U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.
Sounds good, right?
Not really. Perhaps she is being extremely modest in projecting her future lifespan. But regardless of whether she means 5, 10, 20 or 50 years, Yellen sounds hubristic. It’s the kind of off-the-cuff prognosticating that gets you into trouble. Like those um-and-ah gut-driven prognostications from people totally sure that Bitcoin will go to $100,000 by mid 2014. Or that gold will go to $10,000 by late 2012.
Or, like the former occupant of Yellen’s office in 2005 when it came to the housing bubble.
Via Washington Post:
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.
Yellen has no data to tell her that there will be no financial crisis. She has no clue what the next crisis will look like, either. None of us do. Each crisis is unique. All she has is the last crisis to go by. Regulatory policy will always be reactive because human behaviour is intrinsically innovative. Market participants will always and by definition seek to bend rules and look for loopholes, and new and exciting ways to eke out a profit. In the long run, that is beneficent. In the short run, it can lead to all kinds of wobbles, and shakes, and tumbles.
As Hyman Minsky put it, “stability is destabilizing.” This is a tricky, trippy, counterintuitive concept to really grasp, so it is hardly surprising that neither Yellen nor Bernanke grapple with it. It is not so much a problem with the arrogance or with the limited or skewed visions of policymakers as it is a problem with entropy. Stability makes people forget what instability feels like. Policymakers are people. Market participants are people. Heck, voters are people.
The United States had a remarkable and bounteous seventy years of strong, unwavering economic growth with improving civil rights, widening property ownership, rising real estate prices—the thing, lest we forget, that tricked Bernanke—and rising median incomes and median net worths. The United States’ government was led throughout this period predominantly by career politicians and civil servants, with ideas provided by neoliberal economists and political theorists. For the most part, it worked well. But stability is destabilizing. Only historians and bookworms have any clue what it is like to have a pussygrabbing P.T. Barnum-esque showman as emperor. So, in the wake of a great recession and rising inequality—something that was bound to happen sooner or later, even with deft macroeconomic management, after all, stability is destabilizing—the Trump thing happened.
I don’t mean to go off on an anti-Trump rant. That is not the point of this essay. My point is only that stability is destabilizing. No matter how many well-meaning historians, and philosophers, and economists argue against Trump’s flawed anti-trade economics, his authoritarian tendencies, his xenophobic wailing, and so forth, people didn’t listen in the most part. For they didn’t live under Nero, or Mussolini. They didn’t live through the era of Godwinian strongman nationalism in the 1930s. They never lived in Saudi Arabia, or Sisi’s Egypt, or Putin’s Russia. They want to see what it’s like to shake the apple tree. To destabilize things. Stability is destabilizing. Get it yet?
Of course, having that unhinged maniac and his entourage of nutjobs and wackadoodles pissing about in the White House and ignoring sound economic reasoning is a very good tell that Yellen’s prognostications will likely be tested very soon, and why the booming stock market is likely soaring toward a euphoric bubble.
As I have been writing for years and years, modern, developed trade systems are fragile to shocks. That doesn’t mean that we should eschew global trade. Far from it. The more the world trades, the richer it gets. Ricardo was completely correct in his theory on comparative advantage, and trade is overwhelmingly beneficial so long as governments compensate the communities that lose out to trade migration. (Which, the U.S. government has again and again failed to do since the beginning of the great industry migration in the 1980s).
But we should be ready for breakdowns in these complicated systems. We must be ready. And if government is taken over by a group of people who are actively hostile to the trade systems that make the United States richer, doubly, trebly, quadruply so.
I don’t know what the next crisis will look like. But I do know that central banks have already stretched their balance sheets. I know markets are once again, like 2007, engaged in speculative frenzies over exotic asset classes (like, for instance, cryptocoins) that few if any really understand. And I know that Trump is the loosest of loose cannons. One tweet from him can tank a Fortune 500 stock.
The United States has had a run as the richest, strongest nation in the world. But stabilility is destabilizing. And we are well and truly in the destabilization phase now.