before an IMF meeting.

    They are going to do what previous FBR has done, wait and see and
    then react..

    They know they do not know what to do.

  • kcst1300:

    Pater, good article I wish more analysts would focus on the world balance sheet. That said, your metrics are flawed. You should use nominal GDP instead of real GDP. The reason you should use nominal GDP is the Debt is in nominal dollars therefore apples and apples. If you’re going to use real GDP then you need to inflation adjust the debt.

    Nominal GDP to nominal Debt is a metric that I keep a close eye on and even using nominal vs. nominal it’s clear that we have substantially more debt to service now that we did 30 years ago:
    1980 1.6
    1985 1.9
    1990 2.2
    1995 2.3
    2000 2.6
    2005 3.1
    2010 3.7
    current = 3.5

    All this info come from the St. Louis Fed and goes back to 1949. Between 1949 and 1980 debt to GDP was stable between 1.4 and 1.6.

    This high level of debt is OK until it isn’t and there’s no way you or anyone can predict when this will come apart, it could go on for years. We are one major world event away from a financial market melt down. The “beautiful deleveraging” that Ray Dalio is predicting may happen but I don’t think so. Stay nimble my friend.

    • Hans:

      1300, nice stats!

      I am sorry but I can not take this Chairwomen seriously
      in any fashion…

      She will be a disaster, even worse than Bank Bernank.

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