During her initial congressional testimony as chairwoman of the Federal Reserve last week, Janet Yellen stated that she “expects a great deal of continuity in the [Fed’s] approach to monetary policy.”
This essentially translates to the continuation of “quantitative easing” — the Fed’s buying up of securities and assets to put more money into the financial system.
It’s thought that pumping money into the economy through quantitative easing stimulates it. In other words, it’s reasoned that more dollars circulating means that people will demand more, prices will go up and jobs will be created.
Additionally, Yellen told Congress the Fed would also likely keep interest rates at near-zero levels — at least until the unemployment rate dips below 6.5 percent.
Unfortunately, such an approach has consequences. And it would be nice to see more skepticism rather than celebration about Yellen’s projections
The Federal Reserve has often tried to hasten post-recession economic recovery by manipulating asset prices. Monetary and fiscal policy at the Fed and the federal government, respectively, helped create the dot-com boom when stock valuations and Internet stock prices became inflated through exuberance and such haphazard decision-making. The Fed also waited too late when putting the brakes on the money flowing into capital markets in the late 90s, a mistake that fueled speculation.
Once the ramifications of the bursting bubble on Wall Street hit Main Street, then easy money became the tool to “lift the economy” out of recession.
The Federal Reserve also kept rates low and even encouraged speculation in the housing market. This actually helped cause the recession of 2008-2009.
Fast-forwarding to the present, is there any reason to believe this phenomenon will not happen again under Yellen?
The value of the S&P 500 has exploded, with a 170 percent increase since it hit its rock bottom on March 2, 2009. Over the same period, unemployment moved from 8.7 percent to a high of 10 percent and is now down to 6.6 percent. And the gross domestic product has only grown 20 percent since that time, from $14.4 trillion to $17.1 trillion.
But the most compelling indicator that America could be on the verge of another bursting bubble is the reaction to Yellen’s testimony. The stock market rose 200 points that day. One cannot help but question why Yellen’s testimony — which discussed the need for “continuity” in stimulus measures — would cause stocks to soar.
According to an article posted on Forbes, low interest rates allowed the financial sector to grow fastest among the S&P 500. This could fuel a stock-market bubble. A burst bubble would lead to significant negative economic effects akin to the dot-com and housing bubbles.
Meanwhile, those dependent on savings, such as seniors, are already seeing their savings rates in CDs and bank savings accounts languish at less than one percent as too much cheap money floods the system due to Federal Reserve action.
It seems America’s financial standing is on shaky ground.
If there is such a risk, why isn’t there coverage of it? Why aren’t alarm bells going off in newsrooms across America? The elements are all there.
To be clear, there is no question that Janet Yellen is qualified for the top job at the Fed. But she appears to be the latest in a line of leaders there who have allowed the institution to fuel bubbles and hurt savers while helping to artificially pump up bank profits.
The media has not been very helpful in exposing these risks and informing the public. Too much of the focus on Yellen so far has been on her gender.
Hopefully, another bubble won’t burst soon. It would be a shame to have to look back and say the press didn’t focus on how the Fed’s risky continuation of quantitative easing caused financial chaos because they were more interested in the Fed leader’s gender.
