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 cant 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 (43)
No. 1-23
2banana
2banana

Yellen was nominated by President Obama to succeed Ben Bernanke as Chairwoman of the United States Federal Reserve. On January 6, 2014, the U.S. Senate confirmed Yellen's nomination. She was sworn in on February 3, 2014, making her the first woman to hold the position.

compsult
compsult

Stupid is as stupid does

Pete Venkman
Pete Venkman

Retards or crooks - kinda hard to tell. Probably some of both in positions of power at the Fed. End the Fed.

Roger_Ramjet
Roger_Ramjet

I heard former Fed Chair Bernanke this week dispute the notion that Fed activities have had anything to do with the growing populist movement. Under Yellen's strategy, income and wealth inequality will amplify at a greater pace than we have seen thus far. Does she really believe that Fed actions had nothing to do with a Ferrari recently selling for $42 million? She should be careful with her extreme and unproven prescriptions for controlling the economy as there are likely some very unexpected and negative outcomes that could arise.

Runner Dan
Runner Dan

Please keep rates lower for longer or at least until I die! -Yellen

Stuki
Stuki

Reductio ad absurdum Financialism: The more "inveeeestment," the better. Never mind whether it is 100% malinvestment or not. Just do more of it. Call it a boom. Be dumb and uncritical enough to believe "boom" is some sort of direct synonym for "good." "Bust" ditto for "baaad." Nuance and even slightly deeper understanding?? Huh???

How these clowns have enough functioning grey matter to coordinate the intricacies of breathing, shall forever remain a mystery..

Greggg
Greggg

Let's even the playing field... let the general public borrow at the Fed Window rate directly. Let's skip right over Lloyd Blankfein.

Webej
Webej

Implicit in this "policy" is the idea that the policy makers are actually in the driver's seat of the economy !! Ha ha. Driving by using the brakes and the gas pedal simultaneously !! Good for the car.

hmk
hmk

In theory there is no difference between practice and theory, but in practice there is. These ivy league educated arrogant assholes in ivory towers, who have collectively never worked in the free market have no business setting interest rates whatsoever. Interest rates should be set by the market.

thimk
thimk

WOW ,Yellen has the magic formula, the elixir of prosperity . (of course no mention of fiscal/structural changes needed) ;the mighty fed can workaround those issues. wonder what she is worried about?

channelstuffing
channelstuffing

Central bank syncronized around the clock money printing and buying virtually everything their is to buy along with regular limit increases on folks credit cards in yellen's eyes can continue to acheive economic growth in perpetuity ,(until it doesn't)

killben
killben

Greenspan was the guy who started it all in 1987. After that there was no looking back for him till 2007, 20 years later. Followed by "housing never falls with the courage to act" Bernanke and "no bust in my lifeterm" Yellen. This act of reducing interest rates to create a bubble and then raising it when it cannot be sustained resulting in a bust and sometimes collapse of the system like in 2007 is the only textbook that the Fed reads.

I hope that the next crash happens soon and people see them for the charlatans they are and hang them from the nearest lamp post.

CautiousObserver
CautiousObserver

Mish said: 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.

It seems like a lost cause today to advocate that the economic reins be given to Adam Smiths invisible hand and bank lending be strictly limited to deposits + bank assets. Hopefully you are incorrect about that being the only way to arrive at sound economic policy.

I would settle for: [1] Total Federal Government spending growth firmly capped at 2% per year except in case of imminent sovereign peril. Borrowing off-balance sheet not allowed. Lesser problems like an oil price shock or credit contraction cycle are not imminent sovereign peril. [2] Financial fraud results in prison time, not just fines, for those responsible, even when stock prices are going up.

DFWRealEstate
DFWRealEstate

Japan or bust. :)

pyrrhus
pyrrhus

These officials will never understand, or perhaps don't want to understand, that artificially depressed interest rates don't help the real economy, they merely create financial bubbles and tons of malinvestment...Peak prosperity under Reagan saw the prime rate at 8%.

RonJ
RonJ

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

It allows the economy to bust, as the boom causes the bust.

RonJ
RonJ

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

The housing bubble was also intentional. A new bubble purposefully replacing another. It wasn't an accident that Bush's Ownership Society came about. It was part of creating the bubble, along with Greenspan taking lending standards to ZERO.

Blacklisted
Blacklisted

You could end the Fed tomorrow and it would not solve anything, as long as we have career politicians that don't have to live by the laws they pass, spend money they don't have, and increase taxes & fees to mask their malfeasance.

You also ignore global capital flows that are the driver behind markets. As we have seen, CB's cannot make people borrow. The Fed will try to stop another stock bubble by raising rates, but it will only compound the problem, and when confidence collapses they won't be able to attract money no matter how high they raise rates (as Turkey is currently demonstrating). Confidence is the key, and it will decline quickly when the truth is fully revealed.

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.

ML1
ML1

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

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.

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.

ConstitutionalReset
ConstitutionalReset

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