The Yellen "Resilience" Doctrine Is Dangerous Keynesian Blather

Tyler Durden's picture

Submitted by David Stockman of Contra Corner blog,

Just when you thought that nothing could be worse than bubble blindness of Greenspan and Bernanke - along comes the Yellen doctrine of “resilience”. Its dangerous Keynesian blather, and far worse than Greenspan’s feigned agnosticism which held that the Fed does not have the capacity to recognize financial bubbles in the making and should therefore mop them up after they burst. The Maestro never did say exactly what caused the massive and destructive dot-com and housing bubbles which occurred on his watch - except that Chinese factory girls stacked 12-to-a-dorm-room apparently saved way too much RMB.

By contrast, Yellen’s primitive Keynesian mind knows exactly what causes financial bubbles. She has now militantly asserted that bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability.  That’s right, if the Fed could find a way to peg the money market rate at negative 10% to further its self-defined dual mandate of just enough inflation and always more jobs - even then any speculative excesses would presumably be attributable to still another outbreak of the market’s alleged propensity for error, irrationality and greed.

Let’s see. If the central bank arranged to cause carry-traders to get paid 8% to borrow short-term money (i.e. on a negative 10% deposit rate) in order to fund the carry on junk bonds, Turkish construction loans and the Russell 2000, do ya think they might get a tad rambunctious? For crying out loud, when it comes to speculation, leverage, maturity transformation and re-hypothecation of financial assets the money market interest rates is “not nothing” as Yellen contends. Its everything!

That’s the heart of the matter and why Keynesian central banking is the most destructive and dangerous doctrine ever invented. In effect, it mandates central bankers to seize control of the single most important price in all of capitalism–the price of “carry” or gambling stakes in the financial markets - and then asserts that this drastic pre-emption will have no impact on the behavior of speculators, traders and investors.

That predicate is so perverse that it puts one in mind of the boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan! Keynesian central bankers like Yellen are doing exactly the same thing. Pegging the money market rate at zero for seven years amounts to killing all of the financial market’s inherent stability mechanisms.

That is to say, carry trades are made essentially risk free because the money market rate is officially pegged at zero. Moreover, the Fed has further promised to be utterly transparent in notifying gamblers as to when the spread between their funding cost and their asset yield will change, and with ample advance notice.

Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen “put” the cost of “protection” against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.

Accordingly, momentum deals and carry trades are far more profitable than they would be on an honest free market because in the latter case market-priced insurance premiums would eat up far more of the winnings. Needless to say, out-sized and artificial profitability attracts massive excess capital and resources into the hedge fund and trading desk gambling arenas—–the very motor forces of financial instability.

Likewise, an essential ingredient of honest two-way financial markets is speculation from the short-side. Self-evidently, ZIRP, bond market repression and the Fed’s stock market put have driven the short interest out of the casino entirely. So now we have one-way markets that are inherently prone to powerful speculative excess.

Worse still, as one-way markets gain steam they are self-evidently prone to pro-cyclical acceleration and mania buying of anything going up solely on the grounds that rising prices beget even higher prices. Clearly that is what is happening in the C-suites today where companies are consuming all of their earnings in share repurchases in order to goose their share prices by attracting even more momentum chasers into their stock.

In this context of pro-cyclical acceleration of the bubble,  “price discovery” is lost entirely, fundamentals become irrelevant and the market becomes a pure gambling arena.  What all of this adds up to, of course, is massive, intensifying and dangerous financial instability.

At the end of the day, blaming the private market for financial instability is the most perverse form of statist lie that is imaginable. According to Yellen, the financial system should be made more “resilient” through strengthened “macro-prudential” policies. That’s Washington pettifoggery for more intrusive, extensive and arbitrary regulation of the financial markets.

But here’s the thing. When you sponsor a casino you should not be shocked to find that gambling is happening inside. And it is utterly naïve to assume that you can hire enough police to monitor, comprehend and regulate the amount of risk-taking that goes on among the gamblers.

Yellen has hinted, for instance, that the LBO market is getting frothy, and regulators are now proposing to limit leveraged loans to 6X EBITDA. Good luck with that! By the time regulators figure out all the “adjustments” to GAAP EBITDA, the next round of bankruptcies will already be underway.

So the clear and present danger is this: We now have two decades of financial instability and three bubble cycles that prove Keynesian central banking is the culprit.  Accordingly, the way to make financial markets more “resilient” is to eliminate the central bank’s price pegging and propping policies which fuel serial bubbles and the economy impairing boom and bust cycles which go with them.

A place to start would be to repeal Humphrey-Hawkins, abolish the FOMC and let the money market rate be set by the supply of savings and the demand for funding. Once today’s Fed enabled gamblers had been laid low and purged from the system, the financial markets would take care of their own “resilience”.

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knukles's picture

Her comments sound like the Perfect Central Banker for a government bound and determined to destroy is fiat currency by overprinting in an attempt to fund inordinately impossible, unsustainable and absurd expenditures
Hint:  read Cicero about Rome and Caesar.

Pool Shark's picture



War is peace...

Slavery is Freedom...

Ignorance is wisdom...

We have always been at war with eastasia...


Sadly, Yellen has learned Hitler's 'Big Lie' device quite well. 


International Jew's picture

I read this an agree

I am your average zerohedge muppet and I have no money or intelligence.  HAI DUR WIL MUPPETS :D

Very simple.  This is a planned destruction of an economy.  see the Protocols of Zion.



Keynesianism is somewhat alright... 

inflation does hurt the rich more than the poor

UNLESS! you pump all the inflationary dollars into wallstreet, which they've done.


Also note that the reason we are printing so much is the federal government is spending money into the stratosphere...




Here's a video on dianetics.  Watch you muppets!  THE POWER OF CHRIST COMPELS YOU

Silly wil muppets.  rabble rabble rabble!

International Jew's picture

Here, let me help you wil m-mu-muppets with this one... 

rabble rabble rabble! I'm a dumbass who doesn't understand anything. 

'Zerohedge told me to buy gold at 2000 and short the stock market!  I lost everything!'

BigJim's picture

Well lookee here! We gots ourselves a new troll!

tolivian's picture


And a particularly obnoxious one as well!

TrulyBelieving's picture

You're wrong if you think that inflation hurts the rich more than the poor. Considering such a prepostorous statement one could only conclude it to be state propoganda or sheer ignorance. 

ebworthen's picture

I knew it was Stockman when in the preview I saw "Keynesian blather".  Priceless.

What Yellen is really saying is that income and production don't matter.

Great, send me my $3 Million tax-free Janet.

NYPoke's picture

What she is saying is that devaluing a currency has no effect on prices.  She obviously flunked Econ 101.

Greenskeeper_Carl's picture

I had the same thought. He has also used "going full retard" in several articles when referencing these things, kinda makes me wonder if he has been reading the comment section on here.

FeralSerf's picture

She's even crazier than Lagarde.

Spastica Rex's picture

Imagine a system where leadership is drawn from those with exceptional ambition, an exceptional sense of self-worth, barely average intelligence, and a complete lack of ethics.

International Jew's picture

Smart person

Supremely stupid dumb person - my wil goyim wog.

Dude.  They people running the show are supremely intelligent. 



& for that matter, most all of you are supremely unintelligent, fucking wogs and goyim.


Rehab Willie's picture

Calamity Janet to the rescue

Seasmoke's picture

That We allow this cunt to be in a position to control is disgusting. 

damicol's picture

Camels cunt... Please !!

stinkhammer's picture

String the central bankers high; treason!

stinkhammer's picture

Double post grrr. No post bubble here

DOGGONE's picture

Get these DATA
in everybody's face, all the time!
That is the best BS reducer!

I Write Code's picture

Well, you're right and she's wrong to this extent, the #1 reason for the real estate bubble that burst in 2007/2008 was that Greenspan held real interest rates negative for too long, and every warm-blooded creature in North America saw this and borrowed all they could and used it to speculate on housing.  Really, all the rest is commentary.

And the Bernanke/Yellen ZIRP is much, much worse.

Have a nice day.

XRAYD's picture

" bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability" .. 

SHE is absolutely right. She operate in a private market open to banks and treasury only, which they can rig to always profit. If this is not true, the Fed should open a mutual fund for all tax payers with a 2% fee, instead of the hedge fund it is operating.  Who is getting the 2 + 20? 

DOGGONE's picture

The MAIN ENABLER of sizable asset price bubbles is keeping the real price histories out of sight.

AGREE or not?

Aussiekiwi's picture

Everything is under control, the FED is steering us to perpetual wealth, no more Bubbles, no more crashes, they will simply not be allowed, gives me a warm feeling all over, or is that just me pissing myself.

Youri Carma's picture
Central Bankers Fire Back at Their Own Club Over Bubbles

damicol's picture

Don't blame Yellen for the syphilis ravaged brain in this sodden dying old hag

Just because she got where is today by learning at 12 how suck every black cock  around the block and open her legs to every  fucking degenerate in a suit that worked in  a Govt office and her mama if she ever had one apart from some fucking camel, didn't teach her fuck all about protection.

That is why the US needs protection from this ravaged bitch

Nick Jihad's picture

what a stupid comment. couldn't you come up with even one insult that is remotely related to monetary policy, which is, you know, the only reason we talk about her at all?

AdvancingTime's picture

 Janet Yellen has been head of the Federal Reserve bank long enough that we no longer need to speculate as to her job performance. As we begin to critique her ability to perform we must remember perception is often just as important as reality. Another issue that comes into play is how you stack up or compare to the person who held the position previously, this often extends to style as much as it does to substance.

As expected it appears Janet Yellen has chosen to take us down the same the rabbit hole as Bernanke on a journey to prove that if we just continue doing what is not working, all will turn out fine. Caution, this path leads down, and down, and down, farther and deeper then most can ever imagine. If asked to critique "Old Yellar" now playing in theaters everywhere I would by way of the reasoning above have to give her the maximum two solid thumbs down. More on this subject in the article below.

goldhedge's picture

Hurry up and let TSHTF

Nick Jihad's picture

I like how she argues for less focus on bubbles, and more focus on "resilience", figuring we won't notice that they are called "bubbles" because a bubble is the most non-resilient thing in the known universe.

moneybots's picture

" She has now militantly asserted that bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability."


All she has to do to prove it is raise the FED rate on Monday to what ever normal should be at this time. 

Obviously, she wouldn't dare, which makes a falsehood of her statement.