Wednesday, December 23, 2015

Yellen’s “Bernanke Moment”

In Mid 2007, then Federal Reserve Chairman Ben Bernanke apparently (as he recently suggested in his book about the crisis) completely missed the significance of the housing decline when he asserted that the subprime implosion and the wider housing troubles were “contained” and economic growth would continue.

In her most recent statement following the Feds decision to raise interest rates, the current Federal Reserve Chair, Janet Yellen, made just as significant a blunder.

“It’s a myth that expansions die of old age,” Yellen said. “I don’t see anything in the underlying strength of the economy that would lead me to be concerned” about a recession.

If you have spent any time evaluating macroeconomic trends you will know that this is more than just a preposterous statement… it is wishful thinking or willful neglect… but in either case, Yellen invoked this statement for the same reason as Bernanke before her.

Just as Bernanke should have had the total implosion of the nation’s housing sector as his top concern in 2007 and 2008 (very obviously by this point), Yellen’s priority should be on the looming recession and the potential systemic shock it could bring (particularly in light of the weak expansion from the worst recession since the Great Depression) and NOT attempting to bluff her way through the inevitable.

In 2016, we may well see the end of the current expansion… there are, in fact, the beginnings of “old age” signals starting to show in the macroeconomic trends and we DO know with absolute certainty (from past experience and common sense) that periods of expansion do, eventually, all “die” and give way to periods of contraction.

So the question is, now that Yellen has indicated that she plans to go with the same failed “bluffing” strategy as her predecessor, is she up for the challenge of what is inevitably going to come?

Based on her recent performance addressing the University of Massachusetts-Amherst, I think not.