S*** My Future Fed Chair Said

In honor of Janet Yellen, the former President of the San Francisco Federal Reserve, being recently elevated to "frontrunner" status for the chair of the Federal Reserve Board, I present a list of past quotations from Mrs. Yellen here. All emphasis is my own.

"While a tightening of credit to the subprime sector and foreclosures on existing properties have the potential to deepen the housing downturn, I do not consider it very likely that such developments will have a big effect on overall U.S. economic performance." - Speech to the Money Marketeers of New York University, April 26, 2007 (link) 

Of course, these events very much did have an impact on overall economic performance, and continue to do so today, some 6 years later.

"A concern that is frequently expressed is that an easing of the stance of monetary policy could end up shielding investors who misjudged fundamentals or incorrectly assessed risks from losses and thereby lead them to take inappropriate risks in the future because they think the Fed will act to cushion the consequences of their decisions. I have two responses to this concern. First, the Fed’s policy response will not prevent a repricing of risk from occurring and investors who misjudged risks will surely suffer losses even if monetary policy is successful in keeping the economy on track. Second, I don’t believe that the Fed should stand aside as a financial shock threatens to derail the economy, because that would run the risk of many innocent people being hurt by the loss of jobs and economic well-being." - Speech to Town Hall, Los Angeles, October 9, 2007 (link)

Within the next calendar year, many investment banks were deemed "too big to fail", bearing out the concerns of moral hazard and shielding them from substantial losses.

"I suspect that the markets and the Committee have become more closely aligned, sharing the view that growth in the U.S. is, and is likely to remain, healthy. In further support of this view, stock market values have risen and implied volatilities have been flat or trended down, as we continue to get stronger news on overall economic growth." - Speech to the First Annual Conference of the Risk Management Institute Singapore, July 5, 2007 (link)

Stock market values would not get much higher than where they were in July 2007, until more than 5 years later. Volatility, as measured by the VIX index, has remained above where it was at the time of these statements through present.

"Furthermore, fundamentals in commercial real estate markets continued to improve this year, increasing demand for commercial space from office parks to warehouses. ... Going forward, even at a more moderate pace of economic expansion, private forecasters expect the positive trends in commercial real estate in both California and the nation to continue but to moderate next year as capacity comes online." - Speech to California Independent Bankers 16th Annual Convention, October 9, 2006 (link) 

California was one of the hardest-hit locations for real estate in general; in the area where Mrs. Yellen was speaking on this occasion, one would be hard pressed to say that the "positive trends" continued.

"In my view, it makes sense to organize one’s thinking [about a potential housing bubble] around three consecutive questions—three hurdles to jump before pulling the monetary policy trigger. First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, “no,” “no,” and “no.”" - Presentation to the Fourth Annual Haas Gala, October 21, 2005 (link)

Clearly, the answers to the first two questions proved incorrect; the third, though still ambiguous, is a position which Mrs. Yellen took a 180-degree turn on once the financial crisis unfolded, as evidenced in this 2009 speech.

"We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term." - Remarks to the 2008 National Interagency Community Reinvestment Converence, March 31, 2008 (link)

Mrs. Yellen has not subsequently backed down from these statements, and has continued to maintain that the Community Reinvestment Act was effective and not causally related to the housing bubble.

"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened." - Interview with the Financial Crisis Inquiry Commission, November 15, 2010 (link)

At least she's honest; but, don't we deserve someone who did?