Yellen Imitates Bernanke and Greenspan with Declaration that Economy is A-OK

06/29/2017Doug French

Janet Yellen finally did it, mark the date June 27, 2017. Something all modern Federal Reserve chairs do: open mouth, insert foot. Tuesday in London Ms. Yellen announced the end of financial panics...well...at least while she’s alive.

"Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," Yellen said.

She follows in the footsteps of two great Fed Chair prognosticators

In 2002 Alan Greenspan said,

The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect. First, unlike in the stock market, sales in the real estate market incur substantial transactions costs and, when most homes are sold, the seller must physically move out. Doing so often entails significant financial and emotional costs and is an obvious impediment to stimulating a bubble through speculative trading in homes. us, while stock market turnover is more than percent annually, the turnover of home ownership is less than percent annually— scarcely tinder for speculative conflagration. Second, arbitrage opportunities are much more limited in housing markets than in securities markets. A home in Portland, Oregon is not a close substitute for a home in Portland, Maine, and the “national” housing market is better understood as a collection of small, local housing markets. Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.

When Federal Reserve Chairman Ben Bernanke was questioned in 2005 about whether house prices might be getting ahead of the fundamentals, he replied:

Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.

Also in 2005.

House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

Later that same year

With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.

Then in 2006

Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.

February 2007

Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.

March 2007

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.

May 2007

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

October 2007

It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.

June 2008

The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

July 2008

The GSEs are adequately capitalized. They are in no danger of failing.

December 2010

I wish I'd been omniscient and seen the crisis coming.

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Yellen: "GDP is a Pretty Noisy Indicator"

03/16/2017C.Jay Engel

As much as the Fed pretends it is data dependent, in actuality they do what they want and use the data to justify their actions. Or, in the case of GDP, they shoo it away as if it doesn't matter. We always hear how important GDP is as a summary of the economy's health (the Austrian view is that the GDP is quite overrated). But when the narrative is that "it's all good!" the Professional Monetary Bureaucrats can't let a lousy GDP number get in the way.

Just before the FOMC's announcement, the Atlanta Fed's forecast put the Q1 GDP number below 1%. When asked about it during her press conference, Yellen simply stated that "GDP is a pretty noisy indicator."

Of course, regardless of the actual GDP headline, the economy's fundamentals are never on the right track if the "growth" is built on the artificial expansion of the money supply. But as much weight as economists and other academics place on this precious statistic, it's wholly amusing when it doesn't really matter if it contradicts the official story.

Despite the low GDP forecast, Yellen said that she expected 2017 to result in a 2 percent average GDP overall. Even this is hilarious, if she's bragging about it. The WSJ writes that this "new stage of monetary policy [raising rates] is being driven by a central bank now more focused on the possibility that the economy could outperform forecasts." Well, one might suppose that if your forecasts are in the gutter, outperforming them is indeed possible. Two percent GDP itself, if one is to use GDP as a measure of economic flourishing, is hardly something to be proud of.

What we need, of course, is a complete repudiation of this entire dilemma of rate hikes vs. no rate hikes. The Fed has been an abject failure. Interest rates, like money itself, should be set and discovered via the market process. 

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Yellen To Congress: We'll do Something Someday

02/14/2017C.Jay Engel

On Yellen's Humphrey-Hawkins testimony, the Reuter's headline says it best: "Fed on course to raise interest rates at an upcoming meeting." Translation: Fed continues on path to do something someday.

Her time before Congress was a continuation of Yellen's unique ability to say absolutely nothing while pretending that she's got everything under control. There was no further information on the overrated Fed Funds rate hike issue — overrated because it is both meaningless and a distraction to the real problems at hand. We cannot emphasize Joe Salerno's point strongly enough:

The targeted variable and its targeted level are not important per se. It is the increase of bank reserves and the resulting expansion of the money supply when banks loan these reserves out that artificially reduces market interest rates and misleads entrepreneurs and capitalists into investment decisions that result in malinvestment and overconsumption. These inflation-fueled malinvestments result in bubbles in real estate, commodity, and financial markets and a distortion of the real structure of production that invariably culminate in financial crises, unemployment and recession or depression.

The Fed and the feebleminded financial press are obsessed with interest rate talk and ignore the elephant in the economy: malinvestment and the destruction of capital.

But of course, it's not just the lack of new information on a meaningless rate increase; it's also the convoluted and contradictory approach of "Fed Speak." On one hand, we get this: "As I noted on previous occasions, waiting too long to remove accommodation would be unwise." As if upping the Fed Funds target another 25 basis points (.25%) is "removing accomodation." On the other hand, however, she was eager to emphasize how "gradual" rate hikes would be.

Being worried about waiting too long and bending over backward to stress how slowly "rates" would rise hardly communicates knowledgeable resolve. Instead, it reinforces the increasingly obvious idea that the Fed has no clue what it is doing and it is merely buying time; trying to save face and save bureaucratic positions in Washington.

Regarding the balance sheet issue, the WSJ reports that "the Fed has no plans to use the balance sheet as an 'active tool of monetary policy management.'" By this, she clearly means what has been obvious to anyone paying attention: the Fed is afraid to reverse its absurd monetary policy of soaking up massive amounts of Federal debt. There's little desire to sell its holdings because no one wants to prick the bubble.

On interest rates, the balance sheet, Dodd-Frank repeal, and fiscal policy, Yellen's testimony is best summed up as: "I'm not sure, we'll just have to see." In this light, Yellen has been entirely consistent, unsurprising. She's always employed convoluted FedSpeak to communicate nothing of substance. 

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