Janet “There Won’t Be Another Financial Crisis in Our Lifetime” Yellen Worried About Another Crisis

Remember back when Janet Yellen was heading up the Federal Reserve and she claimed there won’t be another financial crisis “in our lifetime?” You don’t have to think back too far. It was just about 18 months ago. Tuesday, June 27, 2017, to be precise. But now that Yellen has vacated the Eccles building and taken up residence at the Brookings Institute, she’s changed her tune. In fact, she’s singing an entirely different song.

During a talk at the City University New York, this week, Yellen said she fears there will be another financial crisis.

Assuming she doesn’t plan on dying any time soon, she apparently means within her lifetime. 

Yellen said that while things have improved, “there are gigantic holes in the system,” and “the tools that are available to deal with emerging problems are not great in the United States.”

I do worry that we could have another financial crisis.”

Yellen specifically mentioned leveraged loans and corporate debt as a looming problem.

She’s not wrong.

According to the S&P/LSTA Leveraged Loan Index, the total leveraged loan market has doubled since 2008 and has grown by about 17% this year alone. Currently, there are some $1.12 trillion in outstanding leveraged loans. When you hear leverage loan, think subprime loans for companies.

And there is currently about $9.1 trillion in total outstanding corporate debt. To put that in perspective, corporate debt stood at about $4.9 trillion in 2007, on the cusp of the Great Recession.

But it’s not like this just happened over the last 18 months. In fact, it was Yellen’s (and Ben Bernanke’s) zero percent interest rates and quantitative easing that facilitated this massive runup of corporate debt. And it was on purpose. That was the whole point of Fed policy — to “stimulate” the economy with easy money. Suddenly, just 18 months out of the Fed chair, Yellen has the vision to see what she’s done.

Nice.

In another brilliant observation, Yellen said the high level of corporate leverage could lead to a lot of corporate bankruptcies if there is an economic downturn.

Yes. Yes it could.

Yellen also cited deregulation as a problem. She said the Federal Reserve can only address issues at individual banks, not in the financial system as a whole. As CNBC summed it up:

In the wake of the financial crisis, some agency regulatory powers were vastly expanded, but others, for example, the ability of the Fed to lend to an individual company in a crisis, were curtailed. Current Fed officials have pushed back against criticism that their reforms are making the system riskier, saying they are making the system more efficient.”

As far as the current situation goes, Yellen noted that interest rates are still low. The former Fed chair said, “They’re likely to remain lower than they’ve been in past decades.” With rates still under 3%, the central bank has less ability to respond to a future crisis by cutting rates.

That means there’s much less scope to cut short-term rates than there’s been historically in the United States.”

But Yellen took no responsibility for blowing up all of the current asset bubbles and setting the stage for the crisis she now admits might be looming around the corner. In fact, she said the Fed “probably could have done more” quantitative easing. She said public criticism of the central bank’s bond-buying program held it back.

At the margin, I think that was something that concerned people about pushing asset purchases a lot further.”

In other words, people were concerned the Fed was blowing up asset bubbles that would pop down the road.

So, Yellen suddenly sees the problems she helped create, but still seems clueless about her role in it. In fact, this is, in all likelihood, an attempt to pass the buck when the whole thing comes crashing down.

My, my, what a difference 18 months makes.

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