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.
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:
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