Yellen Is Flat-Out Wrong: Financial Bubbles Are Caused By The Fed, Not The Market

Tyler Durden's picture

Submitted by Jeffrey Snider of Alhambra Partners,

More of the same from Janet Yellen in her latest speech, but her focus on “resilience” caught my attention as it relates to very recent developments. The taper threat experience last year may have been a warning, but it doesn’t seem like it resonated with her or policymakers. The major bond selloff, which led to global ripples of crisis in credit, funding and currencies, was the opposite of flexibility. Perhaps a better definition of the word would be a place to start.

But her meaning was a bit different, in that it is clear (from this speech and prior assertions, wrong as they were, about the mid-2000’s housing bubble) she sees bubbles as “market” events in which the central bank’s role is primarily shock absorption. In other words, idiot investors wholly of their own accord create bubbles and it’s the job of the munificent and enlightened Federal Reserve to help ensure that such “market” madness is “contained” without further economic destruction.

At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble” and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.

The primary example she used is very illuminating in that regard, particularly as it relates to monetary neutrality.

Nonetheless, some macroprudential tools can be adjusted in a manner that may further enhance resilience as risks emerge. In addition, macroprudential tools can, in some cases, be targeted at areas of concern. For example, the new Basel III regulatory capital framework includes a countercyclical capital buffer, which may help build additional loss-absorbing capacity within the financial sector during periods of rapid credit creation while also leaning against emerging excesses.

This framework wholly reverses what happened in 2008, but since the FOMC as a whole, with her along for the ride, had absolutely no idea what was taking place at the time this is really not surprising. She sees the Fed as the cleanup crew for the “market’s” mess, essentially the job as it was described anyway a century ago, when in fact the 2008 panic was actually the market finally acting like a true market and exerting some pressure on the central banks to stop the ongoing and heavy inorganic and artificial intrusions. To maintain the idea of market-based mess is to be intentionally obtuse about the nature of interest rate targeting and central bank activism.

The only real question is whether she actually believes this or is dipping into the reservoir of expectations management. It is borderline facetious to suggest that “macroprudential” policy will have any real-time understanding of risks in a crisis (stress tests, really?), particularly since we have little conception of exactly how the “markets” have rebuilt themselves, intertwining leverage and correlation in new and fascinating ways, in the years since the FOMC blundered so badly the last time (with then out-of-date and similar macroprudential bluster). How do they even know how to accurately or even ballpark measure stresses in financials, such as interest rate swaps and other derivatives? I never once read anywhere that the FOMC made any connection between correlation anomalies in structured finance (negative convexity and correlation smiles) and the growing illiquidity of credit default swaps, but we are supposed to believe they will be on top of it next time?

But there is an almost cleverness to this that belies all their past mistakes; Yellen is claiming they are irrelevant going forward.  What she is trying to do is convince us all that “next time” none of it will matter because they are preparing all this “stuff” ahead of time.  In other words, there won’t be a cleanup because any “market” mistakes will have been mitigated before it ever happens – her idea of resiliency.  Does anyone actually buy that?  The lack of understanding of market behavior applies equally to the period before the crisis as it did during.

The only way any of this makes sense is if you buy the primordial orthodox premise that monetary policy is neutral in the long run (or even intermediately). Taking that line will lead you to believe asset bubbles are just markets gone insane of their own accord. Then again, Yellen has largely been hostile to “markets” since her academic career brought some notice, so this is really no surprise. But to experience, right now, the repo market collateral shortage and QE’s direct impact and to still blame markets for lack of resilience is either inordinate impudence or targeted public relations.

I cannot overstate this enough, the selloff last year was a desperate warning about the lack of resilience in credit and funding. That repo markets persist in that is, again, the opposite of the picture Janet Yellen is trying to clumsily fashion. Central banks cannot create that because their intrusion axiomatically alters the state of financial affairs, and they know this. It has always been the idea (“extend and pretend” among others) to do so with the expectation that economic growth would allow enough margin for error to go back and clean up these central bank alterations. That has never happened, and the modifications persist.

Resilience is the last word I would use to describe markets right now, with very recent history declaring as much.

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economics9698's picture

You always wonder to yourself if these 138 IQ tribe members are really that stupid or are they just playing stupid.

Squid Viscous's picture

no actually they're very smart...qui bono?... there was a little hiccup in '08 but that was easily papered over... tanks in the streets threat etc.

any stats re: Ashkenazim/Sephardic wealth vs. rest of the planet suckers in last 30 years will bear that out, I have no doubt

I MISS KUDLOW's picture

i seriously doubt yellen is in charge, bernankes teacher is #2 at the fed now

Four chan's picture

Create the bubble with easy money. Collapse the bubble with successive int rate increases, all the borrowers go under water enslaving them to you, many default allowing you to capture those assets people have worked their lives for, for nothing more than paper. the tentacles of the fed, their franchises, the banks, get swamped with all these assets, the owner (the fed) creates an equivalent amount of money to the bubble it created in the first place and "buys" all the "bad" mbs its tentacles have now acquired, both devaluing their debt slave's savings by that amount and capturing all those yummy house assets for the feds true owners/creators. the system called federal is working perfectly for its owners, and i know none dare call it treason but someone really should. on a side note, if the fed is a private corporation, and it is, why doesn't it pay taxes? Must be a religion like apple.


Ps the tentacles (the tbtf) has used all the new money to buy the market with zero risk zirp funds, which is clearly the only thing driving the market.

NotSure2505's picture

dont forget they take that mint new money give 80% to the treasury and the rest to Wall Street primary dealers.


I am still not sure they architected it all. It is kind of saying Lenin and the other top bolshevik brass created socialism. In truth they incrementaly reacted to threats to their power and came up with the magolamaniac soviet police state causing millions of farmers to starve to death in the Urals and Czechoslovakia.


MeMadMax's picture

I was wrong about yellen...


I thought she was a puppet carrying out her marching orders...


Sadly, I was wrong...


She's a dead stick... A person that is just waving in the breeze with big empty cow eyes...

Escrava Isaura's picture


Kudlow was 'still' full of shit. He’s a propagandist indoctrinating the sheeple on the Right.

About Janet Yellen: “Tell me lies tell me sweet little lies” – Fleetwood Mac, 1987

Squid-puppets a-go-go's picture

id really like to box her in a corner and ask ; If intervention is acceptable - muting the freeness of the market - why is it unthinkable to act pre bubble and only act post bubble

this is never adequately explained

ATM's picture

I'd like to box her in a corner, box her in a hallway, box her in the drivewat or garage or street. I think I could take her too.

Winston Churchill's picture

I have a family full of these high IQ morons.Prof this ,and Prof that.

Not a scintilla of common sense between  them collectively.,and that is the hard science ones.

So yes, they are dumb, and highly intelligent concurrently,unable to succeeed outside their cloistered


What a way to run a planet..

Squid Viscous's picture

the syrian/sephardic tribe might be outmaneuvering the Ashkenazim their nouveux riche - disgusting attitude:

economics9698's picture

Thanks.  My family hunts hogs (metaphorically speaking) for fun.

samuraitrader's picture

yes book smart in one area, but lacking in common sense and WISDOM.

juujuuuujj's picture

The Fed is not a government entity, it's a cartel organization of market players. So technically, it is the market. Also, there were bubbles before the establishment of the Fed.

vmromk's picture

Yellen is a fucking lying criminal and deserves to swing from the highest lampost with the rest of the scum at the fed.

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.

economics9698's picture

It will not be long before the bankers start swinging.

sessinpo's picture

economics9698    It will not be long before the bankers start swinging.


Which will occur after thousands of regular people are killed. Will any of us be one of them? How many of us will be sacrificed just so a new banker gets put in place? Same goes for politicians.

kchrisc's picture

Bubbles are a feature of the Rothschild banksters' theft.


"Guillotines will be a feature of the popping."

sessinpo's picture

kchrisc    Bubbles are a feature of the Rothschild banksters' theft.


Then please explain the bubbles that occurred before the Rothchilds existed?

lunaticfringe's picture

They aren't stupid. They are paid well to believe their own bullshit...and so they do. We don't have to.

Same as it ever was.

texas economist's picture

Janet Yellen is a sociopath, so the truth is used only to the degree it has utility in any given situation. The biggest problem with stimulus is not the bubbles it creates although bubble problems are significant. Stimulus automatically allocates resources inefficiently as to prevent meaningful growth. When an artificial fed generated interest rate is less than the rate of inflation the attribute of scarcity is removed from money and it becomes a gift rather than a resource. It stops functioning as money.

Dollarmedes's picture

"It is difficult to get a [woman] to understand something when [her] salary depends upon [her] not understanding it."
- Upton Sinclair (paraphrasing)

ThirteenthFloor's picture

All these pundits put too much faith in the what people say.  Jeffrey I hope you read this comment.

1. The Federal Reserve was buying T-Bills at a rate of ~10b USD per day as early as 2005.  Way before QE was invented...ummm.

2. The Federal Reserve was buying Mortgages at a rate of ~3b USD per day in 2005.  When Greenspan was preaching in Atlanta to others the dangers of MBS.

3. Every Investment Bank - Floor complies to reporting (agency and mortgage) buying to the Fed daily.  So THEY KNEW what was happening.

That caused 2 bubbles at the same time, one has popped the other is a few weeks away. 

The unsterilized bond buying destroyed investment in the production economy, we know what happened with mortgages, and America was busted and now lost it's sovereignity to either China or the OITC (Office of International Treasury) owns all the mortgaged property

Anything and everything the Fed publicly says is/was a LIE.  Tell us something NEW.  The FRB was NEVER here to help America, it was created to profit then destroy The United States of America, and keep it subservient to the London/Vatican banking cartel. Clearly spelled out in 1917 by rep. Charles A Lindbergh.

Alan, Ben and Janet all lie to promote their agenda. I have some ocean front property for sale in Arizona, interested ?


bycatch's picture

I'll sell my ocean front for less than your ocean front.

hooligan2009's picture

we have a new word..."macroprudential", i tis making me throw up in my mouth a little; from here:

Central Bankers Fire Back at Their Own Club Over Bubbles

By Simon Kennedy  Jul 4, 2014 4:36 AM CT  

57 Comments Email Print

Central bankers are firing back at their own central bank. Janet Yellen and Mario Draghi rebuffed a warning from the Bank for International Settlements that monetary authorities risked raising interest rates “too slowly and too late” to counter emerging asset bubbles.

“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen, the Federal Reserve chair, said on July 2, three days after the BIS published its advice. So-called macroprudential regulation should have the “primary role,” she said.

Draghi, the European Central Bank president, delivered what he called the “bottom line” the next day. “The first line of defense against financial stability risk should be the macroprudential exercise,” he said. “I don’t think that people would agree with the raising of interest rates now.”

Piling on, Bank of England Deputy Governor Jon Cunliffe said tightening monetary policy to curb asset values risked hurting the economy and so “should be seen as one of the last lines of defense” for stability. The BOE is already seeking to cool its property sector with measures to limit riskier mortgages and prevent an unsustainable buildup of consumer debt.

In Sweden, the Riksbank cut interest rates yesterday by a bigger-than-expected 50 basis points to ward off deflation, noting it is for “other policy areas to manage” rising household debt and housing markets.

Bankers’ Message

“The message from the Fed as well as the ECB and Riksbank this week was that macroprudential policies will address any risks to financial stability while monetary policy remains loose for as long as it take to get a solid recovery and as long as inflation remains low,” Bank of America Corp. strategists said in a report to clients today. “The bottom line is that data, not asset prices, is what we think will drive monetary policies for now.”

It’s not the first time staff at the Basel, Switzerland-based BIS, which is owned by central banks and serves as a counterparty for them, has broken with their bosses. In 2003, BIS economists Claudio Borio and William R. White warned policy makers might need to raise rates to combat asset-price bubbles.



hooligan2009's picture

we did just have a housing bust because house prices got way ahead of value (affordability) at a rate of interest that was consistent with a "good" level of economic growth (6% nominal GDP growth and 6-7% nominal mortgage interest rates?)


bycatch's picture

Once upon a time bubbles were caused by the 'market' as there was no Fed -  see 'Tulip Mania 1637'. Now, in this venue, I'm certain that someone will correct me. 

NotSure2505's picture

Tulip mania broke one single guy, if that! The rest were rich people being exotic with fractions of their earnings.


The true crimes before central banking were fractional reserve banks that did completely mad things with other peoples moneys and then, when people find out how many lies and crap their bankers were, the bank would go under and people would see how much they were stolen.


sessinpo's picture

NotSure2505    Tulip mania broke one single guy, if that! The rest were rich people being exotic with fractions of their earnings.


Hardly. At the time, the tulip bubble collapse hurt a lot of people. Around 1636, tulips were estimated to be possibly the 4th largest export of the Netherlands. Bubbles or manias often have the characteristic of engulfing regular folk who are left holding the bag when the market crashes. That is how the majority of rich people get away with their wealth while the regular folk get hammered.

Additional examples: Mississippi Company, South Sea Company, both before the Federal Reserve Bank.

GreedKillz's picture

Its sad to see old people old fail so miserably. Old people are to blame for the vast amount of problems the world has because unfortunately most politicians happen TO BE OLD. 

Yellen, who makes Bernanke look like a like kindergartener ,seems to think the Fed window, which gives out money to the powerful banks and massive Corporations like GE and many others at 0% is not distortion of the US economy .

This is truly crazy . All it does is lower competition and quality of production. Look at GM for example . Even before the bailout of GM which already sucked off the Gov spigot quality was not good at GM because it did not need to . It was "in the system" therefore if you are never going to go away and be replaced by a better more efficient auto manufacturer who cares about quality and EVEN IF YOU GO BANKRUPT it does not matter because teh taxpayer will BE FORCED to support you to the benefit of the all powerful banks and democrat and republican politicians. 

yellen makes me puke

NotSure2505's picture

Not only old people, because there are lines of kissasses going around the block to take up her place at the first chance they have to sabotage her with some scandal or gossip.

Batman11's picture
Financial Bubbles Are Caused By The Fed, Not The Market:


ermmmm ......  1600s Holland - Tulip Mania ....... South Sea Bubble

There is a whole world beyond the U.S. and the FED.


Batman11's picture

For all the sophistication of modern markets they still behave like the Tulip markets of 1600s Holland., sub-prime ........


I am sure the Tulip markets of that time resounded to the cry of "There is always a bigger fool" (in Dutch of course).

Batman11's picture

Believeing markets are rational is about as sensible as believing in fairies.


In fact, there is more hard evidence that markets are not rational.


zerocash's picture

"Er is altijd een grotere gek"

AdvancingTime's picture

 It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward.  When this happens we are at the end game.

At some point the return on loaning money is simply not worth the risk!  Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.

The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.

yogibear's picture

The other countries should view the US federal reserve as a irresponsible ponzi scheming organization.

The Fed's scheme will continue until there is a run on the dollar and there is a currency crisis.

q99x2's picture

They have been working a long long time on mind control. Wires in the brain to control us like a remote controlled toy for a defacto government. That is why talk radio guests have neurosis on the one hand and the constitution on the other and live in a corporate construct with an elimination of the family farm and poison water and air under agenda 21 la la la la la electro magnetic frequency that we are bathed in la la la I left la la la and now I'm in Pittsburgh.

Chuck Knoblauch's picture

The Federal Reserve is directly manipulating stock prices.

The allegations have been made by some in Congress.

No one is interested in investigating it.

So, there it is!


Last of the Middle Class's picture

The inject insane amounts of cash into a system to save TPTB from their own bad decisions then blame the bubbles created when those same people hoard the money and invest on the market. That isn't even insanity, it is serious psychosis and an attempt to discredit anyone with critical thinking skills. That would be like me feeding my dog until he burst and then blaming it on his being a canine. Or better yet telling anyone in any central amercan country, get your kids here and they can stay then blaming the disease, crime, and absolute chaos on the need for amnesty. Nobody is that fucking stupid who has normal IQ. This is an out of control government run by oligarchs who will do anything to maintain control including using false data to maintain the false idea of climate warming such that a carbon tax for all can be levied. Unbelievable people even listen to anyone in our government anymore.

Dazman's picture

I disagree with that headline (honesly, did not read the article).

Human nature does cause bubbles, but the fed certainly exacerbates them. 

papicek's picture

Y'all need to take a pill.

sessinpo's picture

papicek   Y'all need to take a pill.


You already took them all and refuse to share, you junky.

orangegeek's picture

these central banksters are smart - there's no questioning that


yellen is using her smarts for a life long endeavor of being used car salesman


how you do know when yellen is lying?  you know when she starts talking

khakuda's picture

I also found theYellen speech last week to be scary. Probably her scariest as acting chairman to date.

As justification for QE, Bernanke he told us years ago that it was important to raise asset prices. This was a primary goal of ZIRP and QE. To create a wealth effect, as he said, to reinvigorate economy.

Having been incredibly successful over the past six years in this regard, once again, the story has changed. Even though stock and bond prices have moved up at unsustainable rates as a direct result of these policies, coming off of the free money policy is just too difficult to imagine in the eyes of the Fed, so now the continuation of these policies must be justified.

Now Yellen tells us that QE and ZIRP are not the source of bubbles. Immediately, she should be called on this lie. If the stated goal of these policies was to raise asset prices, it follows that at some point after being aplplied for a long period these policies can raise asset prices too much relative to underlying value, the definition of a bubble.

She also tells us that she doesn't really see any bubbles outside of some specific areas of the credit markets today. However, she also tells us that in the past she has missed the recognition of bubbles and that it is very hard to see bubbles. So, why would we listen to her when she's telling us she sucks at this?

moneybots's picture

"She also tells us that she doesn't really see any bubbles outside of some specific areas of the credit markets today. However, she also tells us that in the past she has missed the recognition of bubbles and that it is very hard to see bubbles. So, why would we listen to her when she's telling us she sucks at this?"


Yellen is speaking to the dumb money.  They don't even know she didn't see the Great Recession coming.

moneybots's picture

"Yellen Is Flat-Out Wrong: Financial Bubbles Are Caused By The Fed, Not The Market"


Wrong is not the term i would use.  Yellen is speakiing a false narrative, to cast blame on something other than the FED.

All financial roads lead to the FED.  As such, the FED is monetary ground zero.

If the FED cut off the money supply tomorrow, the stock market would collapse.  Thus the FED IS the source of the stock bubble, the housing bubble, the deficit bubble.


In fact, as Karl Denninger noted, the FED pulled in the slosh during the TARP debate.  The slosh being liquidity.   The stock market crashed.

The FED does not tell the truth.

moneybots's picture

"The only real question is whether she actually believes this or is dipping into the reservoir of expectations management."


She wants the public to believe it.  Baffle them with B.S.