Yellen Wants Fed to Commit to Future Booms to Make Up for Busts

Former Fed Chair Yellen promotes "Lower for Longer", a policy in which the Fed knowingly keeps interest rates too low.

Here's the asinine policy proposal of the day: Fed Should Commit to Future 'Booms' to Make Up for Major Busts.

The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”

What We Are Doing Already

The official policy is what we are doing already. May as well make a policy out of it.

The caveat, of course, is the Fed does not realize what it's already doing.

Ass Backward

There is one more major flaw. It's ass Backward. We have major busts because the Fed blew major bubbles.

The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.

The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.

The everything bubble, which we are in now, was co-authored by Ben Bernanke and Janet Yellen. They held interest rates too low, too long in the wake of the housing bubble crash.

Seemingly Modest Proposal

Rather than blowing bubbles of increasing magnitude over time, why don't we try sound policies?

Of course, that's easier said than done. Greenspan did not recognize the dotcom bubble. Bernanke famously denied there was a housing bubble.

End the Fed

Ultimately, the only way to arrive at sound policy is to take the economic reins away from Fed charlatans.

We need to end the Fed and fractional reserve lending as well.

Mike "Mish" Shedlock

Comments
No. 1-23
ConstitutionalReset
ConstitutionalReset

Pah. She wants to whipsaw the people into debt slavery faster.

everything1
everything1

The fed spending trajectory is the new QE, low interest rates are needed to keep the bull running and debts serviced, sounds like that 3% 2021 target isn't happening after all, but I'm not surprised, when Trump said hey what are you doing to the fed, keep them low, we knew then what was going to happen. I knew we would never see 4% again but now we won't ever see 3% again either, just my opinion of course.

aqualech
aqualech

These bubbles are just incidental to an intentional parabolic increase in debt. Look for more bail-ins. Sometime around 20yrs ago the bankers realized that the demographics are a time bomb and have positioned themselves for a huge wealth transfer via facilitating unsustainable lending/borrowing. There will be no jubilee.

ML1
ML1

Fixing problems created by unsustainable booms by creating even bigger and longer and more unsustainable booms. GENIOUS... Actually NO. Totally INSANE

Carl_R
Carl_R

The housing bubble was a direct result of the demographics of the baby boom. One of the most important things to remember about interest rates is that you can't push on a string. If there is no demand, the Fed can't create it by lowering rates. If there is excess demand, the Fed can dampen it some, but they can't make it go away by raising rates. Thus, the Fed's impact is only at the margin. They can make a boom marginally greater, or marginally smaller, but they can't "blow a bubble". If it was that easy, Japan would have blown one by now; they've been trying to, unsuccessfully, for years.

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